4 April 2003 GST/HST Ruling 41980 - and GST/HST INTERPRETATION Secure Access Using a Software Application

Dear XXXXX:

Thank you for your facsimile XXXXX to the XXXXX GST/HST Rulings Centre concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to supplies of secure access using a software application and other components bundled together under a single contract. Your enquiry was forwarded to us for response and we apologize for the delay in replying.

Statement of Facts

Our understanding of the facts is as follows:

XXXXX is located in XXXXX, XXXXX and is registered for purposes of the GST/HST.

XXXXX is an extranet or SSL (SSL is an acronym for "secure sockets layer", which is a protocol developed to transmit private documents via the Internet.) virtual private network (VPN) provider. XXXXX gives its customers the ability to have their employees, clients and business partners securely access their corporate resources from Internet-enabled devices through secure VPN access and unique SAS (SAS is an acronym for "secure access system") User authentication credentials (e.g., user name and password, digital certificate or security tokens). It also provides hardware, such as routers, servers and controllers, on which the encryption software is loaded. When XXXXX provides hardware XXXXX, it is situated at the customer's premises or located at any other location [e.g., trade show kiosks], and access to the XXXXX is controlled by the customer. However, the hardware remains the property of XXXXX and the customer is not entitled to modify or tamper with the XXXXX or move it from its location. Title to the software programs also remains with XXXXX.

In other words, under a "XXXXX" (the Agreement), XXXXX supplies software that copies its customer's data and applications from the customer's servers onto the XXXXX (hardware supplied by XXXXX). Through XXXXX software, the customer can authorize employees, partners, etc. to securely access the data and applications via the Internet and XXXXX encryption software that resides on the XXXXX.

XXXXX XXXXX Package includes the VPN features, XXXXX installation and repair services, technical support, and digital certificates.

XXXXX XXXXX Package includes all of the same components as the XXXXX Package along with a XXXXX directory and the services of enrolling and deleting end users, controlling the security protocols by limiting end users' access to certain applications, and remotely customizing XXXXX software program to meet the customer's specifications. Unless the software customization is onerous, it is provided for no additional cost to the customer.

When XXXXX provides either the XXXXX Package, the customer is granted a non-exclusive, non-transferrable licence, without right to sub-licence, for the customer and their end-users, and XXXXX does not restrict the customer from using the features of the XXXXX Package in other locations. The customer is also allowed to make one copy of the applicable software, solely for back-up or archival purposes.

In addition, there are no restrictions regarding the place of use by the customer's employees, clients and business partners who are given digital certificates, user names and passwords to remotely access the customer's data and applications via the encryption software. In fact, one of the purposes of XXXXX supply is to provide the customer's authorized user with secure access (meaning that only the right people access the right information) from anywhere in the world and from a variety of devices.

Except for the installation, repair and maintenance of XXXXX, all of XXXXX activities relating to the XXXXX Package are carried out remotely, via the Internet, from XXXXX XXXXX location.

For a separate fee and under a separate agreement, XXXXX determines the computer security needs of its customers by sending one of its employees to their location to assess the level of protection required (the Consulting Services).

XXXXX also supplies remote Internet access to its customers by purchasing such services from an Internet Service Provider and reselling it to its customers.

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 performing 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 the XXXXX XXXXX Package is in XXXXX.

The above information was obtained from your telephone conversation with XXXXX, our telephone conversation XXXXX, your facsimiles XXXXX and XXXXX Web site XXXXX.

Ruling Requested

You have requested rulings on the GST/HST status of XXXXX supplies of:

1. the XXXXX Package [including installation, repair and maintenance];

2. the Consulting Services; and,

3. the remote Internet access when supplied to Canadian residents.

Pursuant to section 1.4 of the GST/HST Memoranda Series [copy enclosed], a ruling can only be issued where clearly defined facts are established. As the facts cannot be fully ascertained with regards to the supply of the remote Internet access, we are pleased to provide you with an interpretation on this issue following our rulings on the XXXXX Packages and the Consulting Services. In this same interpretation, we shall also provide comments on XXXXX supply of additional customization when it is provided separate from its supply of the XXXXX Package.

Ruling Given

Based on the facts set out above:

1[.] We rule that XXXXX supply of the XXXXX Package to a person located in Canada who is resident in Canada is a supply of intangible personal property (IPP); is deemed to be made in Canada, pursuant to subsection 142(1) of the Excise Tax Act (ETA); and, is subject to the GST at a rate of 7%, under subsection 165(1) of the ETA, even where the recipient is located in a participating province (Nova Scotia, New Brunswick, and Newfoundland and Labrador).

2[.] We further rule that XXXXX supply of the Consulting Service to a person located in Canada who is resident in Canada is a supply of a service; is deemed to be made in Canada, pursuant to subsection 142(1) of the ETA; and, is subject to the GST at a rate of 7%, under subsection 165(1) of the ETA, or HST at a rate of 15% where made in a participating province, pursuant to subsection 165(2) of the ETA.

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 transaction for which you requested a ruling.

Explanation

A taxable [other than zero-rated] supply 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 supply that is zero-rated is taxed at 0%.

A supply of IPP

It is our view that the various property and services, that are bundled together and provided by XXXXX under the Agreement for either the XXXXX Package, are constituent elements of a single supply. In addition, it is our view that the principal object of the single supply provided by XXXXX under the Agreement is the provision of rights to use software applications that enable the customer to provide its employees, clients and business partners with secure access to its computerized resources. It is the CCRA's position that this is a supply of IPP for GST/HST purposes.

As stipulated in paragraph 142(1)(c) of the ETA, 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 IPP exclusively to "in Canada" or "outside Canada", under this paragraph, the supply is deemed to be made in Canada since the IPP may be used in Canada.

To determine the applicable tax rate for a supply made in Canada, section 144.1 of the ETA must be examined. This section deems a supply to be made in a province if it is made in Canada and is, under the rules set out in Schedule IX to the ETA, made in the province; but the supply is deemed to be made outside the province in any other case. Also, a supply made in Canada that is not made in a participating province is deemed to be made in a non-participating province. (the rest of Canada)

As the IPP is not related to real property, tangible personal property or services, there are no restrictions regarding the province or group of provinces in which the IPP may be used, and the place of negotiation of the supply is in XXXXX, the supply of the IPP by XXXXX is deemed to be made in a non-participating province pursuant to section 144.1 of the ETA. As such, XXXXX is required to collect the GST at a rate of 7% on the supply of the IPP, even in cases where the recipient or an end-user [employee, client or business partner] is located in a participating province.

A supply of a service

XXXXX supply of the Consulting Service is a supply of a service for GST/HST purposes.

A supply of a service that is not related to real property is deemed to be made in Canada, under paragraph 142(1)(g) of the ETA, if the service is, or is to be, performed in whole or in part in Canada. As indicated, XXXXX supply of the Consultation Service includes a visit to the customer's location to assess the required level of security. Where XXXXX employee visits the customer's location in Canada, the Consulting Service is performed in whole, or in part, in Canada as XXXXX carries out activities in Canada in performing the Consulting Service. As such, the supply of the Consulting Service is deemed to be made in Canada.

As indicated earlier, 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.

Under Part V of Schedule IX to the ETA, generally, a service is considered to be supplied in a particular province if all or substantially all [90% or more] of the Canadian element (In Part V of Schedule IX to the ETA, the "Canadian element" of a service means the portion of the service that is performed in Canada.) of the service is performed in that province. For example, if the Canadian element of XXXXX Consulting Service is performed entirely in XXXXX, the supply of the service is considered to be made in XXXXX a non-participating province, and therefore subject to GST at 7%.

Where the above does not apply, in this case, the supply may be considered to be made in a participating province pursuant to section 3 of Part V of Schedule IX to the ETA. This section provides, in part, that a supply is made in a participating province where the place of negotiation of the supply is outside Canada and all or substantially all of the service is performed in Canada, and the Canadian element of the service is performed primarily [more than 50%] in the participating provinces. For example, if 90% or more of XXXXX Consulting Service is performed in Canada and the portion of the service that is performed in Canada is performed primarily in Nova Scotia and New Brunswick, the supply of the service is deemed to be made in the participating provinces and subject to HST at 15%.

If neither of the above provisions apply, XXXXX supply of the Consulting Service that is made in Canada is considered to be made in a non-participating province pursuant to section 144.1 of the ETA and subject to GST at 7%.

Interpretation Given

Internet access

Pursuant to subsection 123(1) of the ETA, a "telecommunication[s] facility" is defined to mean " ... any facility, apparatus or other thing [including any wire, cable, radio, optical or other electromagnetic system, or any similar technical system, or any part thereof] that is used or is capable of being used for telecommunications".

A "telecommunication service" is defined in subsection 123(1) of the ETA as follows:

(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).

Access to the Internet is a telecommunication service that involves making available telecommunications facilities.

Section 142.1 of the ETA sets out the place of supply rules for determining when a supply of a telecommunication service is made in Canada. Pursuant to subparagraph 142.1(2)(a) of the ETA, a telecommunication service that consists of making available telecommunications facilities is deemed to be made in Canada where the facilities or any part thereof are located in Canada.

For supplies of Internet access, section 3 of Part IX of Schedule IX to the ETA provides that, notwithstanding any other Part of this Schedule, a supply of a property or service is made in a province if the supply is prescribed to be made in the province. Subsection 10(1) of the Place of Supply (GST/HST) Regulations provides, in part, that when a particular supplier makes a supply of Internet access and there is to be one final recipient who acquires it under an agreement either with the particular supplier or another supplier, the supply is made in a particular province if there is a single ordinary location in that province at which the final recipient avails itself of the access, and either:

•   the particular supplier maintains information sufficient to determine that location, or

•   it is the normal business practice of the particular supplier to obtain information sufficient to determine that location.

In any other case, the supply is made in a particular province if the mailing address for the recipient of the supply is in that province.

For purposes of the Place of Supply (GST/HST) Regulations, a "final recipient" in respect of Internet access means a person who is the recipient of a supply of access and who acquires it otherwise than for the purpose of supplying it to another person. Where consideration for a supply is payable under an agreement for the supply, the person who is liable under the agreement to pay that consideration is the recipient of the supply as defined in subsection 123(1) of the ETA.

Therefore, where a single final recipient of Internet access provided by XXXXX does not avail itself of the access at a single ordinary location or where the conditions above with respect to the information are not met, the determination of the place of supply is based on the mailing address of the recipient. For example, if the mailing address of the recipient of XXXXX supply of Internet access is in one of the participating provinces, such as New Brunswick, the supply is made in New Brunswick and subject to the HST at a rate of 15%. If the mailing address is in a non-participating province, such as XXXXX, the supply is subject to the GST at a rate of 7%.

There are special rules for situations that involve multiple final recipients. More information regarding these rules may be found in the enclosed Technical Information Bulletin B-[0]90 GST/HST and Electronic Commerce.

Customization for the XXXXX Package

Finally, where XXXXX supply of customization is a separate supply from the supply of the XXXXX Package, it is necessary to determine the characterization of the supply. Without further information, we are unable to make this determination. For example, if the customization relates strictly to the human involvement [i.e., the time/labour necessary to design and implement the software modifications that are specific to the customer's needs] and does not entail the supply of the software itself or the use of the software created by XXXXX, the supply may be considered a service for GST/HST purposes. In this case, please refer to the information above with respect to the Consulting Service to determine the application of the GST/HST.

Where the customization is considered to be a supply of IPP, the GST/HST will apply in the same manner as described above with respect to supplies of the XXXXX or XXXXX Packages. Please refer to the enclosed TIB B-090 for further information regarding the characterization of supplies.

The foregoing comments represent our general view with respect to the subject matter of your letter. Proposed amendments to the ETA, 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 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) 952-8806.

Yours truly,

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