5 February 2004 GST/HST Interpretation 36218 - Tax Status of Internet Based Courses, Consulting and Software/Hardware Maintenance

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

Dear XXXXX:

Thank you for your facsimile XXXXX addressed to the XXXXX Tax Services office, and various telephone conversations, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to supply of Internet based courses, consulting, and the maintenance of hardware and software. I apologize for the delay in responding to your letter.

The following information was provided.

•   XXXXX, located in XXXXX, is a registered charity for the purposes of the Income Tax Act, and a public institution as defined under subsection 123(1) of the Excise Tax Act ("the Act"). XXXXX is registered for GST/HST purposes and provides both taxable and exempt services. XXXXX is the recipient of various types of supplies made by non-resident suppliers.

•   A non-resident consulting company, which is not registered for GST/HST purposes provides training courses to employees of XXXXX. The training courses are soft skills type courses, such as management and learning software. These courses are similar to correspondence courses with the exception that the courses are taken over the Internet rather than by mail. There is no instructor and the materials and assignments are available on the Web site of the non-resident company.

•   A non-resident company, which is not registered for GST/HST purposes provides consultation services by sending written reports and recommendations via e-mail to employees of XXXXX. The consultation services are computer-based consulting such as designing a network system.

•   A non-resident company provides Internet training to XXXXX over the Internet similar to the training courses above.

•   Non-resident companies are making supplies to XXXXX pursuant to software/hardware maintenance service contracts or licences, (e.g., an upgrade of existing software). You have indicated that with respect to the maintenance contracts, the work is undertaken by individuals from outside Canada. Any problems are fixed via the Internet either by instructions given by telephone or e-mail or by remote diagnostics where the supplier dials on and fixes the problem. The upgrades are either downloaded from the Internet for a set fee or included as part of a service maintenance contract.

Interpretation Requested

1. What is the tax status of the supply of the on-line training?

2. What is the tax status of the supply of the consultation services and the supplies made pursuant to the maintenance contracts and by licence?

3. Should XXXXX self assess GST on the above supplies?

Interpretation Given

1. What is the tax status of the supply of the on-line training?

For GST/HST purposes, a supply made by electronic means is characterized as a supply of intangible personal property ("IPP") or a service.

Where there is a single supply and the principal object of the supply is access to a software application, that is maintained on the supplier's Web site, to interact with the application while on-line, i.e., the right to access and interact with the software program while on-line, it is the CRA's position that the supply is characterized as a supply of IPP for GST/HST purposes.

Based on the information provided, it appears that the access to the on-line training programs on the non-resident's Web site, where together with the access the non-resident may provide support services, is a supply of IPP where the primary object of the supply is the right to access and interact with the program. I have enclosed a copy of Technical Information Bulletin B-090, GST/HST and Electronic Commerce, which provides additional information with respect to the characterization of a supply. In addition, I have enclosed a copy of Policy Statement P-077R, Single and Multiple Supplies, that may assist in determining whether single or multiple supplies are made.

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

Generally, a supply of IPP is deemed to be made in Canada pursuant to subparagraph 142(1)(c)(i) of the Excise Tax Act ("the Act") if the IPP may be used (meaning "allowed to be used") in whole or in part in Canada. 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 or a general restriction explained on the supplier's Web site. If there are no restrictions regarding the place where the IPP may be used, it is considered that the IPP may be used in Canada.

In certain circumstances, a supply of IPP that may be used in Canada may nevertheless be deemed to be made outside Canada if the supply is made by a non-resident supplier. Specifically, a supply of IPP or a service made by a non-resident person is deemed to be made outside Canada if the non-resident is not registered for GST/HST purposes at the time the supply is made and does not carry on business in Canada. Additional information with respect to when a non-resident would be considered to be carrying on business in Canada may be found in the enclosed Technical Information Bulletin B-090, GST/HST and Electronic Commerce. We note that a significant presence in Canada is required in order for a non-resident to be considered to be carrying on business in Canada.

Whether a supply of IPP that is determined to be made in Canada under the above rules is made in a participating or non-participating province is determined by applying the rules in section 144.1 and Schedule IX to the Act. Section 144.1 of the Act 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 to the Act, 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.

The place of supply rules for a supply of IPP are provided for in paragraph 2(d) of Part III of Schedule IX to the Act. Subparagraph 2(d)(i) of Part III of Schedule IX to the Act states that a supply of IPP is considered to be made in a province if all or substantially all of the Canadian rights in respect of the property may be used only in the province. "Canadian rights" refer to that part of the IPP that may be used in Canada (section 1 of Part III of Schedule IX to the Act). Where there are no restrictions regarding the province in which the IPP may be used, subparagraph 2(d)(i) is not applicable.

Subparagraph 2(d)(ii) of Part III of Schedule IX to the Act states that a supply of IPP will be considered to be made in a province if the place of negotiation of the supply is in the province and the property may be used otherwise than exclusively outside the province. Section 1 of Part I of Schedule IX to the Act defines the "place of negotiation" of a supply to be "... 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 ...". 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. Therefore, where it is determined that the place of negotiation of the taxable (other than zero-rated) supply of the IPP is in a non-participating province XXXXX, subparagraph 2(d)(ii) deems the supply to be made in that province andthe supply is consequently subject to GST at 7%.

2. What is the tax status of the supply of the consultation and the supplies made pursuant to the maintenance contracts and made by licence?

The supply of consultation services is considered to be a supply of a service where it consists of specific work performed for a specific person and does not involve a supply of right to an existing product.

The characterization of the supply made pursuant to the maintenance contract depends on the principal object of the supply. If the principal object of the supply is to obtain technical support provided through interaction with technicians, or specific work done by technicians, the supply would be characterized as a supply of a service, since it is specific work performed for a specific customer. It is important to note that where the principal object of a software maintenance contract is rather to obtain software (where it is bundled with the technical support) or to obtain the right to use existing technical information in the form of on-line documentation and access to a trouble shooting database, the supply would be characterized as a supply of IPP. For additional information, please see the enclosed Technical Information Bulletin B-090, GST/HST and Electronic Commerce.

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. Pursuant to paragraph 142(2)(g) of the Act, a service is deemed to be made outside Canada if the service is, or is to be, performed wholly outside Canada. Therefore, in this case, if the supply of the service is performed wholly in the U.S., the supply is deemed to be made outside 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. A supply of a service is performed at least in part in Canada if:

•   the service requires a person to perform a task (i.e., the supplier acts through one or more of its employees), and the person performing or physically carrying out the task is situated in Canada at the time the activity is done;

•   the service includes operations performed by a supplier's equipment (e.g., computer equipment), and the equipment is located in Canada;

•   the supply involves doing something to or with a recipient's equipment by accessing it from a remote location, and the recipient's equipment is located in Canada (however, this does not apply to a service wholly performed outside Canada, where the results are subsequently delivered electronically to a recipient's computers in Canada, e.g., a programming service carried out at the supplier's location outside Canada and e-mailed to a recipient in Canada; or

•   any activity related to the performance of the service is undertaken in Canada.

Even where a service is performed in Canada it may be deemed supplied outside Canada if it is supplied by a non-registered non-resident that does not carry on business in Canada as previously explained.

The provision of the upgrade would be a supply of IPP where it is determined to be a separate supply pursuant to the principles set out in P-077R, Single and Multiple Supplies. The supply of the upgrade in this case would therefore be subject to the previously explained place of supply rules for IPP. If, however, the upgrade is included as part of a single supply of a service made pursuant to a maintenance service contract, the principal object of which is to obtain a service as described above, then the place of supply rules for services would apply as described above.

3. Should XXXXX self assess the GST on the above supplies?

Based on the information provided, the supplies made to XXXXX may all be deemed to be made outside Canada where the supplies are made by non-resident suppliers that are not registered for GST/HST and are not carrying on business in Canada.

If the supply by the non-resident companies to XXXXX is deemed to be made outside Canada, XXXXX may be required to self-assess GST at 7% pursuant to section 218 of the Act on the value of the consideration for that supply if it is the recipient of an imported taxable supply. An imported taxable supply is defined in section 217 of the Act. Pursuant to paragraph 217(a) of the Act, an imported taxable supply means a taxable supply of a service made outside Canada to a resident of Canada such as XXXXX. However, this does not include a service acquired for consumption, use or supply exclusively in the course of commercial activities of the resident. Pursuant to paragraph 217(c) of the Act, an imported taxable supply also includes a taxable supply of IPP made outside Canada to a resident. However, it excludes IPP that is acquired by the resident for consumption, use or supply exclusively in the course of its commercial activities and also excludes IPP that may not be used in Canada. Therefore, if an imported taxable supply is acquired by XXXXX for use, consumption or supply in the course of its exempt activities and the supply is not for use, consumption or supply exclusively in the course of a commercial activity, XXXXX would be required to self-assess the tax in respect of that supply.

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 the Canada Revenue Agency with respect to a particular situation.

For your convenience, find enclosed a copy of section 1.4 of Chapter 1 of the GST/HST Memoranda Series.

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