24 June 2002 GST/HST Interpretation 34703 - Application of the GST/HST to Subscriptions to Web Sites

Thank you for your letter of February 1, 2001, with attachments, concerning the application of the Goods and Services Tax (GST) and the Harmonized Sales Tax (HST) to supplies made by XXXXX XXXXX[.] We regret the delay in responding.

Statement of Facts

The following facts are taken from your letter with attachments, my telephone conversations with XXXXX, a fax from XXXXX and XXXXX Web site at http://www.XXXXX. XXXXX is registered for GST purposes. XXXXX is located in XXXXX. XXXXX customers are both residents and non-residents. XXXXX makes many supplies in the e-commerce industry including the supply of subscriptions to Web sites.

XXXXX makes supplies of a right to access Web sites, which are sold through the Internet. A customer can sign up on-line to buy a subscription, which will give him access to over XXXXX sites. These sites contain XXXXX. For example, a customer may sign up for a 6 month subscription for $XXXXX US. XXXXX customers can access the Web sites from anywhere in the world including Canada.

The on-line sign-up form provides the customer's name, address and credit card information. XXXXX XXXXX XXXXX. When a customer signs up on-line for a subscription to access a Web site, the customer cannot download any digitized products like music, videos and software. The customer gets viewing privileges only while he is on-line.

XXXXX collects payments from subscribers made by credit card; these transactions are made on-line through the Internet. XXXXX provides a password but does not own the material on the Web sites nor does it own the Web sites themselves. XXXXX pays an agreed amount of commission to the Web site owners i.e., the webmasters, who all appear to be located outside Canada. Subscriptions are automatically renewed unless the subscriber cancels his account prior to the date of renewal. XXXXX bills and collects subscription renewals and then pays the webmasters their commission.

Webmasters also have an on-line sign up form and agreement. XXXXX XXXXX. The Agreement is between XXXXX (a service mark of XXXXX ) and the participating webmaster. The relevant clauses in the Agreement are as follows:

XXXXX

Question Asked

You would like to know if XXXXX supplies of access to Web sites by subscription may qualify for zero-rating under Part V of Schedule VI to the Act.

Answer Provided

The supply of access to web sites (such as is made by XXXXX) is considered to be a supply of intangible personal property (IPP). XXXXX is supplying the right to access the digitized content on the Web sites. XXXXX customers have purchased the right to view/access the Web sites while they are on-line. The content on the Web sites consists of existing information, which has not been developed for a specific customer.

A supply of IPP that may be used (meaning "allowed to be used") in whole or in part in Canada is deemed to be made in Canada pursuant to subparagraph 142(1)(c)(i) of the Act. Conversely, where the IPP may not be used in Canada, the supply is deemed to be made outside Canada pursuant to subparagraph 142(2)(c)(i) of the Act. XXXXX customers may access the Web sites from anywhere in the world including Canada. As there are no restrictions on the place of use of the IPP supplied by XXXXX, these supplies are deemed to be made in Canada.

A taxable supply of IPP made in Canada, is taxable at the rate of 7% GST (15% HST where the supply is made in a participating province: Nova Scotia, New Brunswick, or Newfoundland) unless the supply is zero-rated.

Section 10 of Part V of Schedule VI to the Act is the only relevant zero-rating provision for a supply of IPP made in Canada to a non-resident person. The supply of intellectual property or any right, license or privilege to use any such property is zero-rated under section 10 of Part V of Schedule VI to the Act, when supplied to a recipient who is not resident in Canada and is not registered for GST/HST purposes at the time the supply is made. Intellectual property includes an invention, patent, trade secret, trade-mark, trade-name, copyright or industrial design. The supply of access to Web sites made by XXXXX is not a supply of intellectual property nor a right, licence or privilege to use such property. Therefore, XXXXX supplies of access to Web sites are not zero-rated.

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. In order to determine whether the HST applies to the supplies made by XXXXX, the place of supply with respect to a province must be determined. For this determination, the relevant provisions of the Act are 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, 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.

Subparagraph 2(d)(i) of Part III of Schedule IX to the Act provides 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 may be used only in the province. "Canadian rights" means that part of the IPP that can be used in Canada. Where there are no restrictions regarding the province in which the IPP may be used, subparagraph 2(d)(i) of Part III of Schedule IX to the Act is not applicable.

Subparagraph 2(d)(ii) of Part III of Schedule IX to the Act provides that a supply of IPP will be considered to be made in a province if the place of negotiation of the supply is in the province, and the property may 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...".

Generally, subsection 132.1(2) of the Act defines a permanent establishment for purposes of Schedule IX to be as defined in various provisions of the Income Tax Regulations of the Income Tax Act, based on the type of person involved. For instance, in the case of a corporation that carries on a business within the meaning of subsection 248(1) of the Income Tax Act, a permanent establishment is as defined for the purposes of Part IV of the Income Tax Regulations.

Where there are no restrictions regarding the province in which the right may be used, it will always be the case that the right may be used otherwise than exclusively outside the province where the place of negotiation occurred. Based on the information provided concerning XXXXX supplies of IPP, the place of negotiation is not in a participating province. Therefore, XXXXX supplies of access to Web sites are subject to GST at the rate of 7%.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-4294.