25 June 2002 GST/HST Interpretation 31697 - Tax Status of Web Site Hosting and Advertising

Dear XXXXX:

Thank you for your letter of May 29, 2000, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to Web site hosting and advertising on the Internet.

As per my telephone conversation with XXXXX, this letter pertains only to the first two scenarios appearing in the letter. At issue is the tax status of the supply by your client of Web site hosting and the placement of graphic banners, pop-up windows and dialogue pop-ups on the Internet.

The following two scenarios were presented in the letter. In view of the request for the tax status, I am considering that the client is registered for GST/HST purposes.

Scenario 1

•   The client is resident in Canada and is registered for GST/HST purposes

•   The client leases a server on a monthly basis. The server is located in XXXXX[.]

•   The client uses the server for its own purposes but also uses it to host the Web sites owned by other individuals. At present there are three individuals, all of whom are resident in Canada, who are being provided with this service. There is a potential to host sites from individuals who are not resident in Canada.

Scenario 2

•   The client, resident in Canada and registered for GST/HST purposes, runs high traffic Web sites. Traffic is sold by redirecting its Web site traffic to other companies' Web sites. This is done using the following methods:

•   Graphic Banners - click-able images on their web site linked to another site

•   Pop-up windows - separate windows that pop-up with another site inside

•   Dialogue Pop-ups - pop-up questions asking surfers to visit another site

•   These sources have come from all over the world (one was from Hong Kong), although the client usually deals with businesses and individuals from the United States.

Interpretation Requested

1. What is the tax status of the supply of hosting the web sites?

2. What is the tax status of the supply of graphic banners, pop-up windows and dialogue pop-ups?

Interpretation Given

Scenario 1

The supply of Web site hosting is considered to be a supply of a service for purposes of the Excise Tax Act ("the Act").

A supply of a taxable service deemed to be made in Canada is subject to GST at the rate of 7% (15% HST when made in a participating province: Nova Scotia, New Brunswick or Newfoundland) 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. Whether the server hosting the Web site is situated outside Canada, where any activity related to the performance of the service supplied by your client is undertaken in Canada, the service is considered to be performed at least in part in Canada and consequently deemed to be made 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 a web hosting service 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.

Where 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.

Section 3 of Part IX of Schedule IX to the Act provides that, notwithstanding any other Part of Schedule IX, a supply of property or a service is made in a province if the supply is prescribed to be made in the province. Section 10 of the Place of Supply (GST/HST) Regulations prescribes the place of supply. This section provides that, when a particular supplier makes a supply of a computer related service and there is one final recipient of the service, who acquires it under an agreement either with the particular supplier or another supplier, the supply is considered to be made in a particular province if there is a single ordinary location at which the recipient avails itself of the service, 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.

Failing this, the supply will be made in a particular province if the mailing address of the recipient of the supply is in that province.

For purposes of the Place of Supply (GST/HST) Regulations, a "computer-related service" means a service involving the electronic storage of information and computer-to-computer transfer of information. With respect to computer-related service, a "final recipient" means a person who is the recipient of a supply of the service who acquires it otherwise than for the purpose of supplying it to another person.

Therefore, if the final recipient of a taxable (other than zero-rated) Web site hosting service is located in a particular participating province, the supply is deemed to be made in that province and consequently subject to HST at 15%. If the recipient of the supply is located in a non-participating province, the supply is deemed to be made in that province and consequently subject to GST at 7%.

Scenario 2

By publicizing another person's messages through the supply of graphic banners, pop-up windows and dialogue pop-ups on its Web site, your client is considered to be making a supply of an advertising service. The term advertising is not defined in the Act, however, the CCRA has provided an explanation as to what is generally considered to be an advertising service in GST/HST Memoranda Series Section 4.5.3, Exports - Services and Intellectual Property. This Memorandum refers to an advertising service as 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.

Again, when the taxable supply of a service is, or is to be, performed in whole or in part in Canada, the supply of the service is deemed to be made in Canada pursuant to paragraph 142(1)(g) of the Act and is subject to GST/HST as stated previously, unless zero-rated.

Section 8 of Part V of Schedule VI to the Act zero-rates a supply of a service of advertising made to a non-resident person, who is not registered when the service is performed. As stated in Scenario 1, it is the supplier's responsibility to verify that the recipient is a non-resident and is not registered for GST/HST purposes.

As explained in Scenario 1, 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.

The rule for determining whether a supply of a service such as an advertising service 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 a 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.

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