21 March 2003 GST/HST Interpretation 34339 - Application of GST to Bandwidth Supplied to a Non-resident

Dear XXXXX:

Thank you for your letter to the XXXXX GST/HST Rulings Centre XXXXX XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to supplies that involve bandwidth. Your enquiry was forwarded to us for response and we apologize for the delay in replying to your enquiry.

XXXXX is a GST/HST-registered company located in XXXXX. It is a Web-based managed solutions provider and uses a number of servers that are situated in XXXXX in making its supplies.

XXXXX includes hosting a Web site, XXXXX of storage, a maximum of XXXXX e-mail accounts, support for XXXXX, and XXXXX per month. A customer may request extra e-mail accounts and/or on-site set-up for additional amounts.

XXXXX clients are also offered the following options:

•   additional on-line storage space;

•   more data storage (off-line);

•   monthly or daily back-up services;

•   e-mail enhancements, such as virus scanning and SPAM filtering;

•   domain management;

•   statistical analysis tools such as statistical tracking; and

•   added bandwidth.

All of the components of a Web-based managed solution, including the XXXXX and any of the options listed above, are provided for under an XXXXX XXXXX (Agreement) entered into by the client and XXXXX. Generally, the components are separately priced and payable on either an annual or monthly basis or on a one-time basis.

For billing purposes, XXXXX invoices for bandwidth XXXXX separately from the other components of a managed solution. All of the components except the bandwidth are invoiced XXXXX, whereas bandwidth is invoiced XXXXX (XXXXX) as the billing relates to the amount of bandwidth actually used during XXXXX.

It appears that XXXXX also supplies bandwidth on its own, along with any required equipment rack (i.e., without the other components of a managed solution). The "Terms of Use" that are used in the Agreement for a managed solution are also used for XXXXX supply of bandwidth.

All of XXXXX non-resident clients are corporations or partnerships. They are not individuals.

The above information was obtained from your facsimiles XXXXX XXXXX; our telephone conversations XXXXX; various telephone conversations with, and messages from, your associate, XXXXX; and XXXXX Web site at XXXXX.

Ruling Requested

You have requested a ruling on the GST/HST status of XXXXX provision of bandwidth when provided to a non-resident client.

Rulings are issued upon request where the client has presented all the relevant facts in its request, such as the nature of the transactions, detailed descriptions of services or property involved, the parties involved in all transactions and relevant documentation, such as invoices, contracts and other pertinent agreements. As stipulated in section 1.4 of the GST/HST Memoranda Series (copy enclosed), we are only able to issue a ruling where all of the facts can be ascertained. As the facts cannot be clearly established for XXXXX provision of bandwidth, we are pleased to provide you with an interpretation on this matter.

Interpretation Given

Where a person supplies together, or as a package, goods and/or services, which if supplied separately have a different tax status, it is necessary to perform a "single supply vs. multiple supplies" analysis. Policy Statement P-[0]77R - Single and Multiple Supplies (copy enclosed) provides a framework for analyzing the facts of a particular situation to determine whether a supplier is making a single supply or multiple supplies. The single supply/multiple supplies issue is invariably a question of fact, not interpretation, requiring the analysis of all evidence to establish the nature of the particular transaction(s).

The following interpretation is based on the supposition that XXXXX supply of bandwidth is a separate supply from the supply of the Web-based managed solution. If after you consider all the facts and complete the analysis, it is determined that the bandwidth is, in fact, part of a single supply of a managed solution, we have enclosed a copy of our Technical Information Bulletin B-090 - GST/HST and Electronic Commerce (TIB B-090) to assist you in determining the tax status of that supply. Alternatively, you may contact us for additional information.

A taxable (other than zero-rated) supply made in Canada is subject to the GST at a rate of 7% or HST at a rate of 15% if made in the participating province of Nova Scotia, New Brunswick, or Newfoundland and Labrador. A supply that is zero-rated is taxed at 0%.

Pursuant to subsection 123(1) of the Excise Tax Act (ETA), a "telecommunication service" is defined as:

"(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)".

A "telecommunications facility" means "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".

Based on the limited information provided, it appears that XXXXX supply of bandwidth is a supply of a telecommunication service that falls under paragraph (b) of the above definition. Where XXXXX supply of bandwidth is not a telecommunication service, please refer to TIB B-090 for information regarding the characterization of a supply and the application of the GST/HST.

Section 22.1 of Part V of Schedule VI to the ETA zero-rates a supply of a telecommunication service (other than a telecommunication service where the telecommunication is emitted and received in Canada) made by a GST/HST registrant who carries on a business of supplying such services to a non-resident person who is not a registrant and who carries on such a business. For example, when a GST/HST registered telecommunication service provider makes a supply of a telecommunication service that falls under paragraph (b) of its definition to a non-resident, non-registrant telecommunication service provider, the supply is zero-rated.

If the telecommunication service is not zero-rated, consideration must be given to where the supply is made to determine the application of the GST/HST.

The first consideration to be examined is whether XXXXX supply of bandwidth is a supply of a "telecommunications channel" which is defined in subsection 136.4(1) of the ETA to mean "a telecommunications circuit, line, frequency, channel, partial channel or other means of sending or receiving a telecommunication but does not include a satellite channel". If XXXXX supply of bandwidth meets this definition, the following information may address the application of the GST/HST. Where this is not the case, please refer to the information below under the heading "Application of GST/HST to telecommunication service".

Application of GST/HST to telecommunications channel

Pursuant to subsection 136.1(2) of the ETA, the supply of a telecommunication service of granting to the recipient sole access to a telecommunications channel for transmitting telecommunications between a place in a particular province and a place in another province is considered to be separate supplies made in each province. Where the separate supply is made in a participating province pursuant to section 3 of Part VIII of Schedule IX to the ETA and section 144.1 of the ETA, that separate supply will be subject to HST at 15%. Under these circumstances, XXXXX will be required to charge the non-resident 7% GST on the consideration for the separate supplies that are made in a non-participating province and HST at 15% for the separate supplies that are made in a participating province unless the supplies are zero-rated.

The consideration for the separate supplies is calculated based on the distance over which the telecommunication would be transmitted in the province if it were transmitted by means of cable and related facilities located in Canada that connected, in a direct line, the transmitters for receiving and emitting the telecommunications. This distance is divided by the distance over which the telecommunications would be transmitted in Canada if they were transmitted solely by such means, and the resulting percentage applied to the total consideration payable.

Similarly, it is the Canada Customs and Revenue Agency's (CCRA's) policy to treat such a supply that spans Canada and another country as two separate supplies, one being made in Canada and the other being made outside Canada. In this case, the separate supply that is made outside Canada is not subject to the GST/HST.

Application of GST/HST to telecommunication service

Paragraph 142.1(2)(a) of the ETA stipulates that, in the case of a telecommunication service of making telecommunications facilities available, the telecommunication service is deemed to be made in Canada where the facilities or any part thereof are located in Canada. If the telecommunication service is made in Canada and is not zero-rated, it is necessary to ascertain the appropriate rate of tax by determining the province in which the supply is made.

Pursuant to paragraph 2(a) of Part VIII of Schedule IX to the ETA, a supply of a telecommunication service of making telecommunications facilities available (other than granting sole access to a telecommunications channel) is made in a particular province if, all of the facilities are ordinarily located in that province, or in any other case, the invoice for the supply is sent to an address in that province.

For example, where XXXXX supplies a telecommunication service of making telecommunications facilities available to a non-resident and the supply is not zero-rated, and all of the telecommunications facilities are located in XXXXX a non-participating province, the supply is subject to the GST at a rate of 7%. Where the telecommunications facilities are not all located in XXXXX and the invoice is not sent to an address in a province (e.g., the address is in the state of Maine), the supply will be considered to be made in a non-participating province pursuant to section 144.1 of the ETA and subject to the GST at a rate of 7%.

GST/HST collected in error

In our telephone conversation XXXXX XXXXX requested information on how XXXXX would handle a situation where XXXXX collected GST on a zero-rated supply. If a supplier has charged or collected from a client an amount as or on account of tax in excess of the tax collectible (for example, charged or collected 7% GST where the supply was subject to the tax at a rate of 0%), the supplier may, under subsection 232(1) of the ETA, within two years after the date the amount was charged or collected,

a) where the excess amount was charged but not collected, adjust the amount of tax charged; and

b) where the excess amount was collected, refund or credit the excess amount to the client.

A supplier that adjusts, refunds or credits such an amount must issue a credit note for the amount to the client within a reasonable time containing prescribed information, unless the client issues a debit note. The supplier may then claim a corresponding deduction in its net tax calculation for the reporting period in which the credit note is issued (or debit note received), to the extent that the amount has been included in its net tax for a reporting period. For more information on the prescribed information to be included in a credit/debit note, see page 36 of the enclosed guide, General Information for Registrants.

The foregoing comments represent our general views 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 CCRA 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

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