7 March 2003 GST/HST Interpretation 38697 - Supplies Made Via the Internet

Dear XXXXX:

Thank you for your facsimile to the XXXXX GST/HST Rulings Centre XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to various supplies made available on a Web site via the Internet. Your enquiry was forwarded to us and we apologize for the delay in replying to your enquiry.

XXXXX XXXXX is registered for purposes of the GST/HST and is, amongst other things, a developer of XXXXX software with a server in XXXXX, XXXXX.

One of XXXXX software products, XXXXX, includes additional e-commerce features that are provided by XXXXX through XXXXX a Web portal specifically for XXXXX members to assist them in doing business over the Internet. XXXXX is hosted on XXXXX server in XXXXX. Each additional feature is subject to a separate monthly subscription fee, and the ability to use the features on XXXXX is only available to those who have purchased XXXXX.

There are three features available on XXXXX:

1. XXXXX - This feature includes access to a software program that enables XXXXX client to create and edit up to XXXXX private on-line portfolios for specific customers, to upload and download graphic files from the portfolio, to process up to XXXXX orders for XXXXX, and to utilize XXXXX XXXXX technology. Included with this feature is the storage of the data on XXXXX server. The client's customers are provided with passwords to access their portfolios which enable them to select XXXXX.

2. XXXXX - This feature includes access to a software program that gives XXXXX client the ability to post a XXXXX on XXXXX server, thus enabling their customer to view the information by using a secure password. It also allows the customer to respond to the client's XXXXX. Under this feature, the client is able to archive these postings as up to 3MB of storage is provided on XXXXX server.

3. XXXXX - This feature provides XXXXX client with an on-line XXXXX to market the client's XXXXX over the Internet. This feature includes the necessary software to create and edit a company Web site using XXXXX templates. The client's XXXXX are posted on the Web site that is hosted on XXXXX server and up to XXXXX of storage is provided on XXXXX server. The Web site can also be used to advertise any specials that the client may have. The client does not obtain any ownership rights with respect to the Web site.

XXXXX provides XXXXX, XXXXX on a subscription basis and every XXXXX user gets free access to XXXXX, XXXXX for XXXXX to XXXXX months. In each case, additional storage on XXXXX server may be provided separately.

The above information was obtained from your letter and from XXXXX Web sites at XXXXX[.]

Interpretation Requested

You have requested clarification on the tax status of XXXXX supply of XXXXX, XXXXX when supplied to a non-resident person.

Interpretation Given

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 (Nova Scotia, New Brunswick, and Newfoundland and Labrador)]. A supply that is zero-rated is taxed at 0%.

To determine the tax status of a supply, it is first necessary to establish the characterization of the particular supply - whether it is a good, a service or intangible personal property (IPP).

Based on the limited information provided, it appears that XXXXX supplies of XXXXX are supplies of IPP that is not intellectual property, and XXXXX supply of XXXXX is a supply of an advertising service.

The following interpretation provides the application of the GST/HST to these supplies. However, we have enclosed Technical Information Bulletin B-[0]90: GST/HST and Electronic Commerce, which provides further details with respect to the characterization of supplies. Should all of the facts provide that XXXXX supplies are not characterized as indicated above, please refer to the Technical Information Bulletin for further information on the application of the GST/HST.

A supply of IPP that is not intellectual property

Pursuant to paragraph 142(1)(c) of the Excise Tax Act (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. Where a supplier of IPP does not restrict the use of the IPP to exclusively "in Canada" or "outside Canada", under this paragraph, the supply of the IPP is deemed to be made in Canada as the IPP may be used in Canada.

Where the supplies by XXXXX are in fact supplies of IPP, the supplies made to non-residents are deemed to be made in Canada as there is no evidence that the use of the supplies is restricted. As such, these supplies made to non-residents are subject to the GST at 7%.

There are no provisions under Part V of Schedule VI to the ETA to zero-rate the supply made to a non-resident of IPP that is not intellectual property.

A supply of an advertising service

The term "advertising" is not defined in the ETA, however, the Canada Customs and Revenue Agency (CCRA) has provided an explanation as to what is generally considered to be an advertising service for GST/HST purposes in section 4.5.3, Exports - Services and Intellectual Property of the GST/HST Memoranda Series (copy enclosed). The explanation in this section refers to a service of creating a message and a service directly related to the communication of such a message. Further, the message must be oriented towards soliciting business, attracting donations, or calling public attention in the form of an information notice, a political announcement, or other similar communication.

There are occasions where the person communicating the message will not be the same person creating or supplying the message. Generally, the person supplying the broadcast or communication service will be in possession of the message or will have received sufficient information as to the content of the message prior to the supply of the service to know that the message is in the nature of advertising. In these situations, the supply of the broadcast or communication service will be considered to be a supply of an advertising service.

Although XXXXX supply of XXXXX allows a client to create and edit a company Web site within the limitations of XXXXX software application and to have that Web site hosted on XXXXX server, it appears that the principal object of the supply of XXXXX is to market the client's XXXXX over the Internet, including advertising any current specials. As such, it may be concluded that the supply of XXXXX is a service directly related to the communication of a message that is oriented towards soliciting business and, therefore, an advertising service for GST/HST purposes.

Pursuant to paragraph 142(1)(g) of the ETA, a supply of a service, other than a service in relation to real property, is deemed to be made in Canada if the service is, or is to be, performed in whole or in part in Canada.

Where the supply by XXXXX of XXXXX is in fact an advertising service, the supply made to a non-resident is a taxable supply deemed to be made in Canada as XXXXX service is performed in Canada.

A taxable supply made in Canada may qualify for zero-rating as an export if it is included in Part V of Schedule VI to the ETA.

Section 8 of Part V of Schedule VI to the ETA zero-rates a supply of an advertising service that is made to a non-resident person who is not registered for purposes of the GST/HST at the time the service is performed. It should be noted that when the non-resident person is registered for purposes of the GST/HST at the time the service is performed, the service may still be zero-rated under the general zero-rating provision concerning the export of services that is found in section 7 of Part V of Schedule VI to the ETA. This section zero-rates a supply of a service made to a non-resident person, unless it is excluded by paragraphs 7(a) through 7(h) of this section. For example, a supply of a service made to a non-resident person is excluded from zero-rating under this section when the non-resident person is an individual who is in Canada at any time when the individual has contact with the supplier in relation to the supply of the service, or, when the service is rendered to an individual while that individual is in Canada. The exclusions are discussed in paragraphs 18 to 23 of section 4.5.3 of the GST/HST Memoranda Series.

It is the supplier's responsibility to verify that the recipient is a non-resident and, as the case may be, not registered for GST/HST purposes. For your information, we have enclosed section 4.5.1, Exports - Determining Residence Status of the GST/HST Memoranda Series. Appendix A of this Memorandum describes the documentation the CCRA will generally accept as proof that the recipient is not resident in Canada and Appendix B describes the documentation that the CCRA will usually accept as proof that a person is a non-resident and is not registered for purposes of the GST/HST.

In summary, if XXXXX is in fact an advertising service and XXXXX client is a non-resident, it is necessary to determine if the non-resident is registered for the GST/HST. If the non-resident is not registered, the supply of XXXXX is zero-rated. If the non-resident is registered, the supply is zero-rated under section 7 of Part V of Schedule VI to the ETA unless it is excluded by paragraphs 7(a) through 7(h). If the supply is excluded by one of these paragraphs, XXXXX supply of XXXXX to the registered non-resident is subject to the GST at the rate of 7%.

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