17 March 2003 GST/HST Interpretation 33820 - Tax Status of Application Hosting

Dear XXXXX:

Thank you for your letter XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to application hosting. Please accept our apologies for the delay in responding to your letter.

The following information has been provided:

•   XXXXX is a resident of Canada, located in XXXXX, and is registered for purposes of the GST/HST XXXXX.

•   XXXXX supplies an application hosting service XXXXX[.]

•   XXXXX hosts software, developed by its clients. XXXXX solely provides a hosting service and does not supply software or licences. The client is the owner of the software, which is stored on XXXXX servers, XXXXX. The owner of the software markets the software and the end-users (the owner's client's) access the software. The end-user does not own the licence to use the software. The end-user is licensed to access the software only for the time the end user is logged on.

•   The end-users are both residents of Canada and non-residents.

•   XXXXX bills the owner, based on the number of users who access the client's software. The client subsequently bills the end-user.

Interpretation Requested

How does the GST/HST apply to the supply of the application hosting service?

Interpretation Given

Based on the information provided, the supply of the application hosting is considered to be a supply of a service for GST/HST purposes.

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

Paragraph 142(1)(g) of the Excise Tax Act ("the Act") deems a supply of a service to be made in Canada if the service is, or is to be, performed in whole or in part in Canada. Where the supply of a service including operations performed by a supplier's equipment that is located in Canada or where any activity related to the performance of the service supplied is undertaken in Canada, the service is performed at least in part in Canada and consequently deemed to be made in Canada. Conversely, paragraph 142(2)(g) of the Act deems a supply of a service to be made outside Canada if the service is, or is to be, performed wholly outside Canada.

Section 7 of Part V of Schedule VI to the Act zero-rates a supply of a service when made to a non-resident person provided none of the exclusions of this provision apply. For example, the supply of a service to a non-resident 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. It is the supplier's responsibility to verify that the recipient is a non-resident and to ensure that all of the remaining zero-rating criteria are satisfied. If the supply of application hosting services is provided to a non-resident client, then the supply may qualify for zero-rating under this provision. For your information, please find enclosed GST/HST Memoranda Series Section 4.5.1, Exports - Determining Residence Status. Appendix A of this Memorandum describes the documentation that CCRA will generally accept as proof that the recipient is not resident in Canada. Also enclosed is GST/HST Memoranda Series Section 4.5.3, Exports - Services and Intellectual Property.

Where the supply is made in Canada and is not a zero-rated supply, a further analysis with respect to the province in which the supply of application hosting is made or deemed to be made is necessary to determine the appropriate rate of tax. Whether a supply of a service made in Canada is made in a participating or non-participating province is determined by applying the rules in section 144.1 and Schedule IX to the Act. Section 144.1 of the Act 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 to the Act, made in the province. Section 144.1 also states that a supply made in Canada that is not made in a participating province is deemed to be made in a non-participating province.

Section 3 of Part IX of Schedule IX to the Act provides that, notwithstanding any other Part of Schedule IX, a supply of property or a service is made in a province if the supply is prescribed to be made in the province. Section 10 of the Place of Supply (GST/HST) Regulations prescribes the place of supply. For purposes of the Place of Supply (GST/HST) Regulations, a "computer-related service" means a service involving the electronic storage of information and computer-to-computer transfer of information. The supply of application hosting is considered to be a supply of a "computer related service". Subsection 10(1) of the Regulations provides in part that, when a particular supplier makes a supply of a computer related service and there is one final recipient of the service, 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 at which the final recipient avails itself of the service, and:

•   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.

If the above criteria are not met, the supply of an application hosting service will be made in a particular province if the mailing address of the recipient of the supply is in that province.

For purposes of the Regulations, a "final recipient" of an application hosting service means a person who is the recipient of a supply of the service 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 Act.

Therefore, if the single final recipient of a taxable (other than zero-rated) application hosting service, such as your client, does not avail itself of the service at a single ordinary location or where the conditions above with respect to 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 a taxable (other than zero-rated) supply of application hosting is in a participating province, the supply is deemed to be made in that province and consequently subject to HST at 15%. If the mailing address is in a non-participating province, the supply is subject to GST at 7%.

There are special rules for situations involving multiple final recipients. For your further information, please find enclosed Technical Information Bulletin B-090, GST/HST and Electronic Commerce.

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