21 November 2002 GST/HST Interpretation 36645 - Web Site Design, Web Site Hosting, and Web Site Replication

Dear XXXXX:

Thank you for your facsimile to the XXXXX GST/HST Rulings Centre that was received on XXXXX, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the supply of Web site design, Web site hosting, and Web site replication. Your request was transferred to us for response and we apologize for the delay in replying to your enquiry.

Our understanding of the facts is as follows:

You are a GST/HST-registered sole proprietor operating under the trade name of XXXXX (XXXXX). XXXXX designs and hosts Web sites for residents and non-residents. As part of its supplies of designing and hosting Web sites, XXXXX also provides technical support to its clients for no additional charge. All of the design work and technical support is done at XXXXX's office located in XXXXX and the Web sites are hosted on XXXXX's server. With respect to the Web sites that are designed by XXXXX, no rights are retained by XXXXX.

There are times when a client (Person A) requests the ability to replicate its Web site (the Replication Option) so that their customers and associates (Persons B) can have their own Web site using the same design as Person A's Web site. There is a one-time charge to Person A of XXXXX to obtain the "XXXXX" software and have it installed on their Web site. Most who choose the Replication Option have it added at the time the sites are being designed.

The XXXXX software is modified by XXXXX to meet the particular needs of Person A. As a result, each supply of the software is unique as it is ultimately designed to the particular client's specifications. However, the software is supplied under a licence agreement which provides that XXXXX retains all rights with respect to the programming code and that the client only retains rights with respect to the design elements that are unique to the client. In other words, the client does not acquire full ownership of the software and is prevented from redistributing the software freely or for retail.

Once the Replication Option has been added to Person A's Web site, Person B can duplicate it by using the "XXXXX" function on Person A's Web site. Upon initiating this function: Person A receives an e-mail message that Person B has made the request; Person B receives an acknowledgement that advises them that Person A will contact them; Person B's information is logged into a databank and is tagged with a reference number; and, the replication software automatically creates a personal homepage for Person B. The Web page is either e-mailed directly to Person B, or, Person A can request that it be delivered at a later date. There is no charge to Person B for acquiring the replicated Web site.

XXXXX charges Person B XXXXX year for hosting this replicated Web site on XXXXX's server. The terms and conditions for hosting the replicated Web site stipulate that the fee also covers the registration of the subdomain and any technical support provided by XXXXX.

The above information was obtained from your incoming letter, XXXXX's Web site at XXXXX, my telephone conversation with XXXXX of your office on XXXXX, your e-mail, also of XXXXX, and your telephone conversation with Marcel Boivin of our office on XXXXX.

Ruling Requested

You have requested rulings on the tax status of:

1. XXXXX's supplies of Web site design and Web site hosting, which include technical support, made to resident clients XXXXX and non-resident clients;

2. XXXXX's supply of the XXXXX software made to Person A, where Person A is a resident or non-resident; and

3. XXXXX's supply made to Person B of hosting a replicated Web site, which includes technical support, where Person B is a resident XXXXX or a non-resident.

Pursuant to section 1.4 of the GST/HST Memoranda Series [copy enclosed], a ruling can only be issued where clearly defined facts are established. As the facts could not be fully ascertained, we are pleased to provide you with the following interpretation in lieu of a ruling.

Interpretation Given

When examining the questions asked, we first had to look at the characterization of XXXXX's supplies and then establish whether XXXXX's taxable supplies were made in Canada, and thus subject to the GST/HST, or whether they were made outside Canada.

Based on the information provided, XXXXX's supplies of Web site design and Web site hosting made to Person A and of hosting the replicated Web site made to Person B are considered to be taxable supplies of services for purposes of the ETA, and these services include the technical support provided by XXXXX, if any; XXXXX's supply of the XXXXX software made to Person A is considered to be a taxable supply of intangible personal property (IPP).

A taxable (other than zero-rated) supply made in Canada is subject to the GST at the rate of 7% or HST at the rate of 15%, when made in a participating province - Nova Scotia, New Brunswick and Newfoundland and Labrador. A taxable supply that is zero-rated is taxed at the rate of 0%.

Tax status of Web site design and Web site hosting

Pursuant to paragraph 142(1)(g) of the Excise Tax Act (ETA), a supply of a service, other than a service in relation to real property, is deemed to be made in Canada if the service is, or is to be, performed in whole or in part in Canada. As XXXXX performs all of its services in XXXXX, the Web site design and Web site hosting supplied to Person A and the hosting of the replicated Web site supplied to Person B are supplies made in Canada.

Section 144.1 of the ETA 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 ETA, made in the province; but the supply is deemed to be made outside the province in any other case. Also, a supply made in Canada that is not made in a participating province is deemed to be made in a non-participating province (the rest of Canada).

A supply of Web site design

Under Part V of Schedule IX to the ETA, generally, a service is considered to be supplied in a particular province if all or substantially all [90% or more] of the "Canadian element" of the service is performed in that province. In this Part, the "Canadian element" of a service means the portion of the service that is performed in Canada. For example, if the portion of a Web site design service that is performed in Canada is performed entirely in XXXXX, the supply of the Web site design service is considered to be made in XXXXX. As XXXXX's Web site design service is performed entirely in XXXXX, the supply is made in XXXXX and subject to the GST at the rate of 7%, even if the recipient of the service is located in a participating province, unless the supply is zero-rated (see the following page).

A supply of Web site hosting

Section 3 of Part IX of Schedule IX to the ETA provides that, notwithstanding any other Part of this Schedule, a supply of a property or service is made in a province if the supply is prescribed to be made in the province. Subsection 10(1) of the Place of Supply (GST/HST) Regulations provides, in part, that when a particular supplier makes a supply of a computer-related service and there is to be one final recipient of the service who acquires it under an agreement either with the particular supplier or another supplier, the supply is considered to be made in a particular province if there is a single ordinary location in the province at which the final recipient avails itself of the service, and either:

•   the particular supplier maintains information sufficient to determine that location, or

•   it is the normal business practice of the particular supplier to obtain information sufficient to determine that location.

In any other case, the supply is made in a particular province if the mailing address for the recipient of the supply is in that province.

For purposes of the Place of Supply (GST/HST) Regulations, a "computer-related service" includes "... a service involving the electronic storage of information and computer-to-computer transfer of information". XXXXX's supply of Web site hosting and its supply of hosting the replicated Web site are considered to be computer-related services.

Therefore, where a single final recipient of a Web site hosting service provided by XXXXX does not avail itself of the service at a single ordinary location or where the conditions above with respect to information are not met, the determination of the place of supply is based on the mailing address of the recipient. For example, if the mailing address of the recipient of a taxable (other than zero-rated) supply of Web site hosting is in one of the participating provinces, such as XXXXX, the supply is made in XXXXX and subject to the HST at a rate of 15%. If the mailing address is in a non-participating province, such as XXXXX, the supply is subject to the GST at a rate of 7%, unless the supply is zero-rated.

There are special rules for situations that involve multiple final recipients. More information regarding these rules may be found in the enclosed Technical Information Bulletin B-[0]90 - GST/HST and Electronic Commerce.

Zero-rated services

The general zero-rating provision concerning the export of a service is found in section 7 of Part V of Schedule IX to the ETA. This section zero-rates the supply of a service made to a non-resident person unless it is excluded by paragraphs 7(a) through 7(h) of this section. For example, a supply of a service made to a non-resident person is excluded from zero-rating under this section when the non-resident person is an individual who is in Canada at any time when the individual has contact with the supplier in relation to the supply of the service, or, when the service is rendered to an individual while that individual is in Canada. Section 4.5.3, Exports - Services and Intellectual Property of the GST/HST Memoranda Series is enclosed and provides further information with respect to the exclusions in section 7 of this Part. XXXXX's services of Web site hosting and Web site design supplied to non-residents may be zero-rated under this section provided that the services do not fall within the aforementioned exclusions.

It is the supplier's responsibility to verify that the recipient of a supply is a non-resident person for purposes of the GST/HST. For your information, we have enclosed GST/HST Memoranda Series section 4.5.1, Exports - Determining Residence Status. Appendix A of this Memorandum describes the documentation that the Canada Customs and Revenue Agency (CCRA) will generally accept as proof that the recipient is not resident in Canada.

A supply of IPP

As mentioned earlier, XXXXX's supply of the "XXXXX" software is a supply of IPP. Pursuant to paragraph 142(1)(c) of the ETA, a supply of IPP, that is not related to real property, tangible personal property or a service, is deemed to be made in Canada if the IPP may be used [meaning "allowed to be used"] in whole or in part in Canada. As XXXXX does not restrict use of the software exclusively to "in Canada" or "outside Canada", the supply is deemed to be made in Canada, pursuant to subparagraph 142(1)(c)(i) since the software may be used in Canada.

As indicated earlier, section 144.1 of the ETA works in conjunction with the rules set out in Schedule IX to the ETA to determine the province in which the supply is made.

As the XXXXX software added to Person A's Web site is IPP that is not related to real property, tangible personal property or services, and that there are no restrictions regarding the province or groups of provinces in which the IPP may be used, subparagraph 2(d)(ii) of Part III of Schedule IX to the ETA must be examined when determining the place of supply. Under this provision, a supply of IPP will be considered to be made in a province if the place of negotiation (Section 1 of Part I of Schedule IX to the ETA defines "place of negotiation" 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 ...") of the supply is in the province, and the IPP may be used otherwise than exclusively [90% or more] outside the province. Where there are no restrictions regarding the province in which the IPP may be used, it will always be the case that the IPP may be used otherwise than exclusively outside the province where the place of negotiation occurs.

Based on the information provided and the fact that XXXXX's permanent establishment is in XXXXX, it appears that the place of negotiation of the supply is in XXXXX. Where the place of negotiation of the supply is in XXXXX, XXXXX's supply of the XXXXX software is deemed to be made in XXXXX, a non-participating province. As such, XXXXX is required to collect the GST at a rate of 7% on the supply of the XXXXX software, even if the recipient is located in a participating province, unless the supply is zero-rated.

Zero-rated supply of IPP

Under section 10 of Part V of Schedule VI to the ETA, the supply of, or the right, licence or privilege to use, IPP that is intellectual property is zero-rated when supplied to a non-registered non-resident person. Intellectual property includes an invention, patent, trade secret, trademark, trade name, copyright, or industrial design. As the XXXXX software is considered to be intellectual property for GST/HST purposes, it is zero-rated under this section when provided by XXXXX to a non-registered non-resident. Appendix B of the aforementioned section 4.5.1 of the GST/HST Memoranda Series describes the documentation that the CCRA will generally accept as proof that the recipient is not resident in Canada and not registered for GST/HST purposes.

Additional comments on Foreign Currency

Your Web site indicates prices that are in U.S. dollars. Section 159 of the ETA will apply such that the value of consideration for the supply shall be computed on the basis of the value of the U.S. dollars in Canadian currency on the day the tax is payable, or on such other day as is acceptable to the Minister. By virtue of subsection 168(1) of the ETA, tax is generally payable by the recipient on the earlier of the day the consideration for the supply is paid and the day the consideration for the supply becomes due. As indicated, the Minister may accept alternative days for computing the value of the consideration for a supply in Canadian currency. For more information on these days, please refer to the enclosed copy of GST Memorandum 300-7-10 Foreign Currency. A copy of Policy Statement P-222 - Acceptable Exchange Rate Sources for Converting the Value of Consideration Expressed in Foreign Currency to a Value of Canadian Currency for Purposes of Section 159 of the Excise Tax Act is also enclosed for your reference.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the ETA, 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 CCRA 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) 952-8806.

Yours truly,

Marjorie Stevens
Electronic Commerce Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate