24 June 2003 GST/HST Interpretation 32644 - Supply of Software Over the Internet

Dear XXXXX:

Thank you for your letter XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the supply of software over the Internet. I would also like to thank you for the information provided during our telephone conversations. Please accept my apology for the delay in replying to your letter.

The following information was provided in your letter and our subsequent telephone conversations.

•   XXXXX is a resident of Canada and is registered for the GST/HST XXXXX[.]

•   XXXXX purchases software from XXXXX, XXXXX, XXXXX and resupplies the software to its customers who are all non-resident resellers of the software.

•   XXXXX.

•   XXXXX supplies electronic master copies of their software and user manuals to XXXXX via the Internet, which XXXXX keeps on its own computers. XXXXX also provides training on the software.

•   Dealers purchasing products from XXXXX sign a licence agreement and are given a password to download the products on the Internet. The dealers have two options for obtaining the products. Either the dealers can download the products directly from XXXXX via the XXXXX web site on the Internet, or XXXXX can copy them to CDs and ship them to the dealer. If the dealer requires a paper copy of a manual, XXXXX can print it locally and ship it to the dealers as well. XXXXX creates and ships physical products only if and when required. XXXXX.

•   The software licence includes a XXXXX maintenance agreement. If, XXXXX, an upgrade is made to the software, the client is able to obtain the upgrades.

•   XXXXX offers, to its customers, the option to purchase an annual maintenance agreement, XXXXX, which will provide the dealer with any upgrades and a technical support system beyond the initial XXXXX agreement.

Interpretation Requested

1. Whether XXXXX is required to charge GST/HST on the supplies made to its non-resident customers.

2. How is XXXXX required to reports its sales on its GST/HST return?

3. Can XXXXX claim ITCs for the GST/HST it pays on its business expenses?

Interpretation Given

1. The supply of the right to use software, that is not custom software, is a supply of intangible personal property (IPP) or tangible personal property (TPP) depending on the medium on which it is supplied. When the software is supplied by electronic means it is a supply of IPP and when supplied by means of a physical medium, such as on a CD, it is a supply of TPP.

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 Excise Tax Act (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.

A supply that is made in Canada is subject to GST at the rate of 7%, or HST at a rate of 15% where the supply is deemed to be made in a participating province unless the supply is zero-rated (taxed at 0%). The three participating provinces are Nova Scotia, New Brunswick, and Newfoundland and Labrador.

A supply of IPP can be considered to be made in Canada even if it is not actually used in Canada. The fact that the supply may be made to a recipient who is outside Canada has no bearing on whether the supply is made in Canada.

In determining whether IPP may be used in Canada, reference may be made to any written agreement for the supply that contains terms governing the place of use of the IPP or to a general restriction that may be explained on the supplier's Web site as to the use of the IPP, to which the recipient agrees either expressly or implicitly upon acquisition of the supply.

The supply of intellectual property or any right, licence 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. The CCRA considers the supply of software that is a supply of IPP to be intellectual property. Consequently, the supply of software by XXXXX to a non-resident recipient will be subject to GST/HST at a rate of 0% provided the non-resident is not registered for GST/HST purposes. Under these circumstances, XXXXX must verify and maintain evidence that the recipient is a non-resident and is not registered for GST/HST purposes. GST/HST Memoranda Series Section 4.5.1, Exports - Determining Residence Status has been enclosed for your review. Appendix B of this memorandum describes the documentation that the CCRA will generally accept as proof that the customer is both a non-resident and is not registered.

Where the supply of software maintenance as described is included in the software licence, it is considered to be part of a single supply of the software.

However, where the supply of maintenance is acquired separately, it is not considered to be part of the single supply of the licence to use the software. In this case, the supply of the maintenance is a separate supply from the supply of the software and if the principal object of the maintenance contract is the software upgrades, that separate supply is a supply of IPP (software) that is subject to the previously explained rules.

However, if the principal object of the maintenance contract is technical support the principal object of which is to provide access to technicians, the separate supply is considered to be the supply of a service.

Pursuant to paragraph 142(1)(g) of the Act, a supply of a service is deemed to be made in Canada if the service is, or is to be, performed in whole or in part in Canada. Paragraph 142(2)(g) provides that a supply of a service is deemed to be made outside Canada if the service is, or is to be, performed wholly outside Canada.

Whether a service is performed in whole or in part in Canada is a question of fact to be determined on a case-by-case. A supply of a service is performed at least in part in Canada if:

•   the service requires a person to perform a task (i.e., the supplier acts through one or more of its employees), and the person performing or physically carrying out the task is situated in Canada at the time the activity is done;

•   the service includes operations performed by a supplier's equipment (e.g., computer equipment), and the equipment is located in Canada;

•   the supply involves doing something to or with a recipient's equipment by accessing it from a remote location, and the recipient's equipment is located in Canada; or

•   any activity related to the performance of the service is undertaken in Canada.

Section 23 of Part V of Schedule VI to the Act zero-rates the supply of an advisory service made to a non-resident person provided none of the exclusions of that provision apply. The supply of a technical support service relating to software may qualify for zero-rating as an advisory service under this provision where it is supplied to a non-resident person. It should be noted that an advisory service is not considered to include any work that might be undertaken or performed as a result of the advice provided to the client. For further information, see the enclosed GST/HST Memoranda Series 4.5.3, Exports - Services and Intellectual Property.

Paragraph 142(1)(a) of the Act provides that a supply by way of sale of TPP is deemed to be made in Canada if the TPP is, or is to be, delivered or made available in Canada to the recipient of the supply. A supply by way of sale of TPP is deemed to be made outside Canada, under paragraph 142(2)(a) of the Act, if the TPP is, or is to be, delivered or made available outside Canada. If the supply by way of sale of TPP is deemed to be made outside Canada, it is not subject to the GST/HST. Paragraphs 7 to 11 of the enclosed GST/HST Memoranda Series Chapter 3.3, Place of Supply, explain where TPP is considered to be delivered or made available.

Even if TPP that is supplied by way of sale is deemed to be made in Canada, it may be zero-rated as an export under section 12 of Part V of Schedule VI to the Act in various circumstances, including where the supplier sends the property by mail or courier to an address outside Canada. We have enclosed a copy of section 4.5.2, Exports - Tangible Personal Property of the GST/HST Memoranda Series for your additional information.

The supply of a training service is considered to be supplied in Canada if it is, or is to be, performed in whole or in part in Canada, as previously explained. A supply of a training service that is supplied in Canada may qualify for zero-rating under section 7 of Part V of Schedule VI to the Act. Section 7 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 person 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.

2. The total amount of taxable sales of goods and services must be shown on line 101 of your quarterly return including zero-rated sales. The enclosed guide, General Information for GST/HST Registrants, provides detailed line-by-line instructions for completing your GST/HST return.

3. Pursuant to section 169 of the Act, as a GST/HST registrant, XXXXX may claim ITCs to recover the GST/HST it pays or owes on property or services it acquires or imports for consumption, use or supply (including zero-rated supplies) in the course of its commercial activities. The General Information for GST/HST Registrants guide provides additional information on ITCs.

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