18 March 2003 GST/HST Interpretation 37653 - Issuance of Synchronization Licences

Dear XXXXX

This is further to your predecessor's facsimile XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the supply of synchronization licences by XXXXX[.] We apologize for the delay in responding to the request.

Based on the information contained in the facsimile and our telephone conversations XXXXX we understand that XXXXX (hereinafter referred to as "Can Co.") is a company based in XXXXX and is registered for purposes of the GST/HST XXXXX. Can Co. operates a Web site where clients are able to search, audition, and download music and obtain licences to use the music in media productions. The clients, typically multimedia professionals, graphic designers, Web developers, recording and post-production engineers, video game designers, and sound designers for radio, film, and television, do not pay a fee for registering and using the Web site, but are charged a licensing fee for the right to use the music obtained from the site in a production.

Can Co. acquires the rights to issue the licences through arrangements with the copyright holders, including music libraries, film composers, and independent artists and labels. Depending on the terms of the agreements, a portion of the revenue derived from the issuance of the licences by Can Co. is payable to the copyright holders for the right to issue the licences.

Once a client decides that a particular piece of music will be used in a production, that client must complete the on-line music clearance documentation. The client issues a cheque to Can Co. and in return receives, by fax or mail, a signed synchronization licence (Synchronization Licence is the written permission to mechanically reproduce a music composition in a synchronized relationship with an audio-visual production or other audio signals[)]. XXXXX agreement, which permits the client to use the music as specified in the on-line submission. Can Co. invoices clients in Canada for supplies of synchronization licences.

Clients in the U.S. are able to download music from the same Web site as Canadian clients. However, as the terminology and rules related to the ownership of the copyright may differ between the U.S. and Canada, Can Co. has established a XXXXX % owned subsidiary based in XXXXX to serve its U.S. clients. The subsidiary is responsible for the administration of all on-line transactions originating in the U.S., including invoicing for the synchronization licences issued to U.S. clients.

Ruling Requested

In the facsimile, your predecessor asked us to confirm the application of the GST/HST to the supply of the synchronization licences by Can Co.

In accordance with section 1.4, Goods and Services Tax Rulings of the GST/HST Memoranda Series (enclosed), we are unable to issue a GST/HST application ruling as all the relevant facts and documentation were not provided, i.e., a copy of the synchronization licence agreement was not provided for our review, as well there was some uncertainty about whether the supplies of the licences in the U.S. are made by Can Co. or its U.S. subsidiary. However, for your guidance, we are pleased to provide the following GST/HST interpretation.

Intepretation Given

The Canada Customs and Revenue Agency (CCRA) considers a supply of the right to commercially exploit music downloaded over the Internet to be a supply of intangible personal property (IPP) for purposes of the Excise Tax Act (the ETA).

Pursuant to 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 considered to be made in Canada, if the IPP may be used in whole or in part in Canada. In determining whether IPP may be used in Canada, reference may be made to the terms of a written agreement that provide restrictions regarding the place of use of the IPP. Note, where there are no restrictions on where the IPP may be used, it will always be the case that the IPP may be used in whole or in part in Canada.

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

Whether a supply of IPP made in Canada is made in a participating province or non-participating province is determined by section 144.1 and Schedule IX to the ETA. Section 144.1 of the ETA 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, made in the province. Section 144.1 of the ETA, 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.

The place of supply rules for IPP that is not related to real property, tangible personal property or a service are provided in paragraphs 2(d) and 3(d) of Part III of Schedule IX to the ETA. Pursuant to subparagraph 2(d)(i), a supply of IPP is considered to be made in a province if all or substantially all (i.e., 90% or more) of the Canadian rights ("Canadian rights" refers to that part of the IPP that may be used in Canada, section 1 of Part III of Schedule IX to the ETA) in respect of the IPP may be used only in the province.

For example, a client in Nova Scotia downloads music for use as background music on a television program which will air only in Nova Scotia. The client completes the on-line request form and in return is provided a synchronization licence that permits use of the music within the parameters specified in the application, i.e., as background music on a specified television program that is limited to Nova Scotia. Since the Canadian rights, in respect of the synchronization licence, in this example, are restricted to use only in Nova Scotia, the supply of the synchronization licence is considered to be made in Nova Scotia. In such cases, Can Co. is required to charge the HST in respect of the supply.

Where the above provision does not apply, a supply of IPP will be considered to be made in a province pursuant to subparagraph 2(d)(ii) of Part III of Schedule IX to the ETA. In accordance with this provision, a supply of IPP is considered to be made in a province if the place of negotiation ("place of negotiation" of a supply refers to "... 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 to which that individual ordinarily reports, in the performance of the individual's duties in relation to the activities of the supplier in the course of which the supply is made ...", section 1 of Part I of Schedule IX to the ETA) of the supply is in the province, and the IPP may be used otherwise than exclusively outside the province. Note, 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 outside the province where the place of negotiation occurred.

For example, if the place of negotiation of a supply of IPP is in a non-participating province such as XXXXX, and there are no restrictions regarding the use of the IPP (e.g., limiting the use to a specific province), then pursuant to subparagraph 2(d)(ii), the supply of the IPP is deemed to be made in XXXXX. In this case, the supply of the IPP is subject to GST at 7% even if the client uses the IPP in a participating province.

Further, if the supply of IPP is not deemed to be made in a province under the above rules, the supply may be deemed to be made in a participating province and subject to the HST at 15% under the provisions of paragraph 3(d) of Part III of Schedule IX to the ETA. We have enclosed a copy of Technical Information Bulletin B-078, Place of Supply Rules Under the HST ("TIB-078"), which provides additional information on this rule.

In our telephone conversation XXXXX we discussed whether Can Co. was making a supply to its U.S. subsidiary of the right to issue licences to U.S. clients and the subsidiary in turn supplied the synchronization licences to clients in the U.S., or whether Can Co. was directly supplying the licences to clients in the U.S. with the U.S subsidiary acting as a billing agent. The basis for this discussion was the fact that Can Co. and not the U.S. subsidiary enters into agreements with the music copyright holders for the rights to issue the licences. You indicated that you were uncertain as to whether Can Co. was making a supply to its U.S. subsidiary or to the U.S. client directly.

For purposes of the GST/HST, whether Can Co. is supplying, to its subsidiary, the right to issue the licences or supplying licences directly to clients in the U.S., the supplies may in either case be zero-rated.

Pursuant to section 10 of Part V of Schedule VI to the ETA, a supply of an invention, patent, trade secret, trade-mark, trade-name, copyright, industrial design or other intellectual property or any right, licence or privilege to use any such property, where the recipient is a non-resident person who is not registered under Subdivision d of Division V of Part IX of the ETA at the time the supply is made is zero-rated. A supply by Can Co. of the right to issue the licences made to its subsidiary or a supply by Can Co. of synchronization licence to a client in the U.S. qualifies for zero-rating under section 10 provided the recipient (i.e., either the U.S. subsidiary or the U.S. client) is a non-resident who is not registered for the GST/HST.

Where Can Co. makes a zero-rated supply, the tax collectable on the consideration for the supply is equal to zero. Can Co. is still entitled to claim input tax credits in respect of the GST/HST paid or payable on property and services to the extent that they are for use, consumption or supply in making that supply.

If the supplies by Can Co. to the non-residents do not meet the zero-rating conditions of section 10 of Part V of Schedule VI to the ETA, the supplies will be subject to the GST/HST as described above unless the supplies are not considered to be made in Canada (i.e., the use of the IPP is restricted to use only outside Canada).

Note, if it is determined that the U.S. subsidiary is supplying the licences to the clients in the U.S., these supplies will be considered to be made outside of Canada and not subject to the GST/HST provided that the U.S. subsidiary is not registered for purposes of the GST/HST.

For your perusal, a copy of GST/HST Technical Information Bulletin B-090 is included. This Bulletin addresses the application of the GST/HST to supplies made by electronic means.

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 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) 952-8530.

Yours truly,

Dwayne Moore
Electronic Commerce Unit
General Operation and Border Issues Division
Excise and GST/HST Rulings Directorate