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, 5th floor
320 Queen Street
Ottawa ON K1A 0L5
[Addressee]
Case Number: 217305
Business Number: […]
Dear [Client]:
Subject: GST/HST RULING
Supplies of software and technical support services made with the help of non-resident […][Representatives]
Thank you for your correspondence of [mm/dd/yyyy], […], concerning the application of the goods and services tax/harmonized sales tax (GST/HST) to supplies of […] software and technical support services made with the help of non-resident […][Representatives]. 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
We understand the following from […] [the] fax, additional documents including a sample […][agreement] (footnote 1) (the Agreement), the company’s website […], and [various] telephone conversations held between […] and […][CRA officials]:
1. […] ([…] [ACo]), […], is a non-resident corporation that is registered for the GST/HST under Subdivision d of Division V.
2. [ACo] is a software developer that develops cloud-based […] software products (Software) which are designed to enable users to safely access company networks electronically.
3. [ACo] supplies licenses to use the Software (Licenses), as well as technical support and maintenance services related to the Software (Services), to end-users.
4. [ACo] enters into a separate Agreement with each non-resident contract sales representative ([…][Representative]), allowing the [Representative] to solicit orders for the purchase of the Licenses and Services by end-users.
5. […] The end-users are business entities that use the Licenses and Services in the course of their business activities in Canada.
6. Under the terms of the Agreement, [ACo] appoints a [Representative] as its non-exclusive representative for the sale of the Licenses and Services during the term of the Agreement. In particular, […] of the Agreement states:
[…]
7. The [Representative] is not resident in Canada and performs […][Representative Services] for [ACo] wholly from outside Canada.
8. Under […] the Agreement, the [Representative] undertakes to make best efforts to actively market and promote the Software, to solicit new orders for the purchase of the Licenses and Services directly from new end-users and to solicit subscription renewals from existing subscribers. Under […][the Agreement], each prospective end-user must be individually approved in advance by [ACo] before any sale of a Licence and/or Services can be made to that end-user.
9. The Software is licensed exclusively by [ACo] directly to end-users under the […][License Agreement] which gives end-users a temporary right to use the Software and sets out the terms and conditions of use of the Licenses. […]
10. The Services component is mandatory in the first year that a License is purchased and is included with the supply of the License. In subsequent years, the Services are optional and available for separate purchase. The mandatory Services may appear as a separate line item on the invoice for the initial supply of a License.
11. The Services are provided remotely by [ACo]’s employees […][located outside of Canada] and enable end-users to understand how to use the Software and also how to troubleshoot any issues that arise. [ACo] does not have any employees in Canada; all of its employees are located [outside of Canada] from where they perform all of their technical support duties.
12. The [Representative] is not authorized and shall not perform any of the Services on behalf of [ACo]. The [Representative] is only authorized to perform [Representative Services] and such other services as provided in the Agreement. According to […] the Agreement:
[…]
13. Ownership of the Software vests exclusively with [ACo], who reserves all rights, title and interest therein. Nothing in the Agreement shall be deemed to grant to the [Representative] any ownership, license, entitlement or other proprietary rights with respect to the Software or any modifications or derivative works thereof, all of which shall be exclusively owned by [ACo]. The [Representative] acknowledges that nothing in the Agreement grants to the [Representative] any right, title or interest in the Software. According to […] the Agreement:
[…]
14. [ACo] retains exclusive ownership of all applicable copyrights, trade secrets, patents, and other intellectual property rights in the Software according to […] the Agreement, […]
[…]
15. The [Representative] does not have access to the software source code. Unless otherwise expressly authorized by [ACo], the [Representative] shall have no right to modify, copy, upgrade or reproduce the Software, and shall not reverse engineer or attempt to discover the underlying design, logic, or trade secrets embodied in the Software, including the source code. In addition, the [Representative] must immediately report any unauthorized use of the Software to [ACo] and cooperate in the enforcement of [ACo]’s proprietary rights in the software. Specifically, […] the Agreement state:
[…]
16. End-users receive a temporary, non-exclusive, non-transferable license to use the Software, subject to any restrictions placed on such use by the [License Agreement]. The [Representative] is not a party to the [License Agreement]. [ACo] has exclusive authority to modify the provisions of any [License Agreement].
17. The [Representative] must enlist prospective purchasers to sign […][an acknowledgement form], by which the end-user acknowledges that it is bound by the [License Agreement] between [ACo] and the end-user. Pursuant to […] the Agreement:
[…]
18. Under […] the Agreement, [ACo] may take measures to contact an end-user directly in the event of any breach of the terms of the [License Agreement] or failure to pay for the Licences and Services rendered by [ACo] in order to facilitate a resolution to the breach or to enforce its rights. The Representative must assist [ACo] in identifying any breach of the [License Agreement] and cooperate with any enforcement action taken by [ACo] in such cases.
19. [ACo] is solely responsible for giving access to the Software directly to end-users. This occurs when a completed purchase order for a License is accepted by [ACo], at which point [ACo] sends a link and a password electronically to the end-user in order to set up their account. The connection between the end-user and [ACo] through the [License Agreement] is maintained independently of whether the contractual relationship between the [Representative] and [ACo] is severed. An end-user’s [License Agreement] survives the expiration or termination of any Agreement between [ACo] and a [Representative], as stated in […] the Agreement:
[…]
20. Under […] the Agreement, [ACo] establishes the policies and procedures to be followed by the [Representative] for the ordering and delivery of Licenses and Services by end-users and specifies any requirements, as follows: any restrictions or conditions on the method of delivery; specification of the purchase order, such as name, address and other information required concerning the intended end-user; and […][other conditions].
21. Upon receipt of an end-user purchase request, the [Representative] must submit a purchase order form/invoice to [ACo] in writing, which becomes final once it is accepted by [ACo]. The purchase order form/invoice, as provided by [ACo], must provide details of the date of the transaction between the end-user and the [Representative], a correct description of the type and quantity of Licences and/or Services being ordered (including the version), the legal name and address or any other information about the end-user as [ACo] deems fit, the anticipated date of delivery of the Licences and/or Services to the end-user and the correct fees charged to the end-user by the [Representative].
22. Such purchase order form/invoice shall not have any terms concerning the Licence or Service fees charged to the end-user except in accordance with the Agreement, the policies and procedures issued by [ACo] or as agreed to by [ACo] in advance. Pursuant to […] the Agreement:
[…]
23. [ACo] has sole and absolute discretion to accept or refuse to fill any order submitted by a [Representative] on behalf of an end-user and no contract for the sale of Licenses or Services to an end-user is formed until [ACo] accepts to fulfill the particular purchase order. […]
24. [ACo] negotiates a price (list price) with each [Representative] that it expects to receive for the sale of Licences and Services to end-users. This list price may differ from [Representative] to [Representative] depending on their volume of sales. Other payment terms are more particularly specified in […] the Agreement. In the event that a [Representative’s] outstanding balance owing to [ACo] is […] past due, [ACo] may, in its discretion, suspend the [Representative’s] ability to place new purchase orders for Licences and Services and may also terminate end-users’ active Licences purchased through the [Representative]. […]
25. The [Representatives] independently establish and charge a price to the end-users (retail sale price) for the Licenses and Services. The [Representatives] have sole discretion in determining the retail sale price they will charge to end-users. However, the [Representative] remains obligated to [ACo] for any payments due under the Agreement regardless of whether an end-user has breached its own payment obligations to the [Representative] or the [Representative] has breached its contractual obligations to the end-user. The [Representative] must maintain detailed records relating to the distribution and licensing of the Software and sale of Services. […]
26. The difference between the list price established between [ACo] and each [Representative], and the retail sale price charged to end-users by the [Representatives], represents the commission earned by the [Representatives] on each sale of the Licenses and Services to an end-user. The [Representative] collects the full retail sale price from the end-user and only remits to [ACo] the list price negotiated with [ACo].
27. [ACo] issues an invoice to the [Representative] for the Licenses and Services ordered by the end-user, which indicates the list price agreed to by [ACo] and the [Representative], and also contains a reference to the end-user, including their name and address. This invoice also includes the name of the sales representative from the [Representative] organization responsible for making the sale. With your submission, you have provided three sample invoices containing the names and addresses of the [Representatives] and the end-users (redacted) and the name of the sales representative of the [Representative] organization involved in each transaction: […]
28. Pursuant to […] the Agreement, the [Representative] in turn issues a separate invoice to the end-user for the License and Services ordered, which invoice would indicate the retail sales price charged to the end-user on the sale.
29. The [Representative] is responsible for the creation and processing of invoices to end-users and the collection of accounts receivable arising from the sale of Licenses and Services to end-users.
30. The Agreement provides that all pricing and fees under the Agreement are exclusive of taxes. The [Representatives] shall pay any […] taxes, fees or duties […], including but not limited to, taxes due and owing on amounts due or collected from end-users to the [Representative]. […]
31. The [Representative] also agrees to charge and collect from end-users, and remit and pay to the appropriate governmental authorities, all value-added, sales and other similar taxes arising in connection with the transactions contemplated by the Agreement, including sales made to end-users.
32. Under […] the Agreement, the [Representative] shall maintain detailed records needed to comply with its responsibilities under the Agreement, such as […]
33. According to […], [Representatives] are not required to pay any amounts to [ACo], or make any required purchases from [ACo], in exchange for the [Representative Services] rights granted to them under the Agreement:
[…]
34. Pursuant to […] the Agreement, [ACo] and the [Representatives] are independent contracting parties for all purposes of the Agreement and neither one is deemed to be an agent, partner or employee of the other.
35. [Representatives] are not registered for GST/HST purposes under Subdivision d of Division V, and no GST506 form (Election and revocation of an election between agent and principal) has been executed that allows [Representatives] to account for GST/HST on behalf of [ACo].
RULING REQUESTED
You would like to know whether [ACo] must charge GST/HST on its supplies of Licenses and Services to [Representatives].
RULING GIVEN
Based on the facts set out above, we rule that [ACo] is not making a supply of Licences and Services to [Representatives]; as a result, it is not required to charge and collect GST/HST from the [Representatives].
EXPLANATION
Based on the information provided, [ACo] is not making supplies of Licenses and Services to [Representatives], but rather directly to end-users in Canada. The GST/HST applies to the supplies made in Canada by [ACo] to end-users, which under the Agreement [Representatives] are required to collect and remit.
[ACo] retains all ownership rights in the Software and reserves all its other rights therein, including the distribution rights. A [Representative] is not granted a license to use the Software or the right to reproduce, distribute or make the Software available and accessible to end-users. Furthermore, it is [ACo] that is solely authorized to provide Services to end-users.
[ACo] is therefore not required to collect GST/HST from the [Representatives] in respect of its supplies of Licenses and Services because the [Representatives] are not the recipients of such supplies.
We understand that [Representatives] supply to [ACo] [Representative Services] in respect of [ACo]’s supplies of Licenses and Services to end-users, as well as invoicing and collection services. Where a [Representative’s] services are, or are to be, performed wholly outside Canada, the [Representative’s] supply of such services to [ACo] would be deemed to be made outside Canada under paragraph 142(2)(g) and would therefore not be subject to GST/HST. However, if in future a [Representative’s] services are, or are to be, performed in whole or in part in Canada, the [Representative’s] supply of such services would be deemed to be made in Canada under paragraph 142(1)(g), and would therefore generally be subject to GST/HST.
Additional information on the GST/HST place of supply rules may be found in GST/HST Memorandum 3-3, Place of Supply, as well as GST/HST Technical Information Bulletin B-103, Harmonized Sales Tax – Place of supply rules for determining whether a supply is made in a province.
DISCLAIMER
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. The interpretation(s) given in this letter, including any additional information, is not a ruling and does not bind the CRA with respect to a particular situation. Future changes to the ETA, regulations, or the CRA’s interpretative policy could affect the interpretation(s) or the additional information provided herein.
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 the GST/HST, please contact a GST/HST Rulings officer at 1-800-959-8287.
Sincerely,
Anna Messore
GST/HST Rulings
Border Issues Unit
General Operations and Border Issues Division
GST/HST Rulings Directorate
FOOTNOTES
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