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.
[Addressee]
Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 15th floor
320 Queen Street
Ottawa ON K1A 0L5
Case Number: 127020
August 11, 2011
Dear [Client]:
Subject:
GST/HST RULING
Application of GST/HST to [...] membership cards granting access to a social networking website
Thank you for your letter of July 6, 2010, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the sale of [...] [membership cards].
HST applies at the rate of 15% in Nova Scotia, 13% in Ontario, New Brunswick, and Newfoundland and Labrador, and 12% in British Columbia. GST applies at the rate of 5% in the remaining provinces and territories.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
Statement of Facts
From your letter and from subsequent telephone conversations, we understand the following:
1. [...] (the "Supplier") sells memberships for specified time periods that grant full access to a social networking website [...] called [ABC] (the "Website");
2. The Supplier is the sole and exclusive owner of the Website's content and related intellectual property rights;
3. The Supplier's head office is situated in British Columbia. The Supplier is registered for GST/HST purposes;
4. [...] memberships are sold by the Supplier online through the Website or via physical membership cards (the "Membership Cards") sold in retail stores (the "Retailers") across Canada;
5. A Membership Card is a plastic card with an electronically readable magnetic strip and a PIN number hidden beneath a scratch-off area on the back of the card;
6. Membership Cards are produced with a face value of either $[...], $ [...] or $[...], and may be redeemed for a [...]-month, [...]-month or [...]-month membership respectively;
7. The Supplier arranges for the production of the unactivated Membership Cards and delivers them to a third party (the "Distributor") who acts as the intermediary between the Supplier and the Retailers. The Distributor then delivers the unactivated Membership Cards to the Retailers throughout Canada. The Supplier retains ownership of the Membership Cards at all times until the cards are sold by the Retailers to consumers;
8. Each month, the Retailers forward the total sale proceeds of the Membership Cards to the Distributor. In consideration for the services of the Distributor, the Supplier pays the Distributor a commission which the Distributor then shares with the Retailers. The Distributor forwards the total sale proceeds of the Membership Cards to the Supplier each month, less this commission;
9. When a Membership Card is sold by a Retailer, the cashier activates the Membership Card by scanning the magnetic strip. The supplier is electronically notified and activates the card's hidden PIN number. Once a Membership Card has been activated in this manner, it is capable of being redeemed;
10. The Supplier considers a Membership Card to have been redeemed when a consumer accesses the Website and enters the PIN number hidden behind the scratch-off area on the back of the card;
11. When the PIN number is entered on the Website, the Supplier verifies that the PIN is valid and then creates a user account. The Supplier immediately credits the face value of the Membership Card to the newly created user account and then activates a [...]-month, [...]-month or [...]-month membership, effective from the date the card is redeemed. The entire credit is immediately consumed by the creation of the membership. The consumer may then access the paid content portion of the Website until the membership expires;
12. Some of the Membership Cards sold and activated by Retailers may never be redeemed;
13. The Supplier does not obtain the home address or the business address of a consumer at the time that he or she redeems a Membership Card. That is, the consumers are not required to enter their addresses in order to redeem their Membership Cards;
14. The Supplier determines where a consumer's computer is situated through the use of geolocation software, which identifies the physical location based on the computer's IP address; and
15. The membership can be used throughout Canada, and a Membership Card may be redeemed anywhere in Canada, regardless of where it is purchased.
Ruling Requested
You would like us to confirm:
1. That the Membership Cards sold by Retailers are gift certificates for the purposes of subsection 181.2;
2. If the Membership Cards are gift certificates, that no GST/HST is collectible by the Retailers, the Distributor or the Supplier at the time that a Retailer sells a Membership Card, and that GST/HST only becomes collectible by the Supplier at the time that a Membership Card is redeemed through the Website;
3. That in the event that a Membership Card is activated but is never redeemed via the Website, no GST/HST becomes collectible in respect of that card; and
4. That paragraph 8(b) of the New Harmonized Value-Added Tax System Regulations is applicable for determining the place of supply for the sale of the Membership Cards in Canada and that the consumer's address yielded by the operation of the geolocation software used by the Supplier is an acceptable address of the consumer for the purposes of paragraph 8(b) of the Regulations.
Your last question regarding the determination of the place of supply by using geolocation will be the subject of a separate ruling (Case No. 131828) that will be issued by the Border Issues Unit.
Ruling Given
Based on the facts set out above, we rule as follows:
1. The Membership Cards sold by Retailers are considered to be gift certificates for the purposes of subsection 181.2;
2. GST/HST is not collectible by the Retailers, the Distributor or the Supplier at the time that a Retailer sells a Membership Card. GST/HST becomes collectible by the Supplier at the time that a Membership Card is redeemed through the Website; and
3. No GST/HST is collectible by the Retailers, the Distributor or the Supplier in the event that a Membership Card is activated but is never redeemed by a consumer via the Website.
This ruling is subject to the qualifications in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service. We are bound by this ruling provided that none of the above issues are currently under audit, objection, or appeal, that no future changes to the ETA, regulations or our interpretative policy affect its validity, and all relevant facts and transactions have been fully disclosed.
Explanation
1) Membership Cards are considered to be gift certificates for the purposes of section 181.2
A Membership Card is a "device" in the form of a plastic card with an electronically readable magnetic strip and a PIN number hidden beneath a scratch-off area on its back. Each Membership Card has a monetary value and is sold by the Supplier through intermediaries. At the time that a Membership Card is redeemed via the Website, the Supplier accepts a Membership Card as consideration for a supply. The Membership Card sold by the Supplier therefore constitutes a gift certificate such that section 181.2 applies.
2) No GST/HST is collectible at the time that a Membership Card is sold by a Retailer to a consumer
Where a Membership Card constitutes a gift certificate for purposes of section 181.2 of the ETA, the issuance or sale of that Membership Card is deemed by section 181.2 not to be a supply for the purposes of the ETA and therefore no obligation to collect GST/HST arises at the time that the Membership Card is sold. Instead, the obligation to collect and remit GST/HST would occur at the time that the Membership Card is redeemed and is used as consideration for a taxable supply.
3) No GST/HST is collectible in respect of Membership Cards that are never redeemed
No obligation to collect and remit GST/HST arises in respect of a Membership Card which constitutes a gift certificate until it is redeemed in consideration for the supply of taxable property or services. A Membership Card is redeemed, and becomes consideration for a supply, at the time that a consumer uses the Membership Card to access the Website and set up a user account. If a Membership Card is never redeemed, then there is no obligation to collect and remit GST/HST.
ADDITIONAL INFORMATION
The facts stated above indicate that the Retailer and the Distributor both engage in a variety of activities in relation to the sale of the Membership Cards. Where the supply of these activities by the Retailer and/or the Distributor constitutes a taxable supply, the Retailer and the Distributor as GST/HST registrants would be required to collect GST/HST on the value of the consideration for that taxable supply.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 613-957-8221. 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,
Kathryn Sigetich
Specialty Tax Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
UNCLASSIFIED
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