28 March 2002 GST/HST Interpretation 8404 - Long Distance Minutes Supplied Over the Internet

Dear Sir:

Thank you for your email message of November 5, 1999, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to your intended e-commerce operations.

We apologize for the delay in providing you with a response.

Our understanding of the facts is:

1. You are considering a business opportunity related to the supply of long distance minutes (Minutes) to customers via the Internet;

2. You will acquire Minutes from a person supplying telecommunication services for supply to your customers;

3. The customers will be able to purchase Minutes in a range of denominations (industry standards range from five to one hundred dollars);

4. The only accepted method of payment will be by credit card;

5. The credit card approval and processing will be handled by a third party clearing house;

6. Once the credit card payment is approved and processed, you provide a Personal Identification Number (PIN) to the customer via the Internet;

7. To access the debit amount of Minutes, the customer dials a toll-free number and enters the PIN.

8. Once the PIN is accepted, the customer dials, and is connected to the destination number;

9. You state that you will not know any information other than the PIN that you provide to the customer;

10. Generally, the quantity of Minutes that get deducted by the supplier of the telecommunication service from the debit amount of Minutes depends on the origin of the call, the destination of the call, and the duration (in time) of the call; and

11. Your supplier of the telecommunication services does not provide you with any information relating to the actual use of the Minutes by your customers.

Interpretation Requested

How do you account for the GST/HST on Minutes supplied over the Internet?

Interpretation Given

The sale of Minutes over the Internet made in the course of a commercial activity is considered to be a taxable supply of a telecommunication service, specifically, a 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 as per subsection 123(1) of the Excise Tax Act (the "ETA").

Every recipient of a taxable (other than a zero-rated) supply made in Canada, in a non-participating province, shall pay tax in respect of the supply calculated at the rate of 7% on the value of the consideration for the supply. Every recipient of a taxable (other than a zero-rated) supply made in a participating province (New Brunswick, Newfoundland and Labrador, and Nova Scotia) shall pay tax in respect of the supply calculated at the rate of 15% on the value of the consideration for the supply (Section 165 of the ETA).

In this case, the supply of the telecommunication service is made in Canada if the telecommunication is emitted and received in Canada or the telecommunication is emitted or received in Canada and the billing location for the service is in Canada. (Subsection 142.1(2) of the ETA)

A supply that is made in Canada can also be considered made in a participating province if the supply meets the conditions of the relevant sections in Schedule IX to the ETA. (Section 144.1 of the ETA)

In this case, the telecommunication service is made in a province if the telecommunication is emitted and received in the province. The telecommunication service can also be considered to be made in a province if the telecommunication is emitted or received in the province and the billing location for the service is in the province or if it 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. (Section 2 of Part VIII of Schedule IX of the ETA)

The Canada Customs and Revenue Agency (CCRA) has taken the position, with respect to long distance telephone cards, that the supply of the telecommunication service is made where the card is provided to the recipient. As such, if the card is provided to a recipient in a retail establishment that is located in a participating province, HST at a rate of 15% will apply to the value of the consideration. In the case of Minutes supplied over the Internet, it is the CCRA's position that the supply of the telecommunication service is made where the PIN is provided to the recipient, i.e., the recipient's address.

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.

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) 954-9700.

Yours truly,

Donato Licursi
Services and Intangibles Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate