20 September 1999 GST/HST Interpretation HQR0001671 - Computer Software Services

Dear Sirs:

Thank you for your letter of February 25, 1999, addressed to the attention of Mr. Garry Ryhorchuk, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to several fact patterns. This letter has been forwarded to the undersigned for response.

Interpretation Requested

Section 7 of Part V of Schedule VI to the Excise Tax Act (the "ETA") provides that "[a] supply of a service made to a non-resident person ..." may be a zero-rated supply and thereby taxed at the rate of zero percent pursuant to subsection 165(3) of the ETA. Paragraphs 7(a) to (h), however, provide various exclusions to section 7, and in particular, paragraph 7(a.1) which provides that not included is a supply of "a service that is rendered to an individual while that individual is in Canada".

You are seeking an interpretation to section 7 of Part V of Schedule VI to the ETA in the following specific fact patterns as described below, and in particular, paragraph 7(a.1).

Facts in Common for Fact Pattern Numbers 1, 2 & 3

•   X Co. is a U.S. company. It does not carry on business in Canada and does not have a permanent establishment in Canada. It is not resident in Canada and it is not registered for GST/HST purposes.

•   X Co. has developed a specialized computer software program (the "Software") used in the construction industry. X Co. grants construction companies and architects the right to use this Software under a one-year renewable licence. The licence fees are payable by the users on a quarterly basis and are payable in U.S. dollars.

•   Along with the licence, X Co. also provides a maintenance and support contract to licensed users of the Software.

•   One of the companies that has received a supply of a licence of the Software is resident in Canada (CanCo). CanCo is registered for GST/HST purposes, and is engaged exclusively in making taxable supplies.

•   The employees and directors of CanCo to which the maintenance and support services may be rendered are residents of Canada.

•   Y Co. is a Canadian resident company that is registered for GST/HST purposes.

•   X Co. contracts with Y Co. to undertake the maintenance and support services on its behalf.

Fact Pattern Number 1

•   Six months after X Co. delivered the Software to CanCo, CanCo telephones X Co. and reports that its staff have encountered some errors in the Software. CanCo asks X Co. to fix these problems which entail modifying the Software.

•   X Co. does not have any employees or agents in Canada nor does it have a fixed place of business in Canada. Instead of undertaking the modifications of the Software itself, X Co. contracts with Y Co. to undertake the modifications and corrections to the Software on-site at CanCo's offices.

•   Y Co. invoices X Co. for its services of modifying and correcting CanCo's Software.

•   X Co. does not charge CanCo for the modifications as these corrections are covered under CanCo's maintenance and support contract with X Co.

Fact Pattern Number 2

•   As part of its maintenance and support contract with CanCo, X Co. agreed to provide support services to CanCo. These services included a toll-free telephone help line, as well support by way of e-mail and facsimile, but does not include on-site assistance.

•   X Co. does not have any employees or agents in Canada and does not have a fixed place of business in Canada. Therefore, X Co. contracted with Y Co. to provide the foregoing customer support services to CanCo.

•   Y Co. invoices X Co. for providing these support services to CanCo.

Fact Pattern Number 3

•   Same as Fact Pattern Number 2 except that the support services include on-site assistance.

Interpretation Requested

In each of the above fact patterns, whether the services provided by Y Co. to X Co. are zero-rated pursuant to section 7 of Part V of Schedule VI to the ETA, or whether these services are excluded from section 7 by reason of any of paragraphs 7(a) to (h) of Part V of Schedule VI to the ETA, and in particular, paragraph 7(a.1).

Interpretation Given

Based on the above facts, we provide the following interpretation.

In fact pattern numbers 1, 2 & 3 the supply by Y Co. to X Co. is the supply of a service which is generally deemed to be made in Canada pursuant to paragraph 142(1)(g) of the ETA. Consequently, tax at the GST rate of 7% on the value of the consideration for the taxable supply applies pursuant to subsection 165(1) of the ETA unless the supply is a zero-rated supply pursuant to Part V of Schedule VI to the ETA and taxed at the rate of 0% pursuant to subsection 165(3) of the ETA.

In addition, on April 1, 1997, the harmonized sales tax (HST) replaced the 7% 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%. To the extent that supplies are taxable supplies (which are not zero-rated), tax must be collected at the harmonized rate.

In the situation where a supply is a taxable supply that is made in Canada that is not a zero-rated supply, for the place of supply rules applicable to determine in which province of Canada the supply is made, and consequently whether GST or HST applies, the applicable provisions are section 3 of Schedule IX to the ETA and section 10 of the Draft Place of Supply (GST/HST) Regulations. Concerning fact pattern numbers 1, 2 & 3 the supply would be deemed to be made in the province where CanCo is ordinarily located and which, on the facts, is where the service from Y Co. is received.

As a supply of a service made to a non-resident person, this supply may be zero-rated pursuant to section 7 of Part V of Schedule VI to the ETA provided that none of the exclusions in paragraphs (a) to (h) apply. Based on the limited facts presented, it appears unlikely that the exclusions of paragraph 7(a), or paragraphs 7(c) to 7(h) apply. If paragraph 7(b) were to apply as an exclusion, then the supply would likely be zero-rated pursuant to section 23 as none of the exclusions in paragraphs (a) to (d) of section 23 appear to apply. The remaining issue is therefore whether the exclusion in paragraph 7(a.1) applies which excludes from section 7 a service that is rendered to an individual while that individual is in Canada.

Consequently, concerning fact pattern number 1, the service being rendered is the modification of the Software. This service can be said to be rendered by Y Co. to CanCo, provided that the service does not involve Y Co. rendering the service directly to any CanCo employee involved in the Software modification. As a result, paragraph 7(a.1) of Part V of Schedule VI to the ETA is unlikely to apply to exclude the application of section 7 to zero-rate the supply of the service of modifying the Software.

Concerning fact pattern numbers 2 and 3 involving the support services by way of the toll-free telephone help line, e mail, and facsimile, these services are rendered by Y Co. directly to individual employees of CanCo. As a result, where the individual employee(s) of CanCo receiving the service are in Canada at the time this service is rendered, the supply will be excluded from the application of section 7 pursuant to paragraph 7(a.1) of Part V of Schedule VI to the ETA.

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) 954-2560.

Yours truly,

Richard Aronoff
Border Issues Unit
General Operations and Border Issues Division
GST/HST Rulings and Interpretations Directorate