Please note that the following document, although correct at the time of issue, may not represent the current position of the Canada Revenue Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence du revenu du Canada.
GST/HST Rulings Directorate
Place de Ville, Tower A, 11th floor
320 Queen Street
Ottawa ON K1A 0L5
[Addressee]
Case Number: 205313
Attention: […]
February 28, 2023
Dear [Client]:
Subject: GST/HST RULING
Computer hosting services to non-residents and drop-shipment rules
Thank you for your letter of [mm/dd/yyyy] , concerning the application of the goods and services tax/harmonized sales tax (GST/HST) to the supply of hosting services for a cryptoasset mining operation. We apologize for the delay in this response.
The HST applies in the participating provinces at the following rates: 13% in Ontario; and 15% in New Brunswick, Newfoundland and Labrador, Nova Scotia and Prince Edward Island. The GST applies in the rest of Canada at the rate of 5%.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
STATEMENT OF FACTS
Based on the information contained in your letter of [mm/dd/yyyy] , we understand the following:
1. […] ([…][NonResCo] is a corporation incorporated on [mm/dd/yyyy] […][outside of Canada].
2. [NonResCo] employs [#] persons located […][outside of Canada].
3. [NonResCo] […] is contemplating […][establishment of] a Canadian corporate subsidiary.
4. [NonResCo]’s […] lines of business, [include blockchain infrastructure and cryptoasset hosting and mining operation hosting activities][…]
5. [NonResCo] […] anticipates, most customers will be engaged in cryptoasset mining.
6. A Canadian corporation (“host”) will be created as a wholly owned subsidiary of [NonResCo] for the purpose of carrying out the Canadian operations of [NonResCo] related to blockchain infrastructure and cryptoasset mining hosting activities. The host will be registered for the GST/HST.
7. All customers of the host are expected to be corporations that will be non-residents of Canada based on both jurisdiction of incorporation and location of the central mind and management of the corporation.
8. The host’s customers will not be registered for the GST/HST.
9. The host will establish a facility (“hosting facility”) in Canada to host cryptoasset mining equipment belonging to its customers, all of whom are expected to be located outside of Canada. The customers will be engaged in cryptoasset mining activities through their equipment located at the hosting facility.
10. The host grants its customers the right to place their computer mining equipment in the hosting facility for an extended period of time and to operate it from there on a continuous and ongoing basis, using a connection to the host’s network at the facility or other defined communications carriers as defined by the customer in order to connect to and participate in cryptoasset mining on a commercial basis at the hosting facility.
11. The mining equipment may loosely be described as [cryptoasset mining] computer equipment and includes, generally speaking, […].
12. Title and ownership of the mining equipment hosted at the facility remains at all times vested with the customers, the individual cryptoasset miners. Customers are responsible for operating their own mining equipment, over which they have (remote) access and control. The customers and their employees located […][outside of Canada] have the capacity to direct the use of the mining equipment remotely through the use of software.
13. The customer will be responsible for:
a. purchasing the mining equipment (server & power supply unit);
b. transportation of the equipment to and ultimately from the Canadian hosting facility;
c. insurance (both in transit and while located at the Canadian facility);
d. payment of any applicable import fees, duties, tariffs and all other costs relating to the mining equipment;
e. importation into Canada (importer of record) of the mining equipment it wishes to locate at the hosting facility;
14. The host will enter into a hosting agreement with its customers, the individual cryptoasset miners, by which it agrees to connect, maintain and configure the customer’s mining equipment at the hosting facility so as to optimize its operation, including the following activities (“hosting services”):
[…][The services provided by the host include network management, negotiation of continuous electrical service and the installation of systems to provide the hosting facility and the customer’s equipment with optimal heat and thermal management. The host will maintain valid insurance for the equipment and facility and properly manage, maintain, clean, repair, and securely monitor the facility and the equipment, providing cyber security and 24/7 technical support. The customer’s equipment will be unpacked, installed, configured and maintained at the facility to make it fully operational at maximum performance. The host will also uninstall and repack the equipment at the end of the agreement. Customers are provided with continuous network and data access and customized enclosed spaces including racks.]
15. The mining equipment remains at the hosting facility through its useful life. At the termination of the hosting agreement, it is expected that the residual value of the mining equipment will be nominal. The host will then either transfer possession of the equipment to the customer at the hosting facility in Canada, at which point the customer will ship the equipment for export; alternatively, the host may, for a separate fee, prepare and ship the equipment for export on request by the customer.
16. Customers will engage in cryptoasset mining in a proof-of-work context and will use the mining equipment to verify and confirm proposed transactions on the blockchain network and to solve cryptographic puzzles. If successful, the customer gets to add new blocks to the blockchain ledger of the cryptoasset they are mining.
17. Where a miner adds a new block to the blockchain ledger by successfully completing, solving and producing the proof associated with the block, they will automatically receive a block reward payment from the cryptoasset network.
18. Miners perform these tasks, and receive the corresponding block rewards, primarily by running automated processes installed on their computer mining equipment.
19. The host charges customers a monthly fee under the hosting agreement as consideration for operating the hosting facility (“hosting service fees”). This fee is calculated based on the electrical power consumption attributable to each customer expressed as a percentage of the time that the customer’s computer mining equipment is successfully up and operational.
20. […][Additional information about billing]
RULING REQUESTED
You would like to know whether:
1. The customers would be considered to have a permanent establishment in Canada at the hosting facility; and
2. If customers are not considered to have a permanent establishment in Canada at the hosting facility, would the supply of hosting services made by the host to its customers be considered a taxable supply made outside Canada in application of the drop-shipment rules at subsections 179(1) and 179(4) of the ETA.
RULING GIVEN
Based on the facts set out above, we rule that:
1. The customers would be considered to have a permanent establishment in Canada at the hosting facility; and
2. Since the customers have a permanent establishment in Canada at the hosting facility, the drop-shipment rules at subsection 179(1) and 179(4) of the ETA do not apply to the taxable supply of hosting services made by the host and therefore the supply would not be deemed to be made outside Canada.
EXPLANATION
On February 4th, 2022, the Department of Finance announced draft legislative changes to the ETA and proposed new section 188.2 to clarify the GST/HST application to cryptoasset mining activities with effect from February 5th, 2022. The present ruling, however, and our comments below, are based on the application of the existing GST/HST rules in effect at the time of your ruling request on December 6, 2019 and up until February 5th, 2022.
Ruling 1
Section 123 defines a “permanent establishment” in respect of a particular person as:
(a) a fixed place of business of the particular person, including
(i) a place of management, a branch, an office, a factory or a workshop, and
(ii) a mine, an oil or gas well, a quarry, timberland or any other place of extraction of natural resources,
through which the particular person makes supplies,
or
(b) a fixed place of business of another person (other than a broker, general commission agent or other independent agent acting in the ordinary course of business) who is acting in Canada on behalf of the particular person and through whom the particular person makes supplies in the ordinary course of business.
The Canada Revenue Agency (CRA) Policy Statement P-208R Meaning of “Permanent Establishment” provides certain criteria for determining what would qualify as a fixed place of business of a person or business. The hosting facility appears to meet these criteria since:
1) there exists a space at the hosting facility in which the customer’s mining equipment will be located and be at the disposal and under the control of the customer;
2) the space will be provided on an ongoing, non-temporary and continuous basis; and
3) the […][key] activities of the customer’s business will be carried out through the automated operations of the computer mining equipment located at the hosting facility.
Based on these considerations, the space made available at the hosting facility for the customer’s mining equipment would constitute a fixed place of business of the customer.
The second part of the definition of permanent establishment requires that the fixed place of business of a person be a place through which that person makes supplies. Policy Statement P-208R presents a number of factors, the presence of any one of which is usually an indication that supplies are being made through a fixed place of business.
In particular, in the case of the supply of a service, if the service is performed at the fixed place of business, the supply of the service will be considered to be made through that fixed place of business. Where a service results, in whole or in part, from computer-automated or equipment-related functions, the CRA will consider the supply of such services as being performed through the equipment at the place where the equipment is located.
The automated computer processes running on the customers’ specialized mining equipment for the purpose of producing proofs (of work) on the blockchain network constitute the performance of a service through that equipment and this comprises the bulk of the customers’ operational business activities. Since the equipment located at the hosting facility is under the control of the customer, who has remote access to the equipment in order to operate it in coordination with the host who performs maintenance of the equipment and provides technical support, the service performed through that equipment is considered to be performed at the facility and the customer will be considered to be making a supply of the service through that facility.
In application of the guidance in Policy Statement P-208R, the customers would be considered to have a fixed place of business at the hosting facility through which they make supplies of services performed by the automated operations of the mining equipment located at the facility. And in accordance with the definition of “permanent establishment” cited above, the customers would thus be considered to have a permanent establishment at the hosting facility.
Ruling 2
Paragraph 142(1)(g) provides that a supply of a service is deemed to be made in Canada if the service is, or is to be, performed in whole or in part in Canada. Accordingly, the host’s supply of hosting services to its customers is a taxable supply of services made in Canada since the services are performed in whole or in part at the hosting facility located in Canada.
Subsection 132(2) provides that where a non-resident person has a permanent establishment in Canada, they will be considered to be resident in Canada in respect of their activities carried on through that establishment. Since the non-resident customers acquire hosting services at the hosting facility, and this facility is considered to be their permanent establishment, they will be considered to be resident in Canada in respect of the supply of hosting services.
In order for the drop-shipment rule at subsections 179(1) and subsection 179(4) to apply, the supply of hosting services must be made to a non-resident person that is not registered for the GST/HST under Subdivision D of Division V. However, the customers will be considered resident in Canada with respect to the hosting services they acquire at the hosting facility. Accordingly, the drop-shipment rules do not apply to the host’s supply of hosting services and it remains a taxable supply of a service made in Canada to a customer who is deemed to be resident in Canada.
In accordance with the qualifications and guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, the Canada Revenue Agency (CRA) is bound by the ruling(s) given in this letter provided that: none of the issues discussed in the ruling(s) are currently under audit, objection, or appeal; no future changes to the ETA, regulations or the CRA’s interpretative policy affect its validity; and all relevant facts and transactions have been fully and accurately disclosed.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 343-553-3873. Should you have additional questions on the interpretation and application of GST/HST, please contact a GST/HST Rulings officer at 1-800-959-8287.
Yours truly,
Anna Messore
Border Issues 2 Unit
General Operations and Border Issues Division
GST/HST Rulings Directorate
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