12 September 2002 GST/HST Interpretation 33056 - Internet Access

Dear XXXXX:

Thank you for your facsimile of XXXXX, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to supplies of Internet access. Your request was transferred to us for response. We apologize for the delay in providing you with this interpretation.

The following information and scenarios were provided in your facsimile, our telephone conversations and e-mails:

•   XXXXX (the Company) is resident in Canada and is registered for GST/HST purposes XXXXX;

•   The Company is a global Internet Service Provider and supplies Internet access to its customers; and

•   In each of the following scenarios, the Company is making the supply and invoicing the customer for the supply of the Internet access.

Scenario 1

The Company supplies Internet access to a non-resident. None of the facilities made available by the Company, or any part thereof, that enable connection to the Internet, are located in Canada (e.g., a server located in Canada would not be made available by the Company under any circumstances to the non-resident to enable connection to the Internet).

Scenario 2

The Company supplies Internet access to a non-resident located in the U S. A part of the facilities made available by the Company that enable connection to the Internet are located in Canada.

Scenario 3

The Company makes a single supply of Internet access to a non-resident with offices in the U.S. and Canada.

Scenario 4

The Company makes multiple supplies of Internet access to a non-resident with offices in the U.S. and Canada.

In accordance with GST/HST Memoranda Series section 1.4, a ruling, for GST/HST purposes, provides the Canada Customs and Revenue Agency's (CCRA's) position on specific provisions of the Excise Tax Act (the "Act") as these provisions relate to a clearly defined fact situation of a specific person or persons. For your reference, we have enclosed a copy of this section. Please note that the CCRA is unable to issue a GST/HST ruling when a request is general in nature and does not relate to a specific set of facts and to specific persons. However, we are pleased to provide you with the following general interpretation concerning the application of the GST/HST to supplies of Internet access.

Interpretation Requested

Is the Company required to charge the GST/HST in respect of supplies of Internet access in the above scenarios?

Does the tax status of the supplies of Internet access provided by the Company change if the access is actually provided by the Company's U.S. affiliate on behalf of the Company (e.g., the U.S. affiliate makes its facilities available to the Company and these facilities are, or may be, used to enable connection to the Internet by the non-resident)?

Does the tax status of the supplies of Internet access in scenarios 3 and 4 change if the invoice issued by the Company is sent to one of the non-resident's offices in Canada?

Interpretation Given

For ease of reference and before addressing each of the scenarios presented, we wish to provide you with some general information regarding the GST/HST and Internet access.

A taxable (other than a zero-rated) supply of property or a service made in Canada is subject to the GST/HST at the rate of 7% or 15%, depending on whether the supply is made in a non-participating province or a participating province (The three participating provinces are Nova Scotia, New Brunswick and Newfoundland and Labrador.). A taxable supply made in Canada to a non-resident person may be zero-rated (i.e., taxable at the rate of 0%) under the provisions of Schedule VI to the Act.

Subsection 123(1) of the Act defines a "telecommunications facility" to be "... any facility, apparatus or other thing (including any wire, cable, radio, optical or other electromagnetic system, or any similar technical system, or any part thereof) that is used or is capable of being used for telecommunications".

A "telecommunication service" is defined in subsection 123(1) of the Act as follows:

"(a) the service of emitting, transmitting or receiving signs, signals, writing, images or sounds or intelligence of any nature by wire, cable, radio, optical or other electromagnetic system, or by any similar technical system, or

(b) making available for such emission, transmission or reception telecommunications facilities of a person who carries on the business of supplying services referred to in paragraph (a)."

Access to the Internet is a telecommunication service that involves making available telecommunications facilities.

Section 142.1 of the Act sets out the place of supply rules for determining when a supply of a telecommunication service is made in Canada. This section overrides the general place of supply rules in section 142 of the Act, but remains subject to section 143 of the Act, which deems supplies made by non-residents to be made outside Canada in certain situations.

Pursuant to paragraph 142.1(2)(a) of the Act, a telecommunication service that consists of making available telecommunications facilities is deemed to be made in Canada where the facilities or any part thereof are located in Canada.

If a taxable supply (other than a zero-rated supply) is deemed to be made in Canada, it must further be determined if the supply is made in a participating province and, therefore, subject to HST at 15%.

Section 144.1 of the Act deems a supply to be made in a province if it is made in Canada and is, under the rules set out in Schedule IX to the Act, made in the province, but the supply is deemed to be made outside the province in any other case. Also a supply made in Canada that is not made in a participating province is deemed to be made in a non-participating province.

For supplies of Internet access, section 3 of Part IX of Schedule IX to the Act together with section 10 of the Place of Supply (GST/HST) Regulations (the "Regulations") are the relevant provisions for determining whether a supply of Internet access is made in a particular province.

For purposes of the Regulations, a "final recipient" in respect of Internet access means a person who is the recipient of a supply of the access and who acquires it otherwise than for the purpose of supplying it to another person. Where consideration for a supply is payable under an agreement for the supply, the person who is liable under the agreement to pay that consideration is the recipient of the supply as defined in subsection 123(1) of the Act.

Subsection 10(1) of the Regulations provides, in part, that when there is to be a single final recipient of a supply of Internet access made by a particular supplier, and the recipient acquires the supply under an agreement either with the particular supplier or another supplier, the supply is made in a particular province if the final recipient avails itself of the access at a single ordinary location in that province, and:

•   the particular supplier maintains information sufficient to determine that location; or

•   it is the normal business practice of the particular supplier to obtain information sufficient to determine that location.

In any other case, the supply of Internet access will be made in a particular province if the mailing address of the recipient of the supply is in that province.

Subsection 10(2) of the Regulations applies, in part, where there are to be multiple final recipients of a supply of Internet access made by a particular supplier and each final recipient acquires the supply under an agreement with either the particular supplier or another supplier. Where, in the case of each final recipient, there is a single location at which the final recipient avails itself of the access and:

•   either the particular supplier maintains information sufficient to determine that location; or

•   it is the normal business practice of the particular supplier to obtain information sufficient to determine that location;

the supply is made in the province, if any, that would be determined under the place of supply rules for intangible personal property under Part III of Schedule IX to the Act (discussed on pages 19 and 20 of the enclosed Technical Information Bulletin B-090 - GST/HST and Electronic Commerce), to be the province in which the particular supply is made if the Internet access were attainable in each province in which, and to the same extent to which, the final recipients avail themselves of the access. In other words, the place of supply rules in this Schedule are to be applied to the supply of Internet access as a supply of intangible personal property.

In any other case, the supply of Internet access will be made in a particular province if the mailing address of the recipient is in that province.

Finally, where a supply of Internet access made by a registrant who carries on the business of supplying telecommunication services, is made to a non-resident who is not a registrant and who also carries on such a business, the supply is zero-rated under the provisions of section 22.1 of Part V of Schedule VI to the Act.

Section 4.5.1, Exports - Determining Residence Status of the GST/HST Memoranda Series is enclosed for your consideration. The supplier must verify and maintain evidence that the recipient is not resident in Canada and is not a registrant. Appendix B of the above-noted section describes the documentation that the CCRA will generally accept as proof that a person is a non-resident and is not registered.

We will now address the scenarios presented in your letter.

Scenario 1

In this scenario, no part of the telecommunications facilities made available by the Company and that enables connection to the Internet is located in Canada. As the supply of Internet access is not deemed to be made in Canada under the provisions of paragraph 142.1(2)(a) of the Act, it will be considered to be made outside Canada. Therefore, in this case, the Company is not required to charge GST/HST in respect of the Internet access.

Scenario 2

As part of the telecommunications facilities is located in Canada, the supply of Internet access will be deemed to be made in Canada under the provisions of paragraph 142.1(2)(a) of the Act. However, the supply may qualify for zero-rating under the provisions of section 22.1 of Part V of Schedule VI to the Act, as described earlier, if all of the conditions of that section are met.

Where the supply does not qualify for zero-rating, it must be determined whether the supply is made in a participating province or a non-participating province according to the place of supply rules. In this scenario, the non-resident is a single final recipient availing itself of the Internet access at a single ordinary location in the U.S. As a result, the supply of Internet access is not deemed to be made in a participating province under the rules in subsection 10(1) of the Regulations. Therefore, in this case, where the supply is not zero-rated, the supply of Internet access by the Company to the non-resident is subject to the GST at 7%.

Scenario 3

In this scenario we are assuming that the Company is making a single supply of Internet access to a single final recipient as defined earlier.

As the facilities, or any part thereof, are located in Canada, the supply of Internet access is deemed to be made in Canada pursuant to paragraph 142.1(2)(a) of the Act. If all of the conditions in section 22.1 of Part V of Schedule VI to the Act are met, the supply will be zero-rated. It should be noted that in accordance with section 132 of the Act, a person may be deemed to be resident in Canada in respect of certain activities. Given that the non-resident has offices in Canada, the provisions of section 22.1 may not be met if the non-resident is, in fact, a resident for GST/HST purposes. Please refer to section 4.5.1, Exports - Determining Residence Status for further information.

Where the supply is not zero-rated, it must be determined whether the supply is made in a participating or a non-participating province according to the place of supply rules. In this scenario, the non-resident is a single final recipient availing itself of the Internet access at more than one location. As a result, the supply of Internet access is not deemed to be made in a participating province under the rules in subsection 10(1) of the Regulations. Therefore, in this case, where the supply is not zero-rated, the supply of Internet access by the Company to the non-resident is subject to the GST at 7%.

It should be noted that if, in this case, the non-resident were a single final recipient who availed itself of the Internet access supplied by the Company at a single ordinary location in a participating province and the Company maintained information sufficient to determine that location, the supply of Internet access would be subject to HST at 15%. This would also apply if it were the Company's normal business practice to obtain information sufficient to determine that location.

If the Company is making a single supply of Internet access where there are to be multiple final recipients, the provisions of subsection 10(2) of the Regulations as described earlier may apply.

Scenario 4

In this scenario, we are assuming that the Company is making multiple supplies of Internet access and for each supply there is a single final recipient. For your reference, we are enclosing a copy of Policy Statement P-077R - Single and Multiple Supplies.

Each of the multiple supplies must be considered separately for purposes of determining whether the supply is made in Canada, zero-rated, or made in a non-participating or a participating province. As such, some of the supplies may be taxed at 0%, 7%, or 15%. Reference should be made to the information provided earlier and the determinations made in scenarios 1, 2 and 3.

Other Interpretations Requested

With respect to your question regarding the tax status of access to the Internet where a U.S. affiliate of the Company makes its facilities available, the tax status may be affected, as evidenced in the information above. For example, in scenario 2, if the telecommunications facilities that enable connection to the Internet are, in fact, made available by the Company through its U.S. affiliate and the facilities are located in the U.S., such that none of the facilities that enable, or may enable, connection to the Internet are located in Canada, the supply of Internet access by the Company to the non-resident would not be deemed to be made in Canada and, therefore, not subject to the GST/HST. In this case, the U.S. affiliate is supplying its facilities to the Company who is in turn making these facilities available to the non-resident and none of the Company's facilities in Canada are used or may be used to enable connection to the Internet. If, in providing the non-resident's Internet access, the Company's telecommunications facilities in Canada are made available to enable connection to the Internet in certain situations, for example, in circumstances where the U.S. affiliate's facilities cannot accommodate the connection, the supply of Internet access will be deemed to be made in Canada.

With respect to the impact of where the invoice is sent, if the invoice issued by the Company is sent to one of the non-resident's offices in Canada, the tax status of the supply of Internet access is still determined by applying the place of supply rules discussed in this letter. The first step is to determine if the supply of the Internet access is deemed to be made in Canada under the provisions of paragraph 142.1(2)(a) of the Act. Second, if the supply is made to a non-resident person, as mentioned in scenario 3 this is a question of fact and reference should be made to section 132 of the Act, and is deemed to be made in Canada under paragraph 142.1(2)(a) of the Act, it must be determined if the supply is zero-rated pursuant to section 22.1 of Part V of Schedule VI to the Act. Third, if the supply is deemed to be made in Canada under the provisions of paragraph 142.1(2)(a) of the Act and it is not zero-rated, it must be determined if the supply is made in a participating province or a non-participating province according to rules in section 10 of the Regulations. In certain cases, the supply of Internet access is made in a province if the mailing address of the recipient is in a province. As such, if the non-resident's mailing address is its office in a participating province, depending on the facts of the particular case, the supply of Internet access may be deemed to be made in that province and subject to HST at 15%.

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
Electronic Commerce Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate