19 April 2002 GST/HST Interpretation 32669 - Sale of Software Via the Internet

Dear XXXXX:

Thank you for your letter of August 24, 2000, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to supplies of software over the Internet by your client XXXXX. Your request has been transferred from the XXXXX to the Border Issues Unit of the General Operations and Border Issues Division for our response.

Our understanding of the situation from your letter is as follows:

•   XXXXX sells software predominately over the Internet to customers throughout the world.

•   The customer downloads the software from the Internet to allow testing.

•   If the customer decides to purchase the software, he would pre-pay XXXXX using a credit card.

•   XXXXX will then issue a code to the customer to unlock the downloaded software.

•   At this point in time, the customer now owns the software.

In addition, it appears from your client's website that the software is not customized.

Interpretation Requested

You are seeking an interpretation regarding XXXXX obligations for Internet sales outside Canada. There will be no bill of lading issued for the sales as nothing is being shipped. Therefore, if the customer's address is outside Canada, is this sufficient proof to permit XXXXX not to charge the GST on the sale of the software?

Interpretation Given

Depending on the medium by which it is supplied, the supply of software that is not custom software may be a supply of tangible personal property (TPP) or intangible personal property (IPP). If the software supplied by XXXXX is not customized for any particular customer and is supplied and delivered by electronic means through the Internet, the supply is considered to be a supply of IPP.

The supply of the software by XXXXX will be deemed to be made in Canada pursuant to subparagraph 142(1)(c)(i) of the Excise Tax Act (the Act) if the software may be used in whole or in part in Canada. If the supply of the software may not be used in Canada, then the supply of the software is deemed to be made outside Canada under subparagraph 142(2)(c)([i]) of the Act. The fact that the supply may be made to recipients who are outside Canada has no bearing on whether a supply of IPP is made in Canada. Whether the supply of the software may be used in Canada is dependent on the terms of the agreement for the supply.

Every recipient of a taxable supply made in Canada is required to pay GST/HST in respect of the supply at the GST rate of 7% (or the HST rate of 15% where the supply is deemed to be made in a participating province) on the value of the consideration for the supply unless the supply is zero-rated (taxed at 0%). The three participating provinces are Nova Scotia, New Brunswick, and Newfoundland.

We consider the supply of software that is a supply of IPP to be a supply of intellectual property. The supply of intellectual property or any right, license or privilege to use any such property is zero-rated when supplied to a recipient who is not resident in Canada and who is not registered for GST/HST purposes at the time the supply is made. Consequently the supply of the software by XXXXX to a non-resident recipient will be zero-rated provided the non-resident recipient is not registered for GST/HST purposes. When making supplies of the software, XXXXX must verify and maintain evidence that the recipient is not resident in Canada and is not registered for GST/HST purposes. We have enclosed a copy of GST/HST Memoranda Series Chapter 4.5.1 Exports - Determining Residence Status for your review. The documentation that the CCRA will generally accept as proof that the customer is both a non-resident and is not registered is described in Appendix B of this Memorandum.

When the supply of the software is made in Canada and is not zero-rated, it is necessary to determine the province in which the supply is made, or deemed to be made, in order to determine the appropriate rate of GST/HST. Where a taxable supply that is not zero-rated is deemed to be made in a participating province the supply will be subject to HST at 15% and where the supply is determined to be made in a non-participating province it will be subject to GST at 7%.

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 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 place of supply rules for a supply of IPP not related to real property, tangible personal property or services are provided for in paragraphs 2(d) and 3(d) of Part III of Schedule IX to the Act. Subparagraph 2(d)(i) of Part III of Schedule IX to the Act states 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 can be used only in the province. "Canadian rights" refers to that part of the IPP that can be used in Canada (section 1 of Part III of Schedule IX to the Act). Subparagraph 3(d)(i) results in the supply being regarded as made in a particular participating province if the Canadian rights in respect of the IPP cannot be used otherwise than primarily in the participating provinces and the greatest proportion of the Canadian rights that can be used only in the participating provinces can be used in the particular province. If the use of XXXXX software is not limited in any manner to any specific province or groups of provinces, subparagraph 2(d)(i) and paragraph 3(d) of Part III of Schedule IX would not be applicable.

2(d)(ii) of Part III of Schedule IX to the Act states 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 can 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 ...". Where there are no restrictions regarding the province in which XXXXX software can be used, it will always be the case that the property can be used otherwise than exclusively outside the province where the place of negotiation occurred. Therefore, if it is determined that the place of negotiation of the supply of the software is in a non-participating province such as Ontario, subparagraph 2(d)(ii) would deem the supply to be made in that province and subject to GST at 7%.

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