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
5th floor, Tower A, Place de Ville
320 Queen Street
Ottawa ON K1A 0L5
[Addressee]
Case Number: 247380
Business Number: […]
October 25, 2024
Dear [Client]:
Subject: GST/HST INTERPRETATION
Royalty payments
Thank you for your correspondence of [mm/dd/yyyy], concerning the application of the goods and services tax/harmonized sales tax (GST/HST) on royalty payments.
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.
We understand the following […]:
1. […] ([…][the Company]) operates the website [...] (Website). The Website is an on-demand video site that allows […][users] […] to access and view […] development content as required by their respective […] regulatory bodies.
2. The content on the Website is primarily provided in video form and users of the Website can either purchase the ability to view single or multiple videos or subscribe to the Website through subscription to have unlimited access to the content.
3. [The Company] is registered for GST/HST purposes under the Business Number […].
4. While [the Company] sometimes creates its own content, the majority of the video content available on its Website is created by sending a videographer to […] conferences, taping the various programs, editing it and uploading it to the Website.
5. Video content on the Website has been accredited by the […][provincial regulatory body] and other provincial […][associations](footnote 1) to be eligible education activities(footnote 2) for [users] to satisfy the required hours of […] development required under their respective jurisdiction.
6. An […] (Agreement) was entered between […][the Party] and the Company. […]. Pertinent sections of the Agreement are provided, in part, as follows:
[…][direct quotes from agreement].
7. All associations and providers of content on the Website are Canadian residents.
8. […], [the Party] is a non-profit organization.
9. […] [the Party] is registered for GST/HST purposes […].
RULING REQUESTED
You would like to know if GST/HST is applicable on the royalties paid by [the Company] to [the Party] pursuant to the Agreement.
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) position on specific provisions of the legislation as these relate to a clearly defined fact situation of a particular person, and where all of the relevant facts and supporting documentation have been presented in writing. As we are not in possession of all of the pertinent facts, we are unable to provide a ruling. However, we are pleased to provide an interpretation of the relevant ETA provisions for your assistance.
INTERPRETATION GIVEN
Generally, supplies of property or services made in Canada are taxable supplies and are subject to the GST/HST, unless they are specifically identified as exempt. Schedule V of the ETA lists exempt supplies, which are not subject to the GST/HST. Schedule VI of the ETA lists zero-rated supplies, which are considered to be taxable supplies, but are subject to the GST/HST at the rate of 0%.
Supply of Intangible Personal Property
Usually, a royalty is a payment made by a person who uses a right in respect of intellectual property (IP) that belongs to another person. The supply of a right to use IP, such as video content, where the supplier retains ownership of the content, is characterized as a supply of intangible personal property (IPP) for GST/HST purposes.
For further information on supplies of a right to use content, please refer to Example 19 of the GST/HST Technical Information Bulletin B-090, GST/HST and Electronic Commerce.
Based on […] the Agreement, [the Party]’s supply of a license or right to use its content would generally be considered as a supply of IPP. As such, [the Party] provides the right to [the Company] to offer the uploaded videos on its Website to users and viewers on a pay-as-you-go or subscription payment basis. As a consideration for the supply of IPP, [the Company] will generally pay the Party in the form of a royalty amount calculated based on percentages of “pay-as-you-go video purchases” and “net subscription revenues”.
Pursuant to paragraph 142(1)(c), a supply of IPP is deemed to be made in Canada if it may be used in whole or in part in Canada or if the IPP relates to goods ordinarily situated in Canada, to real property situated in Canada or to a service to be performed in Canada. To determine whether IPP may be used in Canada, the written agreement should reveal any restrictions regarding the place of use of the IPP. If there are no such restrictions, the supply will be deemed to be made in Canada.
In your situation, considering that there is no indication in the Agreement that the place of use of the content supplied by [the Party] is restricted in any manner, it is assumed for purposes of this interpretation that there are no such restrictions. As such, the content (IPP) supplied to [the Company] could be considered to be made in Canada and therefore subject to the GST/HST.
The rate of tax applicable to a particular taxable supply made in Canada is based on where in Canada the supply is determined to be made. A taxable supply of IPP made in Canada is subject to GST at the rate of 5% (or HST at a rate of 13% or 15% when made in a participating province: Ontario, New Brunswick, Newfoundland and Labrador, Nova Scotia or Prince Edward Island) unless the supply is zero-rated (taxed at 0%).
Additionally, where a taxable supply of IPP is determined to be made in Canada and is not zero-rated, a further analysis with respect to the province in which the supply is made or deemed to be made is necessary to determined the appropriate rate of tax.
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, and where applicable, the New Harmonized Value-added Tax System Regulations (the Regulations). 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. Further, under section 144.1, a supply made in Canada that is not made in any participating province is deemed to be made in a non-participating province.
Section 3 of Part IX of Schedule IX provides that, notwithstanding any other part of Schedule IX, a supply of property or a service is made in a province if the supply is prescribed to be made in the province under the Regulations.
Generally, for supplies of IPP with respect to which there are no restrictions regarding where the property may be used, paragraph 8(b) of the Regulations deems the supply of the IPP to be made in a particular 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, and
* the particular address is in the particular province, and
* the IPP can be used in the particular province.
Where the above rule does not determine the supply of the IPP to be made in a province, paragraph 8(c) of the Regulations 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.
The place of supply rules that determine the province in which a supply, including a supply of IPP, is made are further explained in draft GST/HST Technical Information Bulletin B-103, Harmonized Sales Tax - Place of supply rules for determining whether a supply is made in a province.
ADDITIONAL INFORMATION
Digital Economy Businesses
The ETA was amended, effective July 1, 2021, to include new GST/HST provisions that generally apply to non-resident vendors and distribution platform operators that participate in the digital economy. These provisions are found under Subdivision E of Division II of the ETA.
The following definitions are found in subsection 211.1(1):
“distribution platform operator”, in respect of a supply of property or a service made through a specified distribution platform, means a person (other than the supplier or an excluded operator in respect of the supply) that
(a) controls or sets the essential elements of the transaction between the supplier and the recipient;
(b) if paragraph (a) does not apply to any person, is involved, directly or through arrangements with third parties, in collecting, receiving or charging the consideration for the supply and transmitting all or part of the consideration to the supplier; or
(c) is a prescribed person.
“specified distribution platform” means a digital platform through which a person facilitates the making of specified supplies by another person that is a specified non-resident supplier or facilitates the making of qualifying tangible personal property supplies by another person that is not registered under Subdivision D of Division V.
“specified non-resident supplier” means a non-resident person that does not make supplies in the course of a business carried on in Canada and that is not registered under Subdivision D of Division V.
In applying the definitions above to the case at hand, due to the fact that all associations and freelance providers of content on the Website are Canadian residents, and specifically in this case, since [the Party] is a Canadian GST/HST registered entity, this would not satisfy the definition of “specified non-resident supplier”. As this definition needs to be met in order to further analyze “specified distribution platform” and then “distribution platform operator” we can conclude at this time that [the Company] does not meet the definition of “distribution platform operator”.
Accordingly, as [the Company] is registered for GST/HST under Subdivision D and is not a “distribution platform operator”, there are no digital economy implications applicable to this case pursuant to the Subdivision E provisions of the ETA.
For further information regarding the digital economy businesses, more specifically the section on cross-border digital products, go to “GST/HST for digital economy business” at the Canada.ca website.
Input tax credits
As a registrant, you recover the GST/HST paid or payable on your purchases and expenses related to your commercial activities by claiming an input tax credit (ITC) in your line 108 calculation if you are filing electronically or on line 106 if you are filing a paper GST/HST return.
You may be eligible to claim ITCs only to the extent that your purchases and expenses are for consumption, use, or supply in your commercial activities. To claim an ITC, the expenses or purchases must be reasonable in quality, nature, and cost in relation to the nature of your business.
An ITC that arises in a particular reporting period of the person must be claimed in a return for that reporting period or a subsequent reporting period, filed by the due date of the return for the person’s last reporting period that ends within four years after the end of the particular reporting period.
Where the supplier fails to charge tax to a person before the end of the last reporting period of the person that ends within four years after the end of the particular reporting period in which the tax became payable, the person may be eligible to claim an ITC in the return for the reporting period in which the tax is paid by the person, provided that return is filed by its due date. To be eligible to claim the ITC, the supplier must have disclosed in writing to the person that the Minister has assessed the supplier for that tax and that the person must have paid the tax to the supplier after the end of the last reporting period and before the ITC is claimed by the person.
For further information on ITCs please refer to GST/HST memorandum 8.1 - General Eligibility Rules.
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 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.
CONTACT
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 873-355-5326.
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,
David Agbetiafa
Senior Rulings Officer
Digital Economy Unit
General Operations and Border Issues Division
GST/HST Rulings Directorate
FOOTNOTES
1 […]
2 […]
Email this Content