23 September 2002 GST/HST Interpretation 34134 - Web Site Design

Dear XXXXX:

Thank you for your letter of XXXXX, and the facsimile dated XXXXX XXXXX, sent by XXXXX, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the supply of Web site design. I apologize for the delay in responding to your letter.

Your request for an interpretation has been transferred from the XXXXX Technical Interpretation Services Centre for a response.

The following facts were presented in your letter.

•   XXXXX is a GST/HST registrant that develops Web sites for a company who is resident of the United States (U.S.)

•   The supply of the service of developing the Web sites is performed in XXXXX.

•   After a Web site is designed, XXXXX sends the site and its complement of web pages electronically to the non-resident company. XXXXX does not host the Web site. The U.S. client hosts the site in the U.S. on its own equipment.

•   XXXXX does not retain any rights to the design of the Web sites. The rights to the design are the property of the U.S. client.

Interpretation Requested

The supply of Web site design is zero-rated pursuant to section 7 of Part V of Schedule VI to the Excise Tax Act ("the Act"), when supplied to a non-resident company.

Interpretation Given

A taxable supply of a service made in Canada is generally subject to GST/HST at the rate of 7% (15% when made in a participating province: Nova Scotia, New Brunswick, or Newfoundland) on the value of the consideration for the supply unless the supply is zero-rated (taxed at 0%).

Paragraph 142(1)(g) of the Act deems a supply of a service to be made in Canada if the service is, or is to be, performed in whole or in part in Canada. Conversely, paragraph 142(2)(g) of the Act deems a supply of a service to be made outside Canada if the service is, or is to be, performed wholly outside Canada.

Section 7 of Part V of Schedule VI to the Act zero-rates a supply of a service when made to a non-resident person provided none of the exclusions of the provision apply. For example, the supply of a service to a non-resident is zero-rated provided it is not rendered to an individual while that individual is in Canada or made to an individual who is in Canada at any time when the individual has contact with the supplier in relation to the supply. It is the supplier's responsibility to verify that the recipient is a non-resident and to ensure that all of the remaining zero-rating criteria are satisfied. If the supply of designing a Web site is provided to a non-resident person, then the supply may qualify for zero-rating under this provision. For your information, please find enclosed GST/HST Memoranda Series Section 4.5.1, Exports - Determining Residence Status. Appendix A of this Memorandum describes the documentation that the CCRA will generally accept as proof that the recipient is not resident in Canada. Also enclosed is GST/HST Memoranda Series Section 4.5.3, Exports - Services and Intellectual Property.

When the supply is made in Canada and is not a zero-rated supply, 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 a service made in Canada is made in a participating or non-participating province is determined by applying the rules in section 144.1 and Schedule IX to the Act. Section 144.1 of the Act 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 to the Act, made in the province. Section 144.1 of the Act 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.

The rule for determining whether a supply of a service such as Web site design is made in a particular province is set out in Part V of Schedule IX to the Act. Paragraph 2(a) of Part V of Schedule IX to the Act provides that a service is considered to be supplied in a particular province if all or substantially all (i.e., 90% or more) of the service is performed in that province. The "Canadian element" of a service is the portion of the service that is performed in Canada.

A supply of a service can also be considered to be made in a particular province, pursuant to paragraph 2(b) of Part V of Schedule IX, if the place of negotiation for the supply is in the province, and all or substantially all of the service is not performed outside that province. The "place of negotiation" of a supply means the location of the supplier's permanent establishment at which the individual principally involved in negotiating an agreement for the supplier ordinarily works or reports to in the performance of his or her duties relating to the supplier's activities in the course of which the supply is made. "Negotiating" includes the making or acceptance of an offer. The meaning of "permanent establishment" for this purpose is as defined in various provisions of the Income Tax Regulations of the Income Tax Act, based on the type of person. For more information, please refer to the enclosed Section 3.4, Residence, of the GST/HST Memoranda Series.

In this case, the supply is deemed to be made in a non-participating province because the supply of the Web site design to the non-resident company is performed entirely in the province of XXXXX. Therefore, where a client is resident in Canada the supply is subject to GST at 7%. However, as previously indicated, if the supply of the service of web site design is made to a non-resident person, the supply is zero-rated.

I understand from your letter that you have been charging GST to your non-resident client. If the supply qualifies for zero-rating, as discussed above, the GST was charged or collected in error. If you charge or collect an amount as tax in excess of the tax that was collectible, you have to include that amount in the calculation of your net tax for the reporting period in which it was charged or collected. You may, however, within two years of charging or collecting the excess amount, refund or credit it to your customer. If so, you must issue to your customer a credit note for the amount containing prescribed information. You can then deduct the amount in determining your net tax for the reporting period in which it is refunded or credited. The information to be included in the credit note is as follows:

•   a statement that the document is a credit or debit note;

•   your business or trading name and your Business Number;

•   the customer's name or trading name;

•   the date on which the note is issued.

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.

For your convenience, find enclosed a copy of section 1.4 of Chapter 1 of the GST/HST Memoranda Series.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-6743.

Yours truly,

Cheryl R. Leyton
Border Issues Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate