31 May 2000 GST/HST Interpretation 30272 - GST/HST Status of the Supply of Software Delivered to the Recipient Electronically

Dear XXXXX

Thank you for your facsimile of February 21, 2000, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the supply of software where the software is delivered to the recipient by electronic means. Your request has been transferred from the XXXXX XXXXX to the Border Issues Unit of the General Operations and Border Issues Division for response.

The following information was taken from your letter and our subsequent telephone conversations:

•   XXXXX[.]

•   XXXXX[.]

•   The software that is available for sale is developed by XXXXX at his establishment in XXXXX and is stored on his web site on a server located in XXXXX.

•   Potential clients may download a sample version of the software for evaluation purposes. The sample version has limited capabilities and is provided free of charge to assist the user in determining whether to purchase the fully functional version.

•   To obtain a fully functional version of the software the client must first download the sample version from XXXXX The client must then make payment to XXXXX by providing credit card information and authorization on the web site. Once the payment is received, XXXXX will send the client an electronic mail attachment that allows the recipient full use of the software.

Interpretation Requested

1. What is the GST/HST status of the supply of software by XXXXX XXXXX to its customers where the software is delivered to the recipients electronically?

2. Where the supply is zero-rated pursuant to section 10 of Part V of Schedule VI what would the Canada Customs and Revenue Agency (CCRA) consider satisfactory evidence as proof of non-residence and non-registration for GST/HST purposes?

Interpretation Given

Based on the information provided we offer the following interpretation:

The supply of the right to use software that is not custom software may be a supply of intangible personal property (IPP) or tangible personal property (TPP) depending upon the medium by which it is supplied. Considering the software in question is not customized for any particular user and is supplied and delivered to the recipient by electronic means through the Internet, the supply will be considered by the CCRA to be a supply of IPP.

The supply of software by XXXXX is deemed to be made in Canada pursuant to subparagraph 142(1)(c)(i) of the Excise Tax Act (the "Act") as the software may be used in whole or in part in Canada. The fact that the supply may, in most situations be made to recipients who are outside Canada has no bearing on whether the supply of IPP is made in Canada. Since the software may be purchased for use in laptops or other computers that are located in Canada or may be relocated to a place in Canada, the software may be used in whole or in part in Canada.

Every recipient of a taxable supply made in Canada is required to pay GST/HST in respect of the supply at the rate of 7% (15% where the supply is deemed to be made in a participating province) on the value of the consideration for the supply unless the supply is zero-rated (taxed at 0%). The three participating provinces are: Nova Scotia, New Brunswick, and Newfoundland.

The supply of intellectual property or any right, license or privilege to use any such property is zero-rated when supplied to a recipient who is not resident in Canada provided the recipient is not registered for GST/HST purposes at the time the supply is made. The CCRA considers the supply of software that is a supply of IPP to be intellectual property. Consequently, the supply of the software by XXXXX to a non-resident recipient will be subject to GST/HST at a rate of 0% provided the non-resident recipient is not registered for GST/HST purposes. Under these circumstances XXXXX must verify and maintain evidence that the recipient is not resident in Canada and is not registered for GST/HST purposes. GST/HST Memorandum Series Chapter 4.5.1 Exports - Determining Residence Status has been enclosed for your review. Appendix B of this Memorandum describes the documentation that the CCRA will generally accept as proof that the recipient is both a non-resident and is not registered.

Where the supply of the software is made in Canada and is not zero-rated, a further analysis with respect to the province in which the supply is made or deemed to be made is necessary todetermine the appropriate rate of GST/HST. Where a taxable supply that is not zero-rated is deemed to be made in a participating province the supply will be subject to HST at 15%, where the supply is determined to be made in a non-participating province it will be subject to GST at 7%. Whether a supply of IPP made in Canada is made in a participating or non-participating province is determined by section 144.1 and Schedule IX to the Act. Section 144.1 provides that a supply is deemed to be made in a province if it is made in Canada and is, under the rules set out in Schedule IX, made in the province. Section 144.1 also states that a supply made in Canada that is not made in a participating province is deemed to be made in a non-participating province.

The place of supply rules for a supply of IPP not related to real property, tangible personal property or services are provided for in paragraphs 2(d) and 3(d) of Part III of Schedule IX to the Act. Subparagraph 2(d)(i) of Part III of Schedule IX to the Act states that a supply of IPP is considered to be made in a province if all or substantially all of the Canadian rights in respect of the IPP can be used only in the province. "Canadian rights" refers to that part of the IPP that can be used in Canada (section 1 of Part III of Schedule IX of the Act). Since it appears that the use of XXXXX software is not limited in any manner to any specific province or groups of provinces, subparagraph 2(d)(i) and paragraph 3(d) of Part III of Schedule IX would not be applicable.

Subparagraph 2(d)(ii) of Part III of Schedule IX to the Act states that a supply of IPP will be considered to be made in a province if the place of negotiation of the supply is in the province, and the property can be used otherwise than exclusively outside the province. Section 1 of Part I of Schedule IX to the Act defines the "place of negotiation" of a supply to be "... the location of the supplier's permanent establishment at which the individual principally involved in negotiating for the supplier the agreement for the supply ordinarily works ...". Where there are no restrictions regarding the province in which XXXXX XXXXX software can be used, it will always be the case that the property can be used otherwise than exclusively outside the province where the place of negotiation occurred. Therefore, where it is determined that the place of negotiation of the supply of the software is in a non-participating province XXXXX, subparagraph 2(d)(ii) would deem the supply to be made in that province and subject to GST at 7%. Based on the information provided, it appears that the place of negotiation is at XXXXX[.] 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 Canada Customs and Revenue Agency with respect to a particular situation.

For your convenience, find enclosed a copy of section 1.4 of Chapter 1 of the GST/HST Memoranda Series.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-8532.

Yours truly,

Jeffrey A. Frobel
Border Issues Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate