GST/HST and Electronic Commerce

GST/HST Technical Information Bulletin B-090
July 2002

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• Supplies Made to Non-Residents
• Non-Resident Registration
• I. Non-residents with a permanent establishment in Canada
• II. Non-residents without a permanent establishment in Canada

Supplies Made to Non-Residents

As noted previously, a taxable (other than zero-rated) supply of property or a service made in Canada is subject to GST/HST at the rate of 7% or 15%, depending on whether the supply is made in a participating province. However, if the supply is made to a non-resident person, the supply may be zero-rated under the provisions of Part V of Schedule VI to the Act as an exported supply.

A non-resident person who has a permanent establishment in Canada is deemed by subsection 132(2) of the Act to be a resident in Canada in respect of the activities carried on through that permanent establishment. Therefore, a supply of a service or intangible personal property made to the non-resident would not be zero-rated where the supply is in respect of activities carried on through that permanent establishment (refer to the discussion on permanent establishment in Non-Resident Registration.

Intangible personal property

Pursuant to section 10 of Part V of Schedule VI to the Act, a supply of intangible personal property made to a non-resident is only zero-rated where the non-resident is not registered at the time the supply is made and the supply is one of intellectual property or of any right, licence or privilege to use such property. Intellectual property includes an invention, patent, trade secret, trade-mark, trade-name, copyright or industrial design.

General zero-rating provision

Section 7 of Part V of Schedule VI to the Act is the general zero-rating provision for exported services. Pursuant to this section, a supply of a service made to a non-resident person is zero-rated. However, this provision does not apply to:

• a service made to an individual who is in Canada at any time when in contact with the supplier in relation to the supply;
• a service that is rendered to an individual while the individual is in Canada;
• an advisory, consulting or professional service;
• a postal service;
• a service in respect of real property situated in Canada;
• a service in respect of tangible personal property that is situated in Canada at the time the service is performed;
• a service of acting as an agent of a non-resident person or of arranging for, procuring or soliciting orders for supplies by or to the person;
• a transportation service; or
• a telecommunication service.

If the conditions for zero-rating are met, supplies that are characterized as supplies of services that are provided by electronic means are zero-rated when provided to a non-resident person. This includes supplies of Web site hosting and Web site design when provided by a registrant to a non-resident.

Specific zero-rated services

There are specific zero-rating provisions for certain exported services in Part V of Schedule VI to the Act, including some of those excluded from the general provision in section 7, such as:

• a supply of an advertising service made to a non-resident person who is not registered for GST/HST purposes at the time the service is performed (section 8);
• a supply of a service of instructing non-resident individuals in certain courses or administering certain examinations in respect of those courses when the supply is made to a non-resident who is not an individual and is not registered for GST/HST purposes (section 18); and
• a supply made to a non-resident person of certain advisory, professional or consulting services (section 23).

If the supply of any of these services is made by electronic means to a non-resident person, the supply is zero-rated, provided that all of the requirements for zero-rating are met.

Telecommunication services

Pursuant to Section 22.1, Part V of Schedule VI to the Act, a supply of a telecommunication service is only zero-rated if the supply is made by a registrant who carries on the business of supplying telecommunication services to a non-resident who is also in the business of supplying such services and who is not a GST/HST registrant and if the telecommunication is not emitted and received in Canada.

Non-Resident Registration

I. Non-residents with a permanent establishment in Canada

Under subsection 132(2) of the Act, a non-resident person who has a permanent establishment in Canada is considered to be resident in Canada in respect of, but only in respect of, the person's activities carried on through that permanent establishment. As a result, a non-resident person who makes taxable supplies through a permanent establishment in Canada is required to register for GST/HST purposes under subsection 240(1) of the Act as a resident person, and to collect tax on its taxable (other than zero-rated) supplies made in Canada, unless the person is a small supplier.

Under subsection 240(6) of the Act, a non-resident person who is required to register or who registers voluntarily under subsection 240(3) and who does not have a permanent establishment in Canada is required to provide and maintain security.

"Permanent establishment", for GST/HST purposes, is defined in subsection 123(1) as:

(a) a fixed place of business of the particular person ...

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;

In an electronic commerce environment, non-resident suppliers can make supplies into Canada with the assistance of computer equipment, such as servers, located in Canada, and Web sites stored on such servers. The issue that can arise for GST/HST purposes is whether a non-resident person making supplies into Canada through a Web site or server in Canada is considered to have a permanent establishment in Canada.

At a minimum, a "place of business" of a person requires that a certain amount of physical space be at the disposal of the person. A Web site, which merely consists of software and electronic data, is not tangible property, and therefore does not have a location that can constitute a place of business. As a result, the Web site of a non-resident person, including a Web site that is being hosted in a typical Web site hosting arrangement, does not, in itself, constitute a permanent establishment of the non-resident person for GST/HST purposes.

A server on which a Web site is stored is tangible property having a physical location. The server may constitute a place of business of a non-resident person, if it is at the disposal of the person (i.e., operated and owned or leased by the person). A non-resident person who has its Web site hosted on a server of an independent ISP in Canada would not generally be regarded as having the ISP's server at its disposal.

A server that is at the disposal of a non-resident person can qualify as a permanent establishment of the non-resident person for GST/HST purposes, even if no personnel are required at its location to operate it. However, the functions carried out by the non-resident person through the server must, on their own, be an essential and significant part of the business activity of the enterprise as a whole, or constitute other core functions of the enterprise.

For example, although the operation of a server by a non-resident ISP that is in the business of hosting the Web sites of other businesses would be considered to be an essential and significant part of that non-resident's particular business activity, a server will not result in a non-resident person having a permanent establishment at its location if the operations carried on through that server are restricted to preparatory or auxiliary activities.

Computer equipment, such as a server that is at the disposal of a non-resident person, may on its own qualify as a permanent establishment of the person, provided that the server is located in Canada and the activities carried out by the person through the server are a significant and essential part of its business activity.

Finally, an ISP that hosts a Web site of a non-resident person on its servers in Canada will not generally be an agent of the non-resident person, either because the ISP does not usually have the authority to conclude contracts in the name of the non-resident person, or because the ISP is an independent agent acting in the ordinary course of its business, as evidenced by the fact that it typically hosts Web sites of many different businesses.

II. Non-residents without a permanent establishment in Canada

Under subsection 240(1) of the Act, every non-resident person who makes taxable supplies in Canada in the course of a business carried on in Canada (other than as a small supplier), is required to register for GST/HST purposes. As a registrant, the non-resident is required to collect tax on its taxable (other than zero-rated) supplies made in Canada.

If a non-resident person does not make taxable supplies in the course of a business carried on in Canada and has not voluntarily registered for GST/HST purposes, supplies of property or services made in Canada by that person are generally deemed to be made outside Canada. The non-resident is therefore not required to collect tax on such supplies.

However, tax may be payable under Division III of the Act and will be collected by Canada Customs at the border on the taxable importation of goods, or through self-assessment under Division IV by Canadian residents on imported taxable supplies of intangible personal property and services.

A non-resident person may register voluntarily for the GST/HST under subsection 240(3) if, among other things, in the ordinary course of carrying on business outside Canada, the non-resident regularly solicits orders for the supply by the person of tangible personal property for export to, or delivery in, Canada, or has entered into an agreement for the supply by the person of services to be performed in Canada or of intangible personal property to be used in Canada.

A non-resident person may carry on business in Canada without having a permanent establishment in Canada.

Carrying on business in Canada

It is important to determine whether a non-resident person is carrying on business in Canada for purposes of determining the person's obligations in relation to registration requirements and for purposes of determining the tax status of supplies made in Canada by the person. The factors that the CCRA will consider, both in a traditional and electronic commerce environment, in determining whether a non-resident person is carrying on business in Canada in a particular situation include:

• the place where agents or employees of the non-resident are located;
• the place of delivery;
• the place of payment;
• the place where purchases are made;
• the place from which transactions are solicited;
• the location of an inventory of goods;
• the place where the business contracts are made;
• the location of a bank account;
• the place where the non-resident's name and business are listed in a directory;
• the location of a branch or office;
• the place where the service is performed; and
• the place of manufacture or production.

The importance of a given factor in a specific case depends upon the nature of the business activity under review, and, as always, the particular facts and circumstances of each case.

In general, a non-resident person must have a significant presence in Canada to be considered to be carrying on business in Canada. Isolated transactions carried on in Canada as part of a business that is carried on by a non-resident person outside Canada may not result in the person being considered to be carrying on business in Canada, given that the above-noted factors will usually not be met to a sufficient degree.

Some of the factors that are relevant for businesses engaged in conventional business transactions may not be applicable to businesses engaged in electronic commerce (i.e., engaged in the making of supplies delivered by electronic means over the Internet). This would be the case for factors that relate to a physical presence in Canada, such as the place where the goods in question are manufactured. In addition, some factors must be interpreted to take into account the particular nature of electronic commerce. For example, in determining the place where payment is made, it may be more appropriate, depending upon the circumstances, to consider the place where approval for the electronic transfer of funds takes place, rather than the place of posting or receipt of cheques.

Examples

The following examples illustrate the above-noted approach to determining whether a non-resident making supplies by electronic means is carrying on business in Canada without having a permanent establishment in Canada.

Enquiries

Date modified:

2002-09-25