18 March 2004 GST/HST Interpretation 36148 - Application of the GST/HST on the Supply of Intangible Personal Property

Please note that the following document, although correct at the time of issue, may not represent the current position of the Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence.

Dear XXXXX

Thank you for your letter XXXXX (with attachments) concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to your operations. We apologize for the delay in our response.

We acknowledge your request for a ruling, but as the names of the parties involved in the various agreements submitted have been blacked out, we are unable to provide you with a ruling. Instead we will provide you with the following interpretation of the Excise Tax Act (the ETA) as it relates to the transactions in the agreements provided.

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Interpretations Requested

1. Is XXXXX required to collect GST/HST on the XXXXX licensing fee that is consideration for the rights granted by the Institutions to the Licensee?

2. What portion of the annual royalty XXXXX is subject to GST/HST?

3. How is the GST/HST accounted for on the patent costs reimbursements?

4. How must the GST/HST be accounted for on the Expenses in the XXXXX?

5. Is XXXXX required to collect GST/HST on the amount received under the XXXXX?

6. What is the tax status of the research services provided by a university?

7. Is XXXXX entitled to claim an input tax credit (ITC) on the expenses reimbursed under the XXXXX?

8. Where XXXXX does not directly receive the funds under a XXXXX, how is XXXXX required to collect GST/HST on the funds it receives?

9. Does XXXXX charge GST/HST on supplies made to the Institutions, or does the consideration include GST/HST?

10. How is GST/HST calculated when a taxable supply is made to a non-resident of Canada?

11. What is the application of GST/HST where the licensing of the intangible property is for use in the recipient's foreign manufacturing?

Interpretations Given

All references are to the ETA unless otherwise noted.

Our responses are based on the assumption that XXXXX meets the definition of NPO for purposes of subsection 123(1) and is therefore a public service body (PSB) for purposes of the ETA.

In the agreements submitted some supplies are made by XXXXX, others by the Institutions. An Institution can be classified as a "public institution" under the ETA, where it is a university and a registered charity under the Income Tax Act. Where it is a university, and not a registered charity, the public institution rules will not apply. In those cases the general rules regarding PSBs will be applicable.

Generally, supplies made by a PSB are taxable pursuant to section 165 unless a specific provision applies to exempt them. Alternatively, supplies made by a public institution are generally exempt, unless specifically listed as excluded from the exemption in section 2 of Part VI of Schedule V. Even though the supply may be excluded from the exemption in section 2 of Part VI of Schedule V, other exemptions in Schedule V may apply.

The application of the ETA for the responses to the first three questions is very similar. We will provide one interpretation for all three questions.

1. Is XXXXX required to collect GST/HST on the XXXXX licensing fee that is consideration for the rights granted by the Institutions to the Licensee?

2. What portion of the annual royalty XXXXX is subject to GST/HST?

3. How is the GST/HST accounted for on the patent costs reimbursements?

The licensing fee and the annual royalty are paid pursuant to the XXXXX. Our understanding is that for patent costs incurred by the Institutions, the Licensee shall owe to XXXXX as reimbursement for those patent costs a total of $XXXXX. XXXXX must provide acceptable proof of the patent cost expenses.

It is the supplier of a taxable supply made in Canada who is required to collect any tax payable in respect of the supply to the recipient. To determine who has to collect the tax payable on a supply, one must determine who is the supplier. Where XXXXX does not acquire any interest in the supply of the right for which the licensing fee or annual royalty is paid it cannot be a supplier of those rights.

Where XXXXX is not the person who has incurred the patent costs, but is the facilitator for the reimbursement of the patent costs, XXXXX would not be the person liable for accounting for any GST/HST in respect of those costs.

In summary, where XXXXX is not the supplier of a supply, it generally has no liability towards collecting any GST/HST payable in respect of that supply.

Proposed Amendment to the ETA

On December 20, 2002, the Minister of Finance announced proposed amendments to the ETA. One of the amendments provides for the addition of subsection 177(1.11) "Election for Billing Agent to Account for Tax".

New subsection 177(1.11) applies where a supplier (e.g., the Institutions) engages a registrant XXXXX to act as a billing agent respecting supplies made by the supplier. The registrant acts as the supplier's agent in charging and collecting consideration and tax respecting the supply, but does not act as the supplier's agent with respect to the making of the supply.

New paragraph 177(1.11)(a) deems the billing agent to also act as agent in making the supply just for the purposes of enabling the supplier and the agent to apply subsection 177(1.1). If all other conditions of subsection 177(1.1) are met, the supplier and agent may make an election under that subsection. This amendment gives billing agents the same option for accounting for tax as in the case of agents who make supplies on behalf of suppliers.

As a result of a principal and their billing agent making the election under subsection 177(1.1) in respect of a supply, the billing agent must report and remit the tax in respect of that supply and is the only person entitled to claim bad debt relief respecting the supply under section 231. Similarly, if a price or tax adjustment is made under section 232 in respect of the supply, only the billing agent is entitled to the corresponding deduction under section 232.

In addition, the supplier and the billing agent are jointly and severally liable under paragraph 177(1.1)(b) for obligations arising from the requirement to account for or remit net tax attributable to the supply, from the claiming of deductions by the billing agent under section 231 or 232 and from the requirement to account for or remit amounts attributable to the additions to net tax required by subsection 231(3) resulting from a recovery of bad debts in respect of the supply.

Principals and their billing agents may make elections under subsection 177(1.1) only with respect to supplies made after the Announcement Date of December 20, 2002.

4. How must the GST/HST be accounted for on the Expenses in the XXXXX?

Our understanding is that Revenue less Expenses will be distributed by XXXXX proportionately in the manner set out in XXXXX.

The GST/HST owing on a supply is not altered if expenses are deducted from the total consideration received for a supply before any profits are shared (in accordance with agreements between the parties).

Where the consideration for a supply is based on a share of revenue after expenses are deducted, GST/HST is calculated based on that consideration.

5. Is XXXXX required to collect GST/HST on the amount received under the XXXXX?

The XXXXX would appear to address two separate supplies:

•   Supply by XXXXX, consideration for which is based on XXXXX total, and

•   Supply of research services supplied by the Institutions.

Generally, the supply of services by an NPO would be a taxable supply.

As we have explained previously, where the amount received is consideration for a supply not made by XXXXX, XXXXX generally has no liability towards any GST/HST payable in respect of that supply.

As for the collection of GST/HST on the amount that relates to the consideration for research under the XXXXX, please refer to our discussion of the proposed amendment of the addition of subsection 177(1.11) in our response to Questions 1, 2 and 3.

6. What is the tax status of the research services provided by a university?

Generally, services provided by a public institution are exempt under section 2 of Part VI of Schedule V, unless specifically listed as excluded from the exemption. One exception is if the supply is zero-rated. If services are supplied to a non-resident, the supply may be zero-rated under Part V of Schedule VI.

Generally, supplies made by a PSB are taxable pursuant to section 165 and GST/HST would be applicable where the supplies are made in Canada, unless a specific provision applies to exempt them. There is generally no exemption for services such as research services. The supplies may also be zero-rated if supplied to a non-resident.

In the case where a supply is exempt (i.e., no tax was ever collectible) and tax was collected, in accordance with subsection 225(1), any amount collected as tax, regardless of whether it should have been collected, must be remitted to the Canada Revenue Agency.

Once it has been determined that the supply is taxable, other factors must be considered to establish the amount of tax that is collectible. Under section 165, a taxable supply of a service made in Canada is subject to tax at the GST rate of 7% (HST rate of 15% when made in a participating province: Nova Scotia, New Brunswick, or Newfoundland and Labrador) on the value of the consideration for the supply unless the supply is zero-rated (taxed at 0%). We have briefly described the factors that must be considered to determine the tax status under the following headings of "Place of Supply - Canada", "Place of Supply - Participating Province", and "Zero-rated Supplies":

Place of Supply - Canada

When determining if a supply is subject to GST/HST, one must first determine if the supply is deemed to be made inside or outside Canada. Section 142 is the general provision used to make this determination. Specifically, paragraphs 142(1)(g) and 142(2)(g) are the relevant provisions to determine whether the supply of a research service is made in Canada. Paragraph 142(1)(g) 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. Conversely, a service that is, or is to be, performed wholly outside Canada is deemed to be made outside Canada pursuant to paragraph 142(2)(g).

Where a supply of a service is deemed to be made in Canada it can be subject to GST at 7%, HST at 15% or zero-rated. A discussion on zero-rated supplies follows the next topic.

We have enclosed GST/HST Memoranda, Chapter 3, Place of Supply, Section 3.3, which discusses place of supply.

Place of Supply - Participating Province

Once you have determined that the supply is deemed to be made in Canada, you must determine if the supply is subject to HST. In order to determine whether the HST applies to the supply, the place of supply with respect to a province must be determined. For this determination, the relevant provisions of the ETA are section 144.1 and Schedule IX. Section 144.1 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 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.

Paragraph 2(a) of Part V of Schedule IX deems the supply of a service to be made in a province if all or substantially all (90% or more) of the Canadian element of the service is performed in that province, or if the place of negotiation of the supply is in the province and it is not the case that all or substantially all of the service is performed outside the province.

For purposes of determining the place of supply, the place of negotiation of a supply means 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. For the purposes of this definition, "negotiating" includes the making or acceptance of an offer.

We have enclosed Technical Interpretation Bulletin B-078 Place of Supply Rules Under the HST, which you may refer to for a full discussion of this topic.

Zero-rated Supplies

Regardless if the supply is made by a PSB or a public institution, where it is determined that the supply is not exempt and deemed to be made in Canada, some supplies may be zero-rated when made to a non-resident.

Generally, a supply of a service made to a non-resident is zero-rated provided the supply is not specifically excluded under paragraphs (a) to (h) of section 7 of Part V of Schedule VI. Although a service may be excluded from zero-rating under this provision, the service may still qualify for zero-rating under one of the other sections contained in Part V of Schedule VI.

Please refer to the enclosed GST/HST Memoranda, Chapter 4, Exports - Services and Intellectual Property, Section 4.5.3 for a full discussion on this topic.

7. Is XXXXX entitled to claim an ITC on the expenses reimbursed under the XXXXX?

Pursuant to subsection 169(1), a person may only be entitled to claim an ITC for GST/HST paid or payable on a supply of property or services provided that the person

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•   imported, or

•   brought into a participating province

the property or services and is liable to pay the tax payable in respect of the supply (i.e., the person must be the recipient of the supply). The ITC may be claimed to the extent that the property or service was acquired, imported or brought into the province as the case may be, for consumption, use or supply in the course of making supplies that relate to commercial activities of the registrant. Commercial activity, as defined in subsection 123(1), excludes the making of exempt supplies.

8. Where XXXXX does not directly receive the funds under the XXXXX, how is XXXXX required to collect GST/HST on the funds it receives?

XXXXX is only required to account for GST/HST on supplies it makes, unless proposed subsection 177(1.11) applies or GST/HST was collected. Please see our discussion of proposed subsection 177(1.11) in our response to Questions 1, 2 and 3 for full details.

9. Does XXXXX charge GST/HST on supplies made to the Institutions, or does the consideration include GST/HST?

Subsection 223(1) provides that where a registrant makes a taxable supply, other than a zero-rated supply, and there is no visible notice given at the place where the supply is made, the registrant is required to indicate in the invoice, receipt or written agreement, the consideration paid or payable by the recipient for the supply and the tax payable in respect of the supply in a manner that clearly indicates the amount of the tax. Where the amount paid or payable by the recipient includes the tax, there must be an indication in the invoice, receipt or written agreement that the amount paid or payable includes the GST/HST payable in respect of the supply. In both cases the disclosure must be overt and not presumed.

We have enclosed GST/HST Policy Statement P-116 Collection of GST, by a Supplier, Where the Invoice is Silent on the Tax Payable.

10. How is GST/HST calculated when a taxable supply is made to a non-resident of Canada?

As explained previously, one must first determine the nature of the supply and the place of supply. Supplies deemed to be made outside of Canada are not subject to the GST/HST. Taxable supplies deemed to be made in Canada can be subject to GST at 7%, HST at 15% or zero-rated depending on the place of supply and the nature of the supply.

Value in Canadian Currency

Pursuant to section 159, when the consideration for a supply is expressed in foreign currency (e.g., US dollars), the value of the consideration shall be calculated based on the value of the foreign currency in Canadian currency. The determination of the value of the consideration in Canadian currency is made on:

•   the day that GST/HST is payable; or

•   such other day as is acceptable to the Minister.

The following days are acceptable to the Minister for determining the value of the consideration for a supply in Canadian currency:

•   the day the consideration for the supply is paid,

•   the day the foreign currency was acquired, and

•   the average rate of exchange for the month in which tax is payable.

Consideration expressed in a foreign currency must, therefore, be converted into Canadian currency using either the exchange rate on the day GST/HST is payable or on such other day as is acceptable to the Minister.

GST/HST becomes payable on the earliest of the day on which consideration is paid or becomes due. Consideration or a part thereof for a taxable supply is deemed to become due on the earliest of:

•   the day the supplier first issues an invoice in respect of the supply and the date of that invoice;

•   the day the supplier would have, but for an undue delay, issued an invoice in respect of the supply for that consideration or part; and

•   the day that the recipient is required to pay that consideration or part pursuant to an agreement in writing.

Enclosed for your further information is GST/HST Policy Statement P-222 Acceptable Exchange Rate Sources for Converting the Value of Consideration Expressed in Foreign Currency to a Value in Canadian Currency for Purposes of Section 159 of the Excise Tax Act (the "ETA").

11. What is the application of GST/HST where the licensing of the intangible personal property is for use in the recipient's foreign manufacturing?

Generally, intangible personal property (e.g., a license) provided by a public institution is exempt under section 2 of Part VI of Schedule V, unless specifically listed as excluded from the exemption. One exception is if the supply is zero-rated. If the intangible personal property is supplied to a non-resident, the supply may be zero-rated under Part V of Schedule VI.

Generally, supplies of intangible personal property made by a PSB are taxable pursuant to section 165 and GST/HST would be applicable where the supplies are made in Canada, unless a specific provision applies to exempt them. There is generally no exemption for supplies of intangible personal property made by a PSB. The supplies may also be zero-rated if supplied to a non-resident.

As we have previously discussed, one must first determine if the supply is deemed to be made in or outside Canada and the tax status of the supply.

Pursuant to subparagraph 142(1)(c)(i), a supply of intangible personal property is deemed to be made in Canada if the property may be used in whole or in part in Canada. Conversely, subparagraph 142(2)(c)(i) deems a supply of intangible personal property to be made outside Canada if the property may not be used in Canada. Supplies of intangible personal property deemed to be made outside of Canada are not subject to tax under Division II, that is, the recipient of the supply is not liable to pay the tax and the supplier is not liable to collect the tax. The supply could, however, be subject to tax under Division IV (tax on imported taxable supplies). Please refer to the enclosed GST/HST Memoranda, Chapter 3, Place of Supply, Section 3.3 for a further discussion of place of supply of intangible personal property.

When it is determined that the place of supply is in Canada, the supply of intangible personal property may be zero-rated. Section 10 of Part V of Schedule VI zero-rates 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 for GST/HST purposes at the time the supply is made. Further information on this topic is available in the enclosed GST/HST Memoranda, Chapter 4, Exports - Services and Intellectual Property, Section 4.5.3.

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 Chapter 1 of the GST/HST Memoranda Series, do not bind the Canada Revenue Agency 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) 954-4206.

Yours truly,

Carol A. Gaudet
Charities, Non-Profit Organizations and Educational Services Unit
Public Service Bodies and Governments Division
Excise and GST/HST Rulings Directorate

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