17 May 2002 GST/HST Interpretation 37044 - Prepaid Telephone Calling Cards

Dear XXXXX:

Thank you for your letter of August 9, 2001, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to prepaid telephone calling cards. We apologize for the delay in our response.

Please note that all legislative references are to the Excise Tax Act and regulations thereunder, unless otherwise specified.

Interpretation Requested

You would like to know the following:

•   Are prepaid telephone calling cards taxed at the point of purchase?

•   Are toll telephone calls that are ordinarily subject to tax by the two-out-of-three rule subject to tax when the toll call is made by means of a prepaid calling card?

•   Can there be tax on both the initial purchase of a pre-paid telephone calling card, and on a toll call made by means of that calling card?

•   Is there a difference to the answers above if the purchase of a calling card is made in a participating province or outside of a participating province?

•   Is there a difference in the answers above if a calling card is used to make a call which originates in a participating province but terminates in a non-participating province?

Interpretation Given

A great variety of prepaid telephone cards exist on the market today and the application of the GST/HST may vary from one card to another. Without the details of a particular calling card agreement, we can only address our current position on the application of the GST/HST, in general terms, with respect to some of these cards (i.e., prepaid long distance calling cards) when sold to consumers.

Pursuant to subsection 123(1), a "telecommunication service" is defined as

"(a) the service of emitting, transmitting or receiving signs, signals, writing, images or sounds or intelligence of any nature by wire, cable, radio, optical or other electromagnetic system, or by any similar technical system, or

(b) making available for such emission, transmission or reception telecommunications facilities of a person who carries on the business of supplying services referred to in paragraph (a)".

An amount paid for a prepaid long distance telephone card is an amount paid for a supply of a "telecommunication service", as defined in paragraph (a) of the definition, that is to be rendered when the card is used by the consumer.

Generally, the GST/HST applies to the consideration paid or payable for taxable supplies that are made in Canada, or deemed to be made in Canada, unless a legislative provision specifically exempts the supply. Section 165 imposes on every recipient of a taxable supply the obligation to pay tax in respect of that supply. Taxable supplies, other than zero-rated supplies, made in Canada are subject to the GST at a rate of 7% when made in a non-participating province, and to the HST at the rate of 15% when made in a participating province (New Brunswick, Nova Scotia, or Newfoundland and Labrador).

When looking at place of supply rules, we must first determine whether the telecommunication service is being provided in Canada. Paragraph 142.1(2)(b) provides that a telecommunication service is considered to be supplied in Canada when the telecommunication is both emitted and received in Canada or is either emitted or received in Canada and the billing location is in Canada. With respect to prepaid long distance telephone cards, it is the Canada Customs and Revenue Agency's (CCRA's) position that the supply of the telecommunication service is made where the card is provided to the recipient who has purchased the card.

If a supply is deemed to be made in Canada, we must then determine if the supply is made in a participating province. Section 144.1 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. A supply is deemed to be made in a province if it is made in Canada and is, pursuant to

Schedule IX, made in the province, but is deemed to be made outside the province in any other case and a supply made in Canada that is not made in any participating province is deemed to be made in a non-participating province.

Pursuant to paragraph 2(b) of Part VIII of Schedule IX, a telecommunication service is made in a province if:

"(i) the telecommunication is emitted and received in the province,

(ii) the telecommunication is emitted or received in the province and the billing location for the service is in the province, or

(iii) the telecommunication is emitted in the province and is received outside the province and the billing location for the service is not in a province in which the telecommunication is emitted or received."

As indicated above, with respect to a prepaid long distance telephone cards, it is the CCRA's position that the supply of the telecommunication service is made where the card is provided to the recipient who has purchased the card. As such, the supply of the telecommunication service is made in the province where the card is provided to the recipient and is taxed accordingly.

Generally, in these circumstances, when the GST/HST is collected at the time the card is provided to the recipient, the GST/HST does not apply at the time that the card is used by the recipient to obtain the telecommunication service.

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 CCRA 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) 952-9588.

Yours truly,

Doris Rist
Services and Intangibles
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate