31 October 2002 GST/HST Interpretation 34340 - Application of GST/HST to Network Services

Dear XXXXX:

Thank you for your letter of XXXXX, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to XXXXX network services. Your letter was forwarded to us from the XXXXX GST/HST Rulings Centre for reply. We apologize for the delay in providing you with our response.

XXXXX provides XXXXX network services, i.e., XXXXX a routed wide area network (WAN[)] XXXXX[.] These services consist mainly of transporting data, but could eventually include XXXXX XXXXX. A network may be inter-jurisdictional, having ports in different provinces and potentially in the United States (U.S.).

It is our understanding that the XXXXX network service provided by XXXXX uses a XXXXX from the customer's location to a node on a frame relay network and the remote location with whom information is exchanged has a XXXXX to a nearby frame relay node. In other words, there is a network switch in between the place of emission and reception rather than a point-to-point XXXXX line. The frame relay network is capable of servicing many customers.

The pricing strategy takes into account XXXXX[.] The customer is billed XXXXX. Any extraordinary work charges are shown separately on the invoice. Customers are not charged for individual telecommunications services and these are not tracked by XXXXX systems.

Interpretation Requested

You would like to know if the GST applies to the charge XXXXX located in non-participating provinces and if the HST applies to the charge XXXXX located in participating provinces. In addition, you would like to know if the charge XXXXX located in the U.S., that form part of a cross-border network, is subject to tax.

Interpretation Given

A taxable (other than a zero-rated) supply of property or service made in Canada is subject to the GST at the rate of 7% or the HST at the rate of 15% if the supply is made in a participating province. (The three participating provinces are Nova Scotia, New Brunswick and Newfoundland and Labrador.)

Subsection 123(1) of the Excise Tax Act (the "Act") defines a "telecommunications facility" to be "... any facility, apparatus or other thing (including any wire, cable, radio, optical or other electromagnetic system, or any similar technical system, or any part thereof) that is used or is capable of being used for telecommunications".

A "telecommunication service" is defined in subsection 123(1) of the Act as follows:

"(a) the service of emitting, transmitting or receiving signs, signals, writing, images or sounds or intelligence of any nature by wire, cable, radio, optical or other electromagnetic system, or by any similar technical system, or

(b) making available for such emission, transmission or reception telecommunications facilities of a person who carries on the business of supplying services referred to in paragraph (a)".

It appears that the predominant purpose of XXXXX network service is to provide the customer with the equipment and technology that connects its computers to a network that allows for the speedy transmission and reception of data with a high level of security. As such, XXXXX supply of a XXXXX network service is considered to be a supply of a telecommunication service that involves making available telecommunications facilities.

Section 142.1 of the Act sets out the place of supply rules for determining when a supply of a telecommunication service is made in Canada. A telecommunication service that consists of making available telecommunications facilities is deemed to be made in Canada if the facilities or any part thereof are located in Canada (Paragraph 142.1(2)(a) of the Act). As such, if the facilities, or any part thereof, that form part of the XXXXX network service, including any LAN jacks, are located in Canada, the supply of the XXXXX network service is deemed to be made in Canada.

If a taxable (other than a zero-rated) supply is deemed to be made in Canada, it must further be determined if the supply is made in a participating province and subject to the HST at 15%.

Section 144.1 of the Act deems a supply to be made in a province if it is made in Canada and is, under the rules set out in Schedule IX to the Act, made in the province, but the supply is deemed to be made outside the province in any other case. Furthermore, a supply made in Canada that is not made in any participating province is deemed to be made in a non-participating province.

Section 3 of Part IX of Schedule IX to the Act together with section 10 of the Place of Supply GST/HST Regulations (the "Regulations") are the relevant provisions for determining whether a supply of a "computer-related service" is made in a particular province.

A "computer-related service" is defined to mean, in part, a service involving the electronic storage of information and computer-to-computer transfer of information (Section 1 of the Regulations). Based on the above information, XXXXX supply of a XXXXX network service is not a computer-related service given that it does not involve the storage of information as well as the computer-to-computer transfer of information. As such, section 10 of the Regulations does not apply in this case.

Furthermore, it does not appear that the provisions of section 136.4 of the Act and section 3 of Part VIII of Schedule IX to the Act which deal with the supply of a telecommunication service of granting sole access to a telecommunications channel for transmitting telecommunications apply in this case. Based on the information provided, XXXXX customer is not granted sole access as many customers may be sharing a part of the frame relay network that forms part of the XXXXX network service.

As such, the place of supply rules for telecommunications in section 2 of Part VIII of Schedule IX to the Act will apply. Pursuant to this section, a supply of a telecommunication service that consists of making telecommunications facilities available is made in a particular province if:

•   all of the facilities that are made available are ordinarily located in that province; or

•   where all of the facilities are not ordinarily located in that province, the invoice for the supply of the telecommunication service is sent to an address in that province.

For example, if a XXXXX network service only involves a customer's locations in the province of New Brunswick and the frame relay network is located in New Brunswick such that all of the facilities that form part of the XXXXX network service supplied to the customer and that are made available to the customer are located in New Brunswick, the supply of the service is deemed to be made in New Brunswick and, therefore, subject to the HST at 15%.

Where the facilities that are made available to the customer are located in more than one province, the supply will be made in the province where the invoice is sent. For example, if the XXXXX network service involves a customer's locations in Ontario and Nova Scotia, the supply will be deemed to be made in Ontario if the invoice for the supply of the service is sent to an address in Ontario. In this case, the supply is subject to the GST at 7%. In other words, the GST is calculated on the total consideration charged for the XXXXX network service which would include the charge XXXXX located in Ontario and the charge XXXXX located in Nova Scotia. In addition, if there were XXXXX located in the U.S., the charge XXXXX would also be subject to the GST at 7%.

In the above example, if the invoice were sent to an address in a participating province, e.g., Nova Scotia, the HST at 15% would be calculated on the total consideration for all the XXXXX, as the supply of the XXXXX network service would be deemed to be made in that province.

It should be noted that in the above example, if the invoice is sent to an address in the U.S., the charge XXXXX would remain subject to the GST at 7% as the supply is made in Canada since part of the facilities that are made available are located in Canada and pursuant to section 144.1 of the Act the supply of the XXXXX network service would be deemed to be made in a non-participating province.

It does not appear that the supply of the XXXXX network service would be zero-rated, i.e., taxed at a rate of 0%. A supply of a telecommunication service made by a registrant who carries on the business of supplying such services is only zero-rated under section 22.1 of Part V of Schedule VI to the Act when the supply is made to a non-resident, non-registrant who also carries on such a business, provided the telecommunication is not emitted and received in Canada.

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 the GST/HST Memoranda Series, do not bind the Canada Customs and Revenue Agency 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) 954-7931.

Yours truly,

Anne Kratz
Electronic Commerce Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate