23 September 2002 GST/HST Interpretation 34397 - Application of GST/HST to On-line Interactive Music Program

Dear XXXXX:

Thank you for your facsimile of XXXXX, with attachments, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to supplies made by XXXXX. We apologize for the delay in providing you with this response.

The following information was derived from your submission and subsequent telephone conversations:

1. XXXXX (the "Company"), incorporated pursuant to the laws of the province of XXXXX, is a GST/HST registrant;

2. The Company is providing access to an on-line keyboard interactive music program to government education agencies, school boards, schools, private and commercial music centres, individuals, etc., including non-residents of Canada;

3. The program is hosted on servers located at the Company's office in XXXXX. Employees at this office attend to the day-to-day development and maintenance of the program;

4. Clients are provided with access codes that allow them to logon to the Company's servers via the Internet to access the program. For example, under an agreement for the supply of access to the program, a school may acquire XXXXX access codes for the number of teachers and students who are permitted to access the site and use the program;

5. Clients cannot download any permanent files to their computers, with the exception of XXXXX, which is a XXXXX;

6. Depending on the particular agreement, technical support for the program and content support in respect of the music curriculum may be packaged together with the access to the program and provided to the client; and

7. The Company may provide training to teachers on the use of its program either at XXXXX or at other specified locations, e.g., at a school, which may be in or outside of Canada.

You have requested a ruling on the tax status of the supplies made by the Company; however, pursuant to section 1.4, Goods and Services Tax Rulings of the GST/HST Memoranda Series, a copy of which is enclosed, a ruling can only be issued where clearly defined facts are established. Rulings are issued upon request where the client has presented all the relevant facts such as the nature of the transactions, detailed descriptions of services or property involved, the parties of the transaction and relevant documentation such as invoices, contracts and other pertinent agreements. Where all the relevant facts are not provided, an interpretation may be issued. As indicated in our telephone conversation of XXXXX, we are pleased to provide you with the following interpretation.

As discussed in your telephone conversation of XXXXX, with Dwayne Moore of my staff, the Canada and Customs Revenue Agency (the "CCRA") is responsible for the administration of the GST/HST. Any questions relating to the application of provincial sales taxes must be submitted to the proper provincial authorities.

Interpretation Requested

As agreed in our telephone conversation, we will address the application of the GST/HST to a supply made by the Company of access to the on-line interactive music program to a school where, together with the access, the Company provides technical and curriculum support, and systems that assist in the administration, evaluation and monitoring of the students' progress. In addition, we will address the tax status of training provided to teachers either at the Company's facilities in XXXXX or off site.

Interpretation Given

Where there is a single supply and the principal object of the supply is access to a software application, that is maintained on the supplier's Web site, to interact with the application while on-line, i.e., the right to use the software while on-line, it is the CCRA's position that the supply is characterized as a supply of intangible personal property (IPP) for GST/HST purposes.

Based on the information provided, it appears that the access to the on-line interactive music program supplied to a school, where together with the access, the Company provides technical and curriculum support, and systems that assist in the administration, evaluation and monitoring of the students' progress, is a single supply where the primary object of the supply is the right to access and interact with the program and, as such, a supply of IPP. We have enclosed a copy of Technical Information Bulletin B-090, GST/HST and Electronic Commerce, which provides additional information with respect to the characterization of a supply. In addition, we have enclosed a copy of Policy Statement P-077R, Single and Multiply Supply that may assist in determining whether the supply of access to the program together with the other components of the package that are made available to a school is, in fact, a single supply or whether the Company is making multiple supplies.

With respect to training, where the training is a separate supply, the supply is characterized as a service for GST/HST purposes. As indicated above, if the training is provided together with the access and the Company is making a single supply, the supply is considered to be a supply of IPP where the primary object of the supply is the right to access and interact with the software application.

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

Supply of intangible personal property

The following information is provided where it is determined that the Company is providing a single supply of IPP to a school.

Pursuant to subparagraph 142(1)(c)(i) of the Excise Tax Act (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, i.e., allowed to be used, in whole or in part in Canada. Where there are no restrictions regarding the place of use of the IPP, generally, it is considered that the IPP may be used in Canada. For example, where the agreement for the supply does not specifically restrict the client's access to the program to the location of the school, or otherwise, the supply will be considered to be made in Canada. However, if the agreement for the supply states that the client may only access the program from computers located in a specified school and that school is located outside Canada, the supply is considered to be made outside Canada. As such, a non-resident would not be required to pay the GST/HST in respect of a supply of access to the program where the use of that access is specifically restricted in the agreement for the supply to use outside Canada as the supply is deemed to be made outside Canada.

Where the supply is made in Canada, it will be necessary to determine if the supply is made in a participating province and subject to the HST at 15%, unless the supply is zero-rated. However, in this situation, there are no provisions in Schedule VI to the ETA that would zero-rate the supply by the Company of access and interaction with its software application while on-line.

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 place of supply rules for IPP that is not related to real property, tangible personal property or a service are provided in paragraphs 2(d) and 3(d) of Part III of Schedule IX to the ETA. Pursuant to subparagraph 2(d)(i), a supply of IPP is considered to be made in a province if all or substantially all (i.e., 90% or more) of the Canadian rights ("Canadian rights" refers to that part of the IPP that may be used in Canada, section 1 of Part III of Schedule IX to the ETA) in respect of the IPP may be used only in the province. For example, if the agreement for the supply of the access stated that the program could only be accessed from computers that are located in a specified school and that school was located in Ontario, the supply of the access would be considered to be made in Ontario. As such, the supply would be subject to the GST at 7%.

Where the above provision does not apply, a supply of IPP will be considered to be made in a province pursuant to subparagraph 2(d)(ii) of Part III of Schedule IX to the ETA if the place of negotiation of the supply is in the province and the IPP may be used otherwise than exclusively 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.

Section 1 of Part I of Schedule IX to the ETA 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 ...". If the place of negotiation is in XXXXX and there are no restrictions with respect to the use of the access to the program, pursuant to the aforementioned subparagraph 2(d)(ii), the supply will be considered to be made in XXXXX and subject to the HST at 15% regardless of the location of the school or the person who is accessing the program. XXXXX Where the supply of the IPP is not deemed to be made in a province under the above rules, the supply may be deemed to be made in a participating province and subject to the HST at 15% under the provisions of paragraph 3(d) of Part III of Schedule IX to the ETA. We have enclosed a copy of Technical Information Bulletin B-078, Place of Supply Rules Under the HST ("TIB B-078"), which provides additional information on this rule.

Supply of a service

The following information is provided where it is determined that the training is a separate supply of a service.

Pursuant to paragraph 142(1)(g) of the 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. Therefore, where the training is performed in whole or in part in Canada, the supply is deemed to be made in Canada. Pursuant to paragraph 142(2)(g) of the ETA, such a supply of a service is deemed to be made outside Canada if the service is, or is to be, performed wholly outside Canada. For example, where the training service is performed wholly in the U.S., i.e., no part of the activities carried out by the Company in performing the training service are carried out in Canada, the supply is deemed to be made outside Canada and is not subject to the GST/HST.

As indicated above, where the supply is made in Canada, it will be necessary to determine if the supply is made in a participating province and subject to the HST at 15%, unless the supply is zero-rated.

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, i.e., 90% or more, of the "Canadian element" (In Part V of Schedule IX to the ETA, the "Canadian element" of a service means the portion of the service that is performed in Canada.) of the service is performed in that province. For example, if the portion of the training service that is performed in Canada is performed entirely at a location in XXXXX, the supply is deemed to be made in XXXXX and is subject to the GST at the rate of 7%, unless the supply is zero-rated. If the portion of the training service that is performed in Canada is performed entirely at a location in XXXXX, the supply is deemed to be made in XXXXX and is subject to the HST at the rate of 15%, unless the supply is zero-rated. If the Canadian element of the service is not all or substantially all performed in a province, there are additional place of supply rules to address these situations. TIB B-078 provides additional information on these rules.

The next step is to ascertain whether there are any zero-rating provisions that may apply to a taxable supply of a service made to a non-resident.

The general zero-rating provision concerning the export of a service is found in section 7 of Part V of Schedule VI 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 service is rendered to an individual while that individual is in Canada. In other words, where the training is being provided in Canada to non-resident individuals, the supply of the training service is not zero-rated under this section. In addition, the supply is not zero-rated 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. 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.

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 section 4.5.1, Exports - Determining Residence Status of the GST/HST Memoranda Series. Appendix A of this Memorandum describes the documentation that the CCRA will generally accept as proof that the recipient is not resident in Canada.

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 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) 954-2488.

Sincerely

Marcel Boivin
A/Manager
Electronic Commerce Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate