12 September 2002 GST/HST Interpretation 35069 - Advertising Services

Dear XXXXX:

Thank you for your letter to the XXXXX GST/HST Rulings Centre of XXXXX, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to a supply of an advertising service. Your letter was forwarded to us for a response and we apologize for the delay in replying to your enquiry.

You have provided the following scenario:

A Canadian Corporation (CANCO) owns and operates a Web site that is hosted on a US company's server. CANCO maintains and updates its Web site in Canada.

CANCO enters into agreements with non-resident advertisers (NRCOs) who pay CANCO on a referral basis to advertise on its Web site.

When an individual purchases a subscription to a NRCO's Web site, the NRCO pays a commission to CANCO if the individual has used CANCO's Web site to access the NRCO's Web site. The individual may be resident in Canada or outside Canada. At no time does the individual purchase any goods or services from CANCO.

CANCO's only source of revenue is the commission payments.

It is assumed that activities relating to the placement of the advertisements on CANCO's Web site are performed in Canada.

Ruling Requested

You have requested a ruling on the tax status of CANCO's supplies to the NRCOs; however, pursuant to section 1.4 of the GST/HST Memoranda Series (copy enclosed), a ruling can only be issued where clearly defined facts are established. As these are not established, we are pleased to provide you with the following interpretation in lieu of a ruling.

Interpretation Given

The term "advertising" is not defined in the Excise Tax Act (ETA), however, the Canada Customs and Revenue Agency (CCRA) has provided an explanation as to what is generally considered to be an advertising service for GST/HST purposes in section 4.5.3, Exports - Services and Intellectual Property of the GST/HST Memoranda Series (copy enclosed). The explanation in this section refers to a service of creating a message and a service directly related to the communication of such a message. Further, the message must be oriented towards soliciting business, attracting donations, or calling public attention in the form of an information notice, a political announcement or other similar communication.

There are occasions where the person communicating a message will not be the same person creating or supplying the message. Generally, the person supplying the broadcast or communication service will be in possession of the message or will have received sufficient information as to the content of the message prior to the supply of the service to know that the message is in the nature of advertising. In these situations, the supply of the broadcast or communication service will be considered to be a supply of an advertising service.

Based on the information provided, the supply by CANCO to a NRCO is considered to be a supply of an advertising service for purposes of the ETA.

A taxable (other than zero-rated) supply of an advertising service made in Canada by a GST/HST registrant is subject to the GST at the rate of 7% or HST at the rate of 15% [where made in a participating province (Nova Scotia, New Brunswick and Newfoundland and Labrador)]. A taxable supply of an advertising service that is zero-rated is taxed at 0%.

Pursuant to paragraph 142(1)(g) of the ETA, a supply of a service, other than a service in relation to real property, is deemed 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 ETA deems such a supply of a service to be made outside Canada if the service is, or is to be, performed wholly outside Canada. If a supply of a service is deemed to be made outside Canada, it is not subject to the GST/HST. From the information provided, it appears the advertising service is performed in whole, or in part, in Canada; therefore, the supply would be deemed to be made in Canada.

Section 144.1 of the ETA 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 ETA, 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.

Under Part V of Schedule IX to the ETA, generally, a service is considered to be supplied in a particular province if all or substantially all [90% or more] of the "Canadian element" (In Part V of Schedule IX to the ETA, the "Canadian element" of a service means the portion of the service that is performed in Canada.) of the service is performed in that province. For example, if the portion of the service that is performed in Canada is performed entirely in XXXXX, the supply is considered to be made in XXXXX and would be subject to the GST at the rate of 7%, unless the supply is zero-rated. For your reference, we have enclosed a copy of GST/HST Technical Bulletin - B-078: Place of Supply Rules under the HST.

The next step is to determine whether there are any zero-rating provisions that may apply to a taxable supply of an advertising service.

Section 8 of Part V of Schedule VI to the ETA zero-rates a supply of an advertising service that is made to a non-resident person who is not registered for purposes of the GST/HST at the time the service is performed. It should be noted that when the non-resident person is registered, this section would not apply. However, where a non-resident person is registered for purposes of the GST/HST at the time the service is performed, the service may still be zero-rated under the general zero-rating provision concerning the export of services that is found in section 7 of Part V of Schedule VI to the ETA. This section zero-rates a supply of a service, such as advertising, made to a non-resident unless it is excluded by paragraphs 7(a) through 7(h) (The exclusions to section 7 of Part V of Schedule VI to the ETA are discussed in paragraphs 18-23 of the aforementioned section 4.5.3 of the GST/HST Memoranda Series.) of that section. For example, a supply of an advertising service made to a non-resident person is excluded from zero-rating under this section when the non-resident person is an individual who is in Canada at any time when the individual has contact with the supplier in relation to the supply of the service, or, when the advertising service is rendered to an individual while that individual is in Canada.

It is the supplier's responsibility to verify that the recipient is a non-resident and, as the case may be, not registered for GST/HST purposes. For your information, we have 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 of the supply is not resident in Canada and Appendix B describes the documentation that the CCRA will usually accept as proof that a person is a non-resident and not registered for purposes of the GST/HST.

In conclusion, when determining the tax status of CANCO's supply of an advertising service in this scenario, it is necessary to establish whether the particular NRCO is registered for the GST/HST. If they are not, the supply would be zero-rated under section 8 of Part V of Schedule VI to the ETA. If the NRCO is registered, CANCO's supply would be zero-rated unless it is excluded from section 7 of this Part by paragraphs 7(a) through 7(h). If CANCO's supply is excluded by one of these paragraphs, its supply of the advertising service to the NRCO would be subject to the GST at the rate of 7% or HST at the rate of 15% if it is determined that the supply is made in a participating province.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the ETA, 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 CCRA with respect to a particular situation.

Finally, we have enclosed a copy of our Technical Information Bulletin B-090 - GST/HST and Electronic Commerce.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-8806.

Yours truly,

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