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: 174441
Business Number: […]
Dear [Client]:
Subject: GST/HST RULING and GST/HST INTERPRETATION
Application of GST/HST on funds raised through crowdfunding
Thank you for your letter of [mm/dd/yyyy], concerning the application of the goods and services tax/harmonized sales tax (GST/HST) on funds raised through crowdfunding. We apologize for the delay in our 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 facts as follows based on your letter, the crowdfunding website […][the Platform], and telephone conversations between [you] and an HQ officer on [mm/dd/yyyy] and [mm/dd/yyyy]:
1. […] ([…] [the Company]) […] based in [Canada] […][raised funds to create the Product] (the Project).
2. The Company is incorporated as a for-profit entity and registered for GST/HST with Business Number […].
3. Funds necessary for […] the Company’s Project were raised through the crowdfunding website […] (the Platform).
4. Each project on the Platform is independently created […] by the person or team behind it (i.e. […][X]). Each […][X] has complete control and responsibility over their projects […][including website, pledge amounts and reward related decisions]. […][Supporters (Y) pledge funds to support X’s project] in exchange for a reward such as a copy of […][a product], a limited edition, or a custom experience related to the project. The Platform is “reward-based”.
5. […][Y may] make pledges […] from around the world […], [and will be] charged the amount of their pledges on their credit card and entitled to the corresponding reward.
6. […][Information about Platform fees and payment processing].
7. […].
8. […] the Platform creates a contract between [X] and […] [Y]. […][X, by] posting a project is making an offer and […][Y, by pledging funds to] the project is accepting [X]’s offer and forming that contract. […].
9. […][Information about X’s responsibility with respect to the payment of Platform fees and applicable taxes].
10. […][The Platform does not accept projects with incentives such as equity, revenue sharing and investment opportunities](Footnote 1).
11. […]. The Project obtained $[…] in pledges […].
12. […][Information on the Platform about the Company’s Project and the fulfillment of rewards](Footnote 2).
13. The Project is described as […].
14. The following reward packages, established by the Company, received [funding] pledges from [Y] […]:
[…][Description of items included in each package]
15. The pledge amounts ranged from $[…] to $[…] and the reward packages included […][various elements]. There was no mention in the description of each package if GST/HST is included or in addition to the pledge amount.
16. […].
[…]
RULING REQUESTED
You would like to know the following;
1. Is GST/HST applicable to the funds pledged for this Project?
2. If GST/HST is applicable:
a. Who is responsible for collecting and remitting the GST/HST?
b. What is the consideration used to determine the GST/HST to be remitted?
c. Is the GST/HST calculated on a tax extra or tax included basis on the consideration?
d. What is the correct rate to charge, does it differ based on [Y]’s province of residence?
e. Is GST/HST still applicable […][if Y] did not request or claim their reward?
[…]
We acknowledge your request for rulings on the above matters. However, as noted in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, a ruling provides the Canada Revenue Agency's (CRA's) position on specific provisions of the legislation as these relate to a clearly defined fact situation of a particular person. As the circumstances are such that all of the pertinent facts cannot be established at this time, we are unable to rule on some of these issues. Rather, we are providing general information which we trust will be of assistance.
RULING GIVEN
Based on the facts set out above, we rule that:
1. The GST/HST is applicable to the funds pledged for this Project.
2a. The Company is responsible for collecting and remitting the GST/HST on the funds it received as pledges for the Project.
EXPLANATION
Ruling #1:
Generally, all supplies of property and services made in Canada are taxable unless an exemption from the GST/HST applies. Taxable supplies are supplies made in the course of a commercial activity and may be taxable at the rate of 0% (zero-rated supplies), 5%, 13%, or 15% on the value of the consideration for the supply depending on the province in which the supply is made. Zero-rated supplies are included in Schedule VI. Exempt supplies are not subject to the GST/HST and are included in Schedule V.
Subsection 123(1) defines key terms as follow:
“Supply” as the provision of property or a service in any manner, including sale, transfer, barter, exchange, licence, rental, lease, gift or disposition.
“Property” to mean any property, whether real or personal, movable or immovable, tangible or intangible, corporeal or incorporeal, and includes a right or interest of any kind, a share and a chose in action, but does not include money.
“Service” to mean anything other than property, money, and anything that is supplied to an employer by a person who is or agrees to become an employee of the employer in the course of or in relation to the office or employment of that person.
“Taxable supply” is a supply that is made in the course of a commercial activity.
“Commercial activity” is defined to include a business carried on by a person except to the extent to which the business involves the making of exempt supplies.
According to the [Platform’s terms of use ], a project cannot offer equity. Investment is not permitted and projects cannot offer incentives like equity, revenue sharing, or investment opportunities. Accordingly, the funds raised by the Company through the Project is not a capital contribution, loan or gift. Supporters, referred to as [Y] […], made pledges and […] were charged for the amount of their pledge and were entitled to a “reward” in return.
The Company is a GST/HST registrant and operates a business that is a commercial activity. The Company raised funds to create a new product, that was sold in the business, through reward-based crowdfunding. The rewards provided by the Company for this Project are taxable supplies per subsection 123(1).
Ruling #2a:
[…] (Footnote 3) […] the Platform provides a funding platform for creative projects. When [X] posts a project on the Platform, they’re inviting other people to form a contract with them. […][By making a pledge to support a project, Y] is accepting [X]’s offer, and forming that contract. The Platform is not a part of this contract – the contract is a direct legal agreement between [X] and [Y]. [X] is solely responsible for fulfilling the promises made in their project. […].
As the Company is the supplier it is required to account for the tax in the reporting period of the Company on the earlier of the day the consideration is paid or becomes payable.
INTERPRETATION GIVEN
Single or Multiple Supplies
The Company established [#] different reward packages each composed of different elements for the Project. It must first be determined whether a transaction is a single supply or multiple supplies. To help with this determination the Canada Revenue Agency (CRA) has published GST/HST Policy Statement P-077R2, Single and Multiple Supplies (P-077R2).
P-077R2 outlines the principles used to determine whether a transaction consisting of several elements is to be regarded as a single supply or multiple supplies. They are as follows:
1. Every supply should be regarded as distinct and independent.
2. A supply that is a single supply from an economic point of view should not be artificially split.
3. There is a single supply where one or more elements constitute the supply and any remaining elements serve only to enhance the supply.
Two or more elements are part of a single supply when the elements are so intertwined or interdependent that they must be supplied together. Conversely, multiple supplies occur when one or more of the elements can sensibly or realistically be broken out.
It should also be remembered that the way in which the price for a transaction is set out does not in itself determine whether there are one or more supplies. A single price does not automatically mean that there is one supply. Equally, separately identified prices for certain elements do not necessarily mean that there are two or more supplies.
P-077R2 provides a number of questions that should be asked:
1. Is the property/service provided by two or more suppliers?
2. Is there more than one recipient?
3. What did the supplier provide for the consideration received?
4. Is the recipient made aware of the elements (in detail) that are part of the package?
5. In the context of the particular transaction, does the recipient have the option to acquire the elements separately or to substitute elements?
As previously indicated, […] when [X] posts a project on the Platform, they’re inviting […][Y] to form a contract with them and the Platform is not a part of this contract. The contract is a direct legal agreement between [X] and [Y]. Therefore, the rewards were provided by one supplier, the Company, to one recipient, [Y].
The elements included in each of the packages established by the Company are described […] on the Platform […]
The packages are made up of a mix of […][elements]. […][The Product] is a predominant element based on the goal of the Project which is […][to create the Product]. […][Some] elements, […], have the common characteristic of having a promotional purpose to enhance or promote the [Product].
[…][Element A and element B] are distinct, independent and do not serve to enhance or promote the [Product].
As a result, [#1] Packages […] are a single supply of [the Product which is considered to be intangible personal property (IPP)] . [#2] Packages […] are separate supplies of [the Product] and […][element A, considered to be IPP)]. Package […][#3] is a separate supply of [the Product] and […][element B, which is considered to be IPP].
Where [Y] added […][a supply of element C or element D] to their reward [package] this would be a separate supply of [Tangible Personal Property (TPP)].
Characterization of Supply
As stated previously, the Company is a GST/HST registrant that supplied property for consideration in the course of its commercial activity. […].
A supply made by electronic means is characterized as either a supply of intangible personal property (IPP) or a supply of a service. A number of factors are considered in that determination such as the nature of the agreement between the supplier and the customer, and whether the agreement is in substance for work (or work and materials), or for property (including a right or interest of any kind).
[…][The Product and other IPP elements were sent to Y by email to be downloaded by Y]
Supplies that involve a customer downloading a digitized product from a supplier are generally characterized as supplies of IPP. […].
Please refer to GST/HST Technical Information Bulletin B-090, GST/HST and Electronic Commerce, for more information on the characterization of supplies made by electronic means.
Subsection 223(1) imposes disclosure requirements on a registrant who makes a taxable supply. Essentially, where the tax is charged on a tax-extra basis, the registrant must indicate the total amount of tax payable in respect of the supply. Where the tax is included in the amount charged for the supply, the registrant must indicate that the amount charged includes the tax payable in respect of the supply.
As per section 165, GST/HST is calculated on the value of the consideration for the supply. It is a question of fact whether tax has been added to the value of consideration or if the GST/HST is extra.
[…] of the Platform’s terms of use requires the Company to pay any taxes associated with the use of the platform […].
GST/HST Policy Statement P-118R (P-118R), Assessments on a Tax Extra or Tax Included Basis, may provide you with some guidance as to whether GST/HST should apply to the pledge amounts on a tax-included or tax-extra basis. P-118R provides that the determination of whether a tax-extra or tax-included assessment should be made is a question of fact to be resolved by the auditor based on the facts and the circumstances of the particular situation. Factors such as the invoicing practices, industry practices and supporting documentation will be pertinent and used in the determination.
Place of Supply
The GST (or federal part of the HST) is imposed under subsection 165(1) in respect of taxable supplies that are made in Canada. The provincial part of the HST is imposed under subsection 165(2) in addition to the federal part of the HST in respect of taxable supplies that are made in a participating province.
Subparagraph 142(1)(c)(i) deems a supply of IPP to be made in Canada if the IPP may be used in whole or in part in Canada. As such, the place of supply is determined based on where the rights can be used and not where they are actually being used at a particular time. In determining whether IPP may be used in Canada, reference may be made to the terms of a written agreement to determine if there are any restrictions regarding the place of use of the IPP. Where there are no such restrictions, it will always be the case that the IPP may be used in whole or in part in Canada.
In determining whether a supply of IPP is made in a province, the place of supply rules require a determination of the extent, if any, to which the use of the Canadian rights is restricted to one or more provinces. The Canadian rights in respect of IPP means that part of the IPP that can be used in Canada.
Generally, if there are no restrictions with respect to where the Canadian rights can be used, paragraph 8(b) of the New Harmonized Value-Added Tax System Regulations (the Regulations) would deem the supply of the IPP to be made in a province if:
- in the ordinary course of business of the supplier, the supplier obtains a particular address that is:
- if the supplier obtains only one address that is the home or business address in Canada of the recipient, the home or business address in Canada obtained by the supplier,
- if the supplier obtains more than one such address, the home or business address in Canada of the recipient that is most closely connected with the supply, or
- in any other case, the address in Canada of the recipient that is most closely connected with the supply;
- the particular address is in the province, and
- the IPP can be used in the province.
If a supplier does not obtain an address of the recipient, such as the case where [Y] is receiving [IPP] and no address was requested or obtained, paragraph 8(b) of the Regulations would not determine the province in which the supply of IPP is made. Instead, either paragraph 8(c) or section 11 of the Regulations would determine where the supply is made. Paragraph 8(c) provides that the supply is made in the participating province for which the tax rate is the highest among the tax rates for the provinces in which the property can be used.
However, if the property can be used in two or more participating provinces with the same highest tax rate, then section 11 of the Regulations would determine the province where the supply is made. Section 11 of the Regulations specifies which one of the participating provinces with the same highest tax rate (known as the specified provinces) will be the province where the supply is made. Where section 11 applies, the supply is made in the specified province where the supplier’s business address most closely connected with the supply is located. If the business address is not located in one of the specified provinces, then the supply is made in the specified province closest in proximity, determined in any reasonable manner, to the supplier’s business address that is most closely connected with the supply.
Where the Company obtained an address of [Y] the supply of the IPP would be made in a particular province if the address of [Y] is in that province. Otherwise, paragraph 8(c) or section 11 of the Regulations would determine where the supply is made.
A supply of [element A] is considered to be a supply of IPP. Under subsection 6(1) of the Regulations, a supply of IPP (other than IPP that relates to real property or to TPP) in respect of which the Canadian rights can only be used primarily in participating provinces is made in a participating province if an equal or greater proportion of those Canadian rights cannot be used in another participating province. Conversely, under section 7 of the Regulations, a supply of IPP (other than IPP that relates to real property or to TPP) in respect of which the Canadian rights can only be used primarily in non-participating provinces is made in a non-participating province. […]
A supply of IPP made to a non-resident who is not registered for GST/HST when the supply is made may be zero-rated pursuant to section 10.1 of Part V of Schedule VI if certain conditions are met. Please refer to GST/HST Info Sheet GI-034, Exports of Intangible Personal Property, for additional information.
A supply of TPP, such as [element C or element D], is deemed to be made in Canada pursuant to paragraph 142(1)(a) if the property is or is to be delivered or made available in Canada to the recipient of the supply. Whether a supply made in Canada is made in a participating province or non-participating province is determined by 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 place of supply rules set out in Schedule IX, made in a province. Further, under section 144.1, a supply made in Canada that is not made in a participating province is deemed to be made in a non-participating province.
Pursuant to section 1 of Part II of Schedule IX, a supply of TPP is made in a province if the supplier delivers the property or makes it available in the province to the recipient of the supply. This rule is generally based on the province in which legal delivery of the property occurs. For purposes of this rule, under section 3 of Part II of Schedule IX, property is deemed to be delivered in a particular province if certain conditions are met, including if a supplier sends the property by mail or courier to an address in the particular province.
Timing of Tax Payable
Whether the amounts collected from [Y] […][on] a reward-based crowdfunding [project] are an advance payment is a question of fact.
As per subsection 168(1), tax in respect of a taxable supply is payable by the recipient on the earlier of the day the consideration for the supply is paid and the day the consideration for the supply becomes due.
Under section 133, the entering into of any agreement to supply any property is deemed to be a supply of the property made at the time the agreement is entered into. The provision of the property under the agreement is treated as being a part of the same supply and not as a separate supply. As a result, the tax applies to any advance payment or part payment of the consideration for a supply even if, at the time payment is made, property has not in fact been transferred.
Generally, an advance payment is an amount paid on account of a payment to become due under an obligation and recorded in the supplier's books and records as income. GST/HST is payable at the time the advance payment is made, pursuant to paragraph 152(1)(c), assuming that the advance payment did not become due at an earlier time. If under a written agreement, a customer is required to make an advance payment equal to 100% of the consideration for property to be supplied in the future, the customer would be required to pay, and the supplier would be required to collect, the GST/HST calculated on the amount at the earlier of the time the advance payment became due under the agreement or was paid.
Consideration is defined under subsection 123(1) to include any amount that is payable for a supply by operation of law. [Y] is required to pay GST/HST on the full consideration payable for the pledge amounts that was supplied by the Company. Tax is calculated on the pledge amount and not the amount received by the Company after the fees are deducted from the Platform and the payment processor.
Adjustments, Credits and Refunds
The Company would be required to account for the GST/HST on all pledges in the reporting period of the Company on the earlier of the day the consideration is paid or becomes payable. It is noted on the Platform website that if [Y] wants a refund of their collected pledge once a […] project has ended, they will need to reach out to [X] directly.
Subsection 232(2) provides that where a particular person has charged to, or collected from, another person tax under Division II calculated on the consideration or a part thereof for a supply and, for any reason, the consideration or part is subsequently reduced, the particular person may adjust, refund, or credit, the amount of tax as calculated on the value of consideration that was reduced. The supplier has up to four years after the end of the reporting period in which the consideration was reduced to adjust the amount of tax charged or to refund or credit the tax collected to the recipient.
In issuing a credit note to a person the Credit Note and Debit Note Information (GST/HST) Regulations identifies the information that must be contained within the credit note. The information requirements are further discussed in GST/HST Memorandum 12.2 – Refund, Adjustment, or Credit of the GST/HST under Section 232 of the Excise Tax Act. The legislative provisions and information supplements make it clear that all credit notes issued must contain;
1. a statement or other indication that the document is a credit note;
2. the name of the supplier or an intermediary in respect of the supply, or the name under which the supplier or the intermediary does business, and the registration number of the supplier or the intermediary;
3. the name of the recipient or name of the recipient's business or the name of the recipient's duly authorized agent or representative;
4. the date on which the note is issued.
Further, where the note is issued for a total amount that includes the amount by which the consideration and the tax calculated thereon have been reduced in respect of multiple taxable supplies, the note should contain the total amount of the adjustment, credit, or refund of tax. Without the latter, the issuer of the note must include a statement to the effect that the adjustment includes an amount as tax, the total of the rates at which tax was paid or payable in respect of each of the taxable supplies that is not a zero-rated supply and for which there is a reduction in tax, and either the total reduction of consideration and tax in respect of each such supply or the total reduction of consideration and tax in respect of all such supplies to which the same total tax rate applies.
The legislative framework is specific. Section 232 only applies in circumstances where a reduction in consideration is provided to a person who has paid, or has been charged, the GST/HST on an original taxable supply and for any reason the amount of consideration has subsequently been reduced.
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 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 343-553-3972. 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,
David Phoenix, CPA, CGA
Services and Intangibles Unit
General Operations and Border Issues Division
GST/HST Rulings Directorate
FOOTNOTES
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