23 November 1998 GST/HST Interpretation HQR0001184 - Dedicated Telecommunications Channel

Dear XXXXX

Thank you for your letter of May 11, 1998 concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to telecommunications services.

Facts

In your letter, you outline a typical scenario based on the following facts:

1. The service provider is a telecommunications company XXXXX and assumed to be registered under the GST/HST.

2. One of the services provided to customers is a dedicated channel service. This service consists of the provision of a private data line, used, for example, for electronic mail exchange. The data is transmitted through the system of telephone lines.

3. The majority of the subscribers to this service are business customers.

4. The customer is billed a monthly flat rate charge to retain the dedicated channel service, which is considered to be the fair value of the service.

Your analysis and quotation of the relevant legislation is accurate and will not be reproduced in this letter except for subsection 136.4(2) of the Excise Tax Act (ETA) which impacts directly on the issue raised and proposal presented.

Subsection 136.4(2) of the ETA states:

"For the purposes of this Part, where a person supplies a telecommunication service of granting to the recipient of the supply sole access to a telecommunications channel for transmitting telecommunications between a place in a particular province and a place in another province,

(a) the person is deemed to have made a separate supply of the service in each of those two provinces and in each province, if any, that is between those provinces; and

(b) the consideration for the supply in each province is deemed to be equal to the amount determined by the formula

(A/B) x C

where

A    is the distance over which the telecommunications would be transmitted in that province if the telecommunications were transmitted solely by means of cable and related telecommunications facilities located in Canada that connected, in a direct line, the transmitters for emitting and receiving the telecommunications,

B     is the distance over which the telecommunications would be transmitted in Canada if the telecommunications were transmitted solely by such means, and

C     is the total consideration paid or payable by the recipient for the sole access to the telecommunications channel."

The following issue and proposal, is reproduced directly from your incoming letter.

Issue

To comply with the legislation, it is necessary to establish a method to measure the ratio of the length of a dedicated channel in the harmonized provinces to the total length of the line. Since subsection 136.4(2) of the ETA does not provide further guidance as to the method of measurement, it is necessary to devise a method that is both practical and acceptable to Revenue Canada.

Specifically, the method implemented must satisfy the following criteria:

•   It must be in compliance with the policy intent of the ETA

•   It must be workable from a systems perspective. Although the billing systems of the majority of players within the industry may be sophisticated, nevertheless, they often cannot accommodate the vast combinations of distances between computer terminals transmitting and receiving data through a dedicated channel service.

Proposal

The following is the proposed method of applying the GST/HST legislation relating to the taxing of a dedicated channel service which would satisfy the above criteria.

1. Use area codes as the basis for geographical division to divide Canada into "zones".

2. For each "zone", select the major city or population centre (referred to as the "designated population centre").

3. Measure the straight line distance from the centre of the designated population centre in each area code in the harmonized provinces, to the nearest provincial border[.]

4. Identify each customer who subscribes to a dedicated channel service which lies partially within the harmonized provinces.

5. Identify the designated population centre within the area code in the harmonized province where the transmissionreception point exists (where applicable), and capture the standard distance from this designated population centre to the relevant provincial border, as found in the computerized distance tables. (Item A of formula to follow)[.]

5(a) Where a dedicated channel crosses a harmonized province and where there is not a transmissionreception point within the province, it will be necessary to capture the standard distance from each designated population centre (for each harmonized province through which the dedicated channel passes) to the appropriate provincial border(s).

6. Capture the standard distance between the two designated population centres where transmissionreception point exists (i.e., total length of the dedicated channel).

7. Calculate the consideration upon which HST is to be calculated using the following formula:

Consideration = (A/B) x C, where:

A = standard distance in harmonized province per # 5 and 5(a) above

B = standard distance in total per # 6 above

C = total consideration for the entire dedicated channel service.

Currently the provinces of Nova Scotia, New Brunswick and Newfoundland each contain a single area code. Therefore, under this proposed method each province would have one designated population centre (likely XXXXX respectively). When a dedicated channel service either starts or ends in one of these provinces, then the standard distance from one of these population centres to the appropriate provincial border will be included in the calculation. Where a dedicated channel runs through one of these provinces (without a starting or ending point) the standard distance from one of these cities to both applicable provincial borders (i.e., eastern and western border or the northern and southern border) will be included in the calculation. If, in the future, more area codes are added to these provinces, a designated population centre will be established for each new area code.

Interpretation Requested

You have requested our written opinion regarding the above issue and proposal as it relates to the application of subsection 136.4(2) of the ETA with respect to the supply of a dedicated telecommunications channel.

Interpretation Given

On April 1, 1997, the Harmonized Sales Tax (HST) replaced the goods and services tax (GST) and the provincial sales tax (PST) in the three participating provinces of Nova Scotia, New Brunswick and Newfoundland with a harmonized tax rate of 15%. The supply of a dedicated telecommunications channel to persons in a participating province, to the extent that they are taxable supplies (which are not zero-rated) deemed to be made in a participating province, will attract the HST at the harmonized rate of 15%.

One of the key provisions of subsection 136.4(2) of the ETA, is the deeming provision for separate supplies between a particular province and another province of a service of providing a telecommunications channel where a recipient is given sole access to the channel. The formula (A/B x C) was developed to assign values to the deemed supplies created on a prorated basis.

Subsection 136.4(2) uses the concept of "direct line" distance between the originating transmission point and the particular provincial border involved. Similarly, the direct line distance in Canada from the border of the province in which the transmission terminates is used to finalize the calculation. The distance measured in Canada between the borders of any intervening provinces would be tabulated in the same manner. These distances are compared to the total physical distance of the transmission as if it were sent by way of cable or telephone line in a direct line in Canada from the originating point to the termination point of the transmission in question.

The intent of the legislation with respect to subsection 136.4(2) of the ETA is to adopt the ordinary meaning of the term "direct line" as it applies to distance measurement. That is to say that, a direct line is the most direct way to travel from a starting to an ending point without deviation or consideration to physical limitations or obstacles. Generally, it would be the shortest distance between the two points taking into account that the measurement has to take place within Canada. The direct line distance may not necessarily be a straight line between two points. There are areas between points in Canada where the US boundary would interrupt a straight line distance measurement and, therefore, the Direct line distance would have to take this into account in order to remain a distance measured in Canada.

Certainly there is more than one way to measure actual distance in a direct line and any method would be accceptable as long as it remained within the confines of subsection 136.4(2) of the ETA. For example, physical distance measurements can generally be gauged by using an ordinary map through the application of the scale that is usually included. In other cases, the actual mileage chart or otherwise known direct line distance may be appropriate and the simplest to obtain. Another method may be to use standard trucking distances that are not routed through the United states.

We read your proposal with interest and it appears that it could be a viable alternative method of apportioning the fixed cost of providing a dedicated channel where the transmission passes through a participating province. However, the proposal does not appear to fall within the scope of subsection 136.4(2) of the ETA as it is currently written and administered. The formula contained in subsection 136.4(2) of the ETA was not envisioned to be applied on the basis of zones.

The main concern with your proposal, from a legislative standpoint, is that the concept of standard distance from a chosen central point in a given telephone area code is not precise enough to be used as a method for measuring distance for purposes of the provision. The intent was to use the actual distance or the closest approximation to that actual distance. This is evidenced by the use of the phrase "the transmitters for emitting and receiving the telecommunications," in the definition of component "A" of the formula (A/B) x C.

By using the area code as a point of origin, particularly in provinces that have only one area code, there would be inequities in the amounts on which the GST or HST is applied. For example, a business with a dedicated telecommunications channel situated at or near the participating provinces border would pay the same amount of HST on a transmission as a business that is located at the farthest end of the participating province where the transmissions are going to the same termination point.

We do not feel that the interpretation of the phrase "transmitters for emitting and receiving the telecommunications" necessarily means the actual physical location of a particular device, such as a telephone handset in a certain location. This would certainly make the measurement of distance for purposes of applying section 136.4 of the ETA a cumbersome and difficult task to accomplish with any sort of consistent approach. We believe that it is precise enough to include transmitters located in a concentrated area such as a city, where the differences in physical distance between an originating point of a telecommunication transmission and the same termination point is relatively insignificant.

We would be pleased to consider any future proposal that follows the provisions of section 136.4 of the ETA more closely.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the Excise Tax Act, if enacted, could have an effect on the interpretation provided herein. These comments are not rulings and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST/HST Memoranda Series, do not bind the Department with respect to a particular situation.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 954-9700.

Yours truly,

Fred Adair
Services and Intangibles Unit
General Operations and Border Issues Division
GST/HST Rulings and Interpretations Directorate

Dedicated Telecommunications Channel

Outline

The issue is whether subsection 136.4(2) of the ETA provides a method of calculating the components of the formula (A/B) x C with respect to the supply of a dedicated telecommun[i]cations channel that is used partly in a participating province and partly in a non-participating province.

The answer is, Yes, it does. The provision uses the term "direct line" as if it were transmitted by via cable etc over land. and the word "distance" to signify the type of measurement. as a method of measuring the elements of the fraction. The term direct line is meant to have its ordinary dictionary meaning when it is applied to distance. This is basically the shortest distance between two points without reference to obstacles or other aspects that may interfere with the measurement taking into account that the distance must be measured in Canada which means that the shortest distance between two points may not necessarily be in a straight line. Also, the section does not specifically state overland and it is meant that the measurement is to be taken as if the transmission was sent by wire or cable etc[.] overland. This means that a transmission would be measured directly across a body of water in Canada as if it were overland. In cases where the US border intrudes between the straight line (shortest) distance, the direct line measurement would have to be adjusted to only include distances in Canada.

The client's proposal is to use area codes as the basis for dividing Canada into geographic zones with a large populous in each area as the designated population centre. Measurement for purposes of the formula in subsection 13[6.]4(2) of the ETA would originate from the designated population centre for all dedicated telecommunication channels located in the zone. Distances would be measured from these points to the respective provincial borders and from the various provincial borders to designated population centres in each direction with a final designated population centre as a termination point. The various straight line distances would be the numerator of the fraction "A" in the formula and the total of the distances added together would be the denominator "B".

It is our opinion that the origin and termination point of a transmission does not necessarily have to be the particular location of any given facility. It could be that all transmissions originating in a relatively small geographic area like a city would have the same point of origin for measurement purposes.

Response is to explain the above position and to state that the proposed method does not meet the provisions of subsection 136.4(2) of the ETA as it is currently written, but, that we would consider any proposal that more accurately reflects the intent of the legislation.