28 March 2003 GST/HST Ruling 39061 - Digital Certificates

Dear XXXXX:

Thank you for your facsimile XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to your company's supply of digital certificates to residents and non-residents.

Statement of Facts

Our understanding of the facts is as follows:

XXXXX is registered for purposes of the GST/HST and is located in XXXXX. It is a "Registration Authority" that supplies XXXXX (the Certificates) to its clients.

XXXXX Certificate is a computer-based record or electronic message that identifies the Certificate holder, contains a public and a private key (i.e., encryption software), and includes the validity period for the Certificate. When a client is issued a Certificate, XXXXX guarantees the client's identity. The Certificate can be used on a variety of common office systems, such as MS Outlook 2000(tm) e-mail or Netscape(tm) and can be loaded onto a server so that a person making SSL (SSL is an acronym for "secure sockets layer", which is a protocol developed to transmit private documents via the Internet.) connections can verify that they are connecting to the correct server.

Under the XXXXX Agreement entered into by the client and XXXXX, there are no restrictions on where the Certificates may be used. For example, if the client is situated in XXXXX, XXXXX does not restrict the client from using the Certificate in other locations. The client may also provide the public key included in the Certificate to a person located anywhere in the world to allow that person to decrypt a message sent by the client or to encrypt one sent to the client.

In accordance with the terms of the XXXXX Agreement, XXXXX may revoke the Certificate issued to a client. In addition, the client is required to keep the private key included in the Certificate private.

XXXXX has entered into an agreement with XXXXX, a US Company that is a "Certification Authority". This agreement allows XXXXX to log onto a private section of the Certification Authority's Web site to begin the process of generating a Certificate. For this access, XXXXX pays the Certification Authority a fee of XXXXX per Certificate.

XXXXX has entered into a separate agreement with XXXXX, an organization located in XXXXX (the Organization). Members of the Organization are able to log on to XXXXX Web site to order a Certificate and XXXXX contacts the Organization to authenticate the client's identification. For this authentication, XXXXX pays the Organization a fee of XXXXX per Certificate.

To order a Certificate, a client (i.e., a member of the Organization) logs onto XXXXX Web site and places the order. XXXXX goes to the Certification Authority's Web site and begins the process of generating a Certificate. Upon authentication by the Organization, XXXXX e-mails the client to inform them that the Certificate can be downloaded. The client logs onto the Certification Authority's Web site and downloads the Certificate, including the public and private keys. Nothing is stored on the Certification Authority's Web site or server once the Certificate is downloaded by the client. If required, XXXXX will also provide additional hardware, driver software and/or connection cables at no additional charge.

XXXXX charges XXXXX annually for a Certificate, XXXXX annually for a Certificate that includes a XXXXX Option (which includes the required hardware, driver software and connection cable), or XXXXX annually for a Certificate with a XXXXX Option (including the required hardware, driver software and connection cable). The XXXXX Option and the XXXXX Option allow for added control and flexibility for securing a person's identity regardless of the location of the message.

If the client is paying for the Certificate manually, the funds are sent by the client directly to XXXXX ; however, if the client is paying electronically, the Certification Authority will collect the funds on behalf of XXXXX and transfer the amount to XXXXX, net of the amount XXXXX owes the Certification Authority. Once XXXXX receives the funds, it will then pay the amount owing to the Organization that relates to the Certificate.

The "place of negotiation" (The "place of negotiation" of a supply means 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, or reports to in the performance of his or her duties in relation to the supplier's activities in the course of which the supply is made. "Negotiating" includes the making or accepting of an offer.) of the supply of a Certificate by XXXXX is in XXXXX.

The above information was obtained from your incoming facsimile XXXXX, our telephone conversations XXXXX, your facsimile XXXXX and XXXXX Web site at XXXXX.

Ruling Requested

What is the tax status of XXXXX supplies of the Certificates to residents of Canada and non-residents?

Rulings Given

Based on the facts set out above, we rule that XXXXX supply of a Certificate is a supply of intangible personal property (IPP) and is deemed to be made in Canada, pursuant to subsection 142(1) of the Excise Tax Act (ETA).

We further rule that XXXXX supply of a Certificate made to a resident or non-resident client is subject to the GST at a rate of 7%, pursuant to subsection 165(1) of the ETA, even where the client is located in a participating province. (Nova Scotia, New Brunswick, and Newfoundland and Labrador)

These rulings are subject to the general limitations and qualifications outlined in section 1.4 of the GST/HST Memoranda Series. We are bound by these rulings provided that none of the above issues is currently under audit, objection, or appeal; that there are no relevant changes in the future to the ETA, or to our interpretative policy; and that you have fully described all necessary facts and transactions for which you requested a ruling.

Explanation

The supply of the Certificate is a supply of IPP. A taxable [other than zero-rated] supply of IPP made in Canada is subject to the GST at the rate of 7% or HST at the rate of 15% [where the supply is made in a participating province]. A taxable supply that is zero-rated is taxed, under subsection 165(3) of the ETA, at a rate of 0%.

As stipulated in paragraph 142(1)(c) of the ETA, a supply of IPP that is not related to real property, tangible personal property or a service, is deemed to be made in Canada if the IPP may be used [meaning "allowed to be used"] in whole or in part in Canada. As XXXXX does not restrict use of the Certificate exclusively to "in Canada" or "outside Canada", under this paragraph, the supply is deemed to be made in Canada since the Certificate may be used in Canada.

Section 144.1 of the ETA works in conjunction with the rules set out in Schedule IX to the ETA to determine the province in which the supply is made.

As the Certificate is IPP that is not related to real property, tangible personal property or services, and there are no restrictions regarding the province or group of provinces in which the IPP may be used, subparagraph 2(d)(ii) of Part III of Schedule IX to the ETA must be examined to determine the place of supply. Under this provision, a supply of IPP is considered to be made in a province if the place of negotiation of the supply is in the province, and the IPP may be used otherwise than exclusively outside the province. Where there are no restrictions regarding the province in which the IPP may be used, it will always be the case that the IPP may be used otherwise than exclusively [90% or more] outside the province where the place of negotiation occurred. Therefore, as a GST/HST-registrant with a permanent establishment in XXXXX that is the place of negotiation, the supplies of the Certificates by XXXXX are deemed to be made in XXXXX, a non-participating province (The rest of Canada). As such, XXXXX is required to collect the GST at a rate of 7% on the supply of a Certificate even in cases where the recipient of the Certificate is located in a participating province.

There are no provisions in the ETA that would zero-rate the supply of the Certificates when supplied to a non-resident. As such, the supplies of the Certificates are subject to the GST at 7% when supplied to non-residents.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-8806.

Yours truly,

Marjorie Stevens
Electronic Commerce Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate