6 July 2000 GST/HST Interpretation 7770 - Supply Made Under Software Purchase Agreement

Dear XXXXX

Thank you for your electronic mail messages dated September 30, 1998, and February 3, 1999, in which you ask for our assistance in determining whether the supply of software is tangible or intangible personal property, for purposes of determining entitlement to an input tax credit (ITC). XXXXX. We apologize for the delay in this response.

Statement of Facts:

Our understanding of the facts based on the written information provided and our telephone conversation is as follows:

1. In the case submitted, there is a "Software Purchase Agreement" (the SPA) XXXXX[.] Both the Vendor and the XXXXX Purchaser are residents and are registrants.

2. The SPA stipulates that the Vendor owns certain application computer software known as XXXXX family of software and also intellectual property rights in respect thereof and that the XXXXX Purchaser wishes to purchase from the Vendor a 100% undivided interest in that software and the intellectual property rights related thereto and to market the same worldwide.

3. For the purposes of the SPA, the following terms are defined in XXXXX of the SPA:

"Closing Date" means the date hereof or such other date as may be agreed upon by the parties hereto.

"Closing" means the completion of the sale by the Vendor and the purchase by the XXXXX Purchaser of a 100% undivided interest in the Purchased Assets and the completion of all other transactions contemplated by this Agreement that are to occur contemporaneously therewith.

"Code" means the whole or any part of or any combination of the Object Code and Source Code and, upon their creation, Modifications and Enhancements.

"Copyright" means the exclusive right to do and authorize others to do any and all things restricted by copyright or similar laws of application in any and all jurisdictions in relation to the use, copying, translation, distribution or publication of the Software or Derivative Work.

"Development Documentation" means any devices, programming or documentation, including computers, "workbenches", tools (e.g. flow charts, schematics, statements of principles of operations, architectural standards and any other specifications that are used to create or that comprise the Code) and higher-level (or "proprietary") languages used by the Vendor for the development, maintenance and implementation of the Program.

"Intellectual Property Rights" means all rights to use, copy, reproduce, sell, license, enhance, merge, transcribe, adapt or distribute by any means and for any purpose the Software, including any and all proprietary rights provided under patent law, copyright law or any other statutory provision or common law principles applicable to the Software which may provide a right in either ideas, formulae, algorithms, concepts, inventions or know-how generally, including trade secret law, or the expression or use thereof.

"Purchased Assets" means the whole or any part of or any combination of the Software and Intellectual Property Rights (excluding, for greater certainty, the Trade Marks).

"Software" means the whole or any part of or any combination of the Code, Derivative Work, the user Documentation and the Development Documentation, together with all development tools and runtime libraries that are required for the development, modification and maintenance of the Code.

"User Documentation" means all written materials developed for use by end users of the Program, including user guides, manuals, application and data files and specifications and shall include, at the time of their creation, all modifications thereto. User Documentation shall also include the application, data and document files necessary to produce the Development Documentation and all modifications thereto.

4. XXXXX of the SPA entitled "SALE" gives a description of what is sold in the following terms:

XXXXX[.] In consideration of the payment of the purchase price as set out in XXXXX, the XXXXX Purchaser hereby agrees to purchase, and the Vendor hereby agrees to sell, assign and transfer to the XXXXX Purchaser, on Closing, subject to the terms hereof, a 100% undivided interest in and to the Purchased Assets.

XXXXX[.] Effective on Closing, the XXXXX Purchaser, its successors and assigns shall have and enjoy such perpetual, royalty-free, irrevocable and exclusive immunity from suit by the Vendor or any Person affiliated or otherwise related thereto under any patents or any other intellectual property rights owned or licensable by the Vendor or any Person affiliated or otherwise related thereto at any time as may be necessary for the XXXXX Purchaser to exercise any and all incidents of ownership of the Purchased Assets and any other rights and licenses acquired or granted under this Agreement.

5. XXXXX of the SPA indicates that the Purchase Price of XXXXX shall be payable and paid by the XXXXX Purchaser to the Vendor as follows:

(a) as to XXXXX, by way of cash or certified cheques, the following amounts:

nil, on or before Closing;

XXXXX on or before XXXXX;

(b) as to the balance of XXXXX, on or before XXXXX, upon the following terms and conditions:

... (ii) the unpaid principal sum hereunder, together with all accrued and unpaid interest thereon, shall be payable and paid on XXXXX at the General Partner's address ...

(iii) the XXXXX Purchaser shall repay on account of principal no later than 60 days after December 31 of each year commencing XXXXX an amount equal to 45% of the amount by which the aggregate of all cash distributions payable by the XXXXX Purchaser to its limited partners out of revenues or other amounts received by the XXXXX Purchaser from the exploitation of the Software on or prior to such date, determined on a cumulative basis, exceeds the interest paid or payable hereunder from Closing to such date;

(iv) the unpaid principal sum hereunder may be prepaid in whole at any time or in part from time to time without bonus or penalty upon at least 30 days' prior written notice and payment of all accrued and unpaid interest on the amount so prepaid; ...

6. The XXXXX Purchaser claimed an ITC equal to 7% of the purchase price in respect of the purchase in determining the net tax for the reporting period including XXXXX.

Interpretation Requested

You would like to know whether the supply made under the SPA involves the supply of tangible personal property or intangible personal property. Depending of the outcome, subsection 168(2) or 168(3) of the Excise Tax Act (the Act) would be applicable to determine when tax became payable in respect of the supply for purposes of determining the XXXXX entitlement to a corresponding ITC for the particular reporting period.

Interpretation Given

Based on the information provided, our interpretation is as follows:

We would first like to confirm that policy P-150 Tax Treatment of Imported Computer Software to which you have referred would not apply to the supply being made in this case. This policy only applies to computer software that is imported on a physical medium.

Subsection 123(1) of the Act defines property as any property, whether real or personal, movable or immovable, tangible or intangible, corporeal or incorporeal, and includes a right or interest of any kind, a share and a chose in action, but does not include money. This subsection further provides that personal property means property that is not real property.

While tangible or intangible personal property are not defined in the legislation, tangible personal property is generally viewed as property that may be touched or felt (in other words, property that is perceptive to the senses). Intangible personal property means property that is not perceptive to the senses (i.e., personal property other than tangible personal property). It includes intellectual property such as patents, trademarks, copyrights and industrial design.

Subsection 123(1) of the Act also defines sale in respect of property as including any transfer of the ownership of the property and a transfer of the possession of the property under an agreement to transfer ownership of the property.

The SPA effectively transfers complete ownership of the software including all corresponding intellectual property rights to the XXXXX Purchaser. The supply made under the SPA of the 100% undivided interest in and to the Purchased Assets consisting of the Software and related intellectual Property Rights is a supply by way of sale of intangible personal property.

Subsection 169(1) of the Act provides that a person's ITC for a reporting period in respect of property or a service that is acquired, imported or brought into a participating province for consumption, use or supply exclusively in the course of a commercial activity of the person is equal to the tax that is paid or becomes payable in respect of the supply, importation or bringing in during that reporting period. This is provided the person is a registrant during the reporting period.

Section 168 of the Act deals with the timing of the liability for payment of the tax imposed under Division II on taxable supplies made in Canada. Subsection 168(1) of the Act provides that tax under Division II in respect of a taxable supply is payable on the earlier of the day the consideration for the supply is paid and the day the consideration for the supply becomes due. However, subsection 168(2) of the Act provides that, notwithstanding subsection 168(1), where consideration for a taxable supply is paid or becomes due on more than one day,

(a) tax in respect of the supply is payable on each day that is the earlier of the day a part of the consideration is paid and the day that part becomes due; and

(b) the tax that is payable on each such day shall be calculated on the value of the part of the consideration that is paid or becomes due, as the case may be, on that day.

Subsection 168(3) provides override rules for when tax becomes payable on various supplies of tangible personal property and services.

Paragraph 152(1)(c) of the Act provides that the consideration, or a part thereof, for a taxable supply shall be deemed to become due on the earliest of the day the recipient is required to pay that consideration or part to the supplier pursuant to an agreement in writing.

Thus, as a result of the application of paragraph 152(1)(c) and subsection 168(2) of the Act, tax in respect of the supply made under the SPA will be payable on the earliest of the day the consideration for that supply or part thereof is paid to the Vendor or the day the consideration or part thereof is due under the written SPA agreement. The XXXXX Purchaser will be entitled to claim ITCs accordingly.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (416) 957-8223.

Yours truly,

Carolle Mercier
Services and Intangibles Unit
General Operations and Border Issues Division
GST/HST Rulings and Interpretations Directorate