23 September 2002 GST/HST Interpretation 31183 - Products Sold Over the Internet

Dear XXXXX:

Thank you for your letter of XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to supplies made over the Internet. We apologize for the delay in responding to your request.

It is our understanding that you sell e-documents called XXXXX[.] The documents consist mainly of books, checklists, forms, work orders, sample contracts and schedules and cover a range of topics XXXXX[.] All of the documents can be downloaded. In addition, some sections of some of the documents can be edited to add, delete or change items to suit a particular customer's situation.

You expect that at least 50% of your sales of e-documents will be made to customers located in the United States. You stated that products sold to customers in the United States are for exclusive use in the United States.

In accordance with GST/HST Memoranda Series Section 1.4, an application ruling can only be issued with reference to a clearly defined fact situation of a particular registrant. Rulings are issued upon request and where the taxpayer has presented all the relevant facts such as the nature of the transactions undertaken, detailed descriptions of services or property involved, the parties involved in all the transactions and relevant documentation such as invoices, contracts and other pertinent agreements. Where all the relevant facts are not provided, an interpretation may be issued. I am pleased to provide you with an interpretation which will explain how the GST/HST applies to the supplies described in your letter.

Interpretation Requested

You wish to know if you are required to charge and collect the GST/HST on supplies made by you as described above.

Interpretation Given

As the documents are supplied and delivered by electronic means through the Internet and the customers acquire the right to use and make a copy of the documents, the supply is considered to be a supply of intangible personal property (IPP) for purposes of the Excise Tax Act ("the Act").

A supply of IPP that may be used (meaning "allowed to be used") in whole or in part in Canada is deemed to be a supply made in Canada pursuant to subparagraph 142(1)(c)(i) of the Act. Conversely, where IPP may not be used in Canada, the supply is deemed to be made outside Canada by virtue of subparagraph 142(2)(c)(i) of the Act. A supplier is not required to collect tax in respect of a supply made outside Canada.

A supply of IPP may be considered to be made in Canada even if it is not actually used in Canada. The fact that the supply may be made to a recipient who is outside Canada has no bearing on whether the supply is made in Canada. In determining whether the IPP may be used in Canada, reference may be made to any terms of a written agreement or restrictions regarding the place of use of the IPP. Where there are no restrictions on where the IPP may be used, it will always be the case that the IPP may be used in whole or in part in Canada.

Every recipient of a taxable supply made in Canada is required to pay GST/HST in respect of the supply. Where the taxable supply (that is not zero-rated) is determined to be made in a non-participating province, it will be subject to the GST at the rate of 7%. Where a taxable supply (that is not zero-rated) is deemed to be made in a participating province, the supply is subject to HST at the rate of 15%. The three participating provinces are Nova Scotia, New Brunswick, and Newfoundland.

There is no provision under the Act that would zero-rate a supply of IPP such as the one you are making.

Where a supply that is not zero-rated is made in Canada, a further analysis with respect to the province in which the supply is made or deemed to be made is necessary to determine the appropriate rate of tax.

Whether a supply of IPP made in Canada is made in a participating province or non-participating province is determined by section 144.1 and Schedule IX to the Act. Section 144.1 provides that a supply is deemed to be made in a province if it is made in Canada and is, under the rules set out in Schedule IX, made in the province. Section 144.1 also states that a supply made in Canada that is not made in a participating province is deemed to be made in a non-participating province.

Generally, the place of supply rules for a supply of IPP are provided for in Schedule IX to the Act. Subparagraph 2(d)(i) of Part III of Schedule IX to the Act states that a supply of IPP is considered to be made in a province if all or substantially all of the Canadian rights in respect of the IPP can be used only in the province. "Canadian rights" refers to that part of the IPP that can be used in Canada (section 1 of Part II of Schedule IX to the Act). Since it appears that the supply of IPP is not limited in any manner to any specific province or group of provinces, subparagraph 2(d)(i) is not applicable.

Subparagraph 2(d)(ii) of Part III of Schedule IX to the Act states that a supply of IPP is considered to be made in a province if the place of negotiation for the supply is in the province, and the property can be used otherwise than exclusively outside the province. Section 1 of Part I of Schedule IX to the Act defines the "place of negotiation" of a supply to be "... the location of the supplier's permanent establishment at which the individual principally involved in negotiating for the supplier the agreement for the supply ordinarily works ...". Where there are no restrictions regarding the province in which the IPP may be used, it will always be the case that the property can be used otherwise than exclusively outside the province where the place of negotiation occurred. Therefore, where it is determined that the place of negotiation for the supply of the IPP is in a non-participating province (XXXXX), subparagraph 2(d)(ii) deems the supply to be made in that province.

If this is the case, you are required to charge GST in respect of the supply of the IPP you are making whether the recipient of the supply is a resident of a participating or non-participating province. As previously indicated, where the supply of IPP is deemed to be made in Canada and does not qualify for zero-rating, you are also required to charge GST at the rate of 7% on supplies of the IPP made to a recipient who is a non-resident.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the Excise Tax Act, if enacted, could have an effect on the interpretation provided herein. These comments are not rulings and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST/HST Memoranda Series, do not bind the Canada Customs and Revenue Agency with respect to a particular situation.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 954-7931.

Yours truly,

Anne Kratz
General Operations Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate