24 February 2003 GST/HST Interpretation 42607 - 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 a supply of application hosting.

Pursuant to the information included in your submission and our telephone conversation XXXXX the following is our understanding of the facts.

1. Corporation A is located in Canada and uses a computer software application that is hosted on a server located outside Canada.

2. The software and the server are owned and operated by Corporation B, a non-resident who is registered for GST/HST purposes.

3. Corporation A accesses the software application remotely through the Internet or a dedicated telecommunications line.

4. Corporation A acquires the telecommunication services from a third party ISP. In other words, Corporation A does not acquire the telecommunication services from Corporation B.

5. Corporation A cannot download or copy the software application. Pursuant to a restriction in the agreement between Corporations A and B, Corporation A can only access, execute and operate the software application through Corporation B's server (i.e., although Corporation A may access the software application from its location, it cannot execute or operate the software application on its own server or any other server).

6. Corporation A may download an applet or other software to facilitate access to the server that hosts the software application and to input data. The software application on the server processes the information submitted by Corporation A and provides it a response.

7. Corporation A uses the software application for financial and management accounting purposes.

8. Though the information generated from using the software application is retained on Corporation B's server, Corporation A has access to that information through on-line access and hard copy management reports.

9. In addition, Corporation B has undertaken to maintain its software, and from time to time, effect certain upgrades to the software, at Corporation A's request, to enable Corporation A to generate alternative information.

Interpretation Requested

You are requesting confirmation that Corporation B is making a supply of intangible personal property for GST/HST purposes and that the supply is made outside Canada.

Interpretation Given

Based on the information provided, we concur with your conclusion that Corporation B's supply to Corporation A is characterized as a supply of intangible personal property (IPP) for GST/HST purposes.

Pursuant to subparagraph 142(1)(c)(i) of the Excise Tax Act, 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, i.e., allowed to be used, in whole or in part in Canada. As indicated in Technical Information Bulletin B-090, GST/HST and Electronic Commerce, it is the Canada Customs and Revenue Agency (CCRA)'s view that a supply of IPP can be considered to be made in Canada even if it is not actually used in Canada. Furthermore, in determining whether IPP may be used in Canada reference may be made to any written agreement for the supply that contains terms governing the place of use of the IPP.

To elaborate further in this respect, we are generally looking at the use of the IPP by the recipient. For example, in the above situation, we would look at whether or not there are any restrictions with respect to where Corporation A may obtain access to, execute and operate the software application. The CCRA's view is made evident on page 20 of TIB B-090, which provides an example of the acquisition of software where, pursuant to the licence agreement, the recipient is precluded from using the software outside of the province of Nova Scotia.

As you know, where there are no restrictions regarding the place of use of the IPP, generally, it is considered that the IPP may be used in Canada. For example, where there are no restrictions with respect to where the recipient may obtain access and use of the supplier's software application that is hosted on the supplier's server, the supply of access to and use of the software application is considered to be made in Canada regardless of where the server that hosts the software application is located. However, if an agreement for the supply states that the recipient may only access and use the software application from its computers located outside Canada, the supply would be considered to be made outside Canada even in the case where the software application is hosted on a server in Canada.

As such, in your situation described above, although the software application is hosted on a server located outside Canada and that Corporation A must execute and operate that software application on Corporations B's server, there are no restrictions with respect to where Corporation A may obtain access to and use of the software application. Therefore, even if the server is located outside Canada, in this situation, the supply is considered to be made in Canada as Corporation A may access, execute and operate the software application via the Internet from a computer located in Canada.

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) 954-2488.

Sincerely,

Marcel R. Boivin
A/Manager
Electronic Commerce Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate