14 January 2003 GST/HST Interpretation 33694 - Supply of Software

Dear XXXXX:

Thank you for your letter of XXXXX, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the supply of software. We apologize for the delay in responding to your enquiry.

The following information was presented in your facsimile.

•   Canco is resident in Canada and is registered for GST/HST purposes.

•   Canco has developed, for sale, a shrink-wrap software product that is a prepackaged, commercially available software program, which is available to all customers, and is in usable standard format.

•   The software is sold to non-residents of Canada, who are not registered for GST/HST purposes. The software is sold under a non-transferable, non-exclusive right to use licence agreement. The right to use licence agreement provides for an up-front one-time licence fee.

•   The software may be mailed directly to the non-resident customer by Canco.

•   For greater certainty, the licence provides that the software comprises trade secrets, copyright and proprietary data of the licensor and that the licensee agrees that the licensor retains exclusive ownership of and title to the product.

•   Canco will visit foreign users premises to assist in the installation and set-up of the software. The implementation, set-up and installation of the software product are part of the licence agreement and up-front licence fee.

•   In addition to the licence agreement, the non-resident customers may sign a customer software support and update agreement. The term of the agreement is XXXXX and may be renewed annually. An annual up-front fee is payable upon entering into or renewing a support and update agreement. Under the terms of the support and update agreement the customer receives the following:

o   support in connection with the software sold under the licence agreement; and (the support may take the form of on-site visits to the customer's foreign premises, access via modem directly to the customer's computer system from Canada, telephone support from Canada or any combination of the above)

o   a minimum of XXXXX updates or revisions to the software within each XXXXX month period.

•   The software may be mailed directly to the non-resident customer by Canco or delivered to the customer at its location.

Interpretation Requested

1. Is the supply of the software to non-resident clients subject to GST/HST?

2. Is the revenue, of a supplier, derived from a supply deemed to be made outside Canada required to be included in the supplier's GST/HST return?

3. Is a supply of software updates and support made to non-resident clients subject GST/HST?

Interpretation Given

1. Supply of software

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

The supply of the right to use software that is not custom software may be a supply of tangible personal property (TPP) or intangible personal property (IPP) depending upon the medium, by which it is supplied. Specifically, if the software is supplied on a physical medium it is considered to be a supply of TPP while if it is supplied electronically, it would be considered to be a supply of IPP.

Pursuant to paragraph 142(1)(a) of the Excise Tax Act ("the Act"), a supply by way of sale of TPP is deemed to be made in Canada if the TPP is, or is to be, delivered or made available in Canada to the recipient of the supply. A supply by way of sale of TPP is deemed to be made outside Canada, under paragraph 142(2)(a) of the Act if the TPP is, or is to be, delivered or made available outside Canada.

If TPP that is supplied by way of sale is deemed to be made in Canada, it may be zero-rated as an export under either section 1 or section 12 of Part V of Schedule VI to the Act.

Section 1 of Part V of Schedule VI to the Act allows for zero-rating of a supply of TPP made to a recipient who intends to export the TPP provided:

•   the recipient is not a consumer;

•   the recipient exports the TPP as soon after the TPP is delivered to the recipient as is reasonable, taking into account the circumstances surrounding the exportation and the recipient's usual business practices;

•   the TPP is not acquired by the recipient for consumption, use or supply in Canada prior to export;

•   after the supply is made and before the recipient exports the TPP, it is not further processed, transformed or altered in Canada by the recipient except to the extent reasonably necessary or incidental for its transportation; and

•   the supplier maintains satisfactory evidence of the exportation of the TPP by the recipient.

Section 12 of Part V of Schedule VI to the Act zero-rates a supply of TPP where the supplier:

•   ships the TPP to a destination outside Canada that is specified in the contract for carriage of the TPP;

•   transfers possession of the TPP to a common carrier or consignee that has been retained by the supplier on behalf of the recipient or by the recipient's employer to ship the TPP to a destination outside Canada; or

•   sends the property by mail or courier to an address outside Canada.

When a supply of TPP is zero-rated as an export, the supplier must maintain satisfactory evidence that it has been exported. We have enclosed a copy of chapter 4.5.2, Exports - Tangible Personal Property of the GST/HST Memoranda Series that discusses these zero-rating provisions and the documentary requirements.

Pursuant to subparagraph 142(1)(c)(i) of the Act a supply of IPP, such as software supplied electronically, is deemed to be made in Canada if it may be used (meaning "allowed to be used") in whole or in part in Canada. A supply of IPP could be considered to be made in Canada even if it is not actually used in Canada. The fact that the supply may be made to a recipient who is outside Canada at the time the supply is made will not impact the determination of whether the supply of IPP is made in Canada.

If a supply of IPP may not be used in Canada, then the supply is deemed to be made outside Canada pursuant to subparagraph 142(2)(c)(i) of the Act. In determining whether a supply of IPP may be used in Canada, reference may be made to the terms of the agreement for the supply governing the place of use of the supply.

A supply of software that is a supply of IPP and is deemed to be made in Canada may qualify for zero-rating under section 10 of Part V of Schedule VI to the Act. This section provides that the supply of intellectual property or any right, license or privilege to use any such property is zero-rated (taxed at 0%) when supplied to a recipient who is not resident in Canada and who is not registered for GST/HST purposes at the time the supply is made. Consequently, the supply of software by your client to a non-resident recipient may be zero-rated under this section provided the non-resident recipient is not registered for GST/HST purposes. Under these circumstances, your client must verify and maintain evidence that the recipient is not resident in Canada and is not registered for GST/HST purposes. GST/HST Memorandum Series Section 4.5.1, Exports - Determining Residence Status, has been enclosed for your review. Appendix B of this Memorandum describes the documentation that the CCRA will generally accept as proof that the recipient is both a non-resident and is not registered.

A taxable supply, made in Canada, that does not qualify for zero-rating under the previously explained provisions of Part V of Schedule VI to the Act is subject to GST at 7% or 15% HST. For your additional information, please find enclosed a copy of Technical Information Bulletin, B-090, GST/HST and Electronic Commerce.

2. Information to be included in GST/HST return

The total amount of sales of goods and services, including zero-rated sales and other revenue are required to be included on line 101 of the GST/HST Return for Registrants. For more information, please see Appendix 3 of the enclosed guide, General Information for GST/HST Registrants.

3. Updates and support

The supply made pursuant to the software support and update agreement may be characterized as either a supply of IPP or a service, depending upon the principal object of the supply. If the principal object of the contract is the software updates, the supply would be characterized as a supply of IPP in the same way as the initial supply of software is characterized under #1 above and subject to the same place of supply and zero-rating rules. If, however, the principal object of the supply is the technical support, the supply is characterized as a supply of a service. A supply may be characterized as a service if it does not involve the transfer of rights and human involvement is involved in making the supply, or the supply involves specific work that is performed by a person for a specific customer.

Paragraph 142(1)(g) of 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. Whether a service is performed in whole or in part in Canada is a question of fact to be determined on a case-by-case basis. Where any activity related to the performance of a service is undertaken in Canada, the service is considered to be 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 the 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. If the supply made pursuant to the software support and update agreement is characterized as a supply of a service and is provided to a non-resident person, then the supply may qualify for zero-rating under this provision. 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. 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 the 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.

A supply of a taxable service deemed to be made in Canada that is not zero-rated is subject to HST at a rate of 15% when made in a participating province. For additional information regarding the rules for determining whether a supply of a service is made in a participating province, please refer to the enclosed Technical Information Bulletin. In this regard, we note that where the supply in question is characterized as a supply of a service and is a technical support service that is provided by means of telecommunications and relates to the operation or use of computer hardware or software, the supply is considered to be a "computer related service".

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 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) 952-6743.

Yours truly,

Cheryl R. Leyton
Border Issues Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate