15 July 2003 GST/HST Interpretation 33996 - Tax Status of Advertising

Dear XXXXX:

Thank you for your letter XXXXX, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to supplies that you make over the Internet to non-resident customers.

At issue is the tax status of supplies for which you receive commissions or set click through rates from non-resident companies XXXXX.

The following two scenarios were presented in your letter.

Scenario 1

•   XXXXX is resident in XXXXX and is registered for GST/HST purposes XXXXX[.]

•   XXXXX creates both doorway /search pages and unique Web sites pertaining to a given product or service XXXXX[.]

•   Dar-Ray submits the pages or Web sites to various search engines in hopes of attracting potential customers.

•   XXXXX receives a commission XXXXX if someone goes through its search pages or Web site to access the website XXXXX or XXXXX.

•   XXXXX receives a commission only if a person XXXXX redirects uses a service or purchases a product from the other Web sites.

•   XXXXX[.]

Scenario 2

•   Using the same marketing techniques as described in Scenario 1, Web site owners offer to pay a set rate XXXXX for people XXXXX redirects from XXXXX or search pages to it's client's Web site.

•   In order to receive the set rate, the person redirected from XXXXX Web site must actually enter the XXXXX Web site(s) beyond the welcome pages.

•   XXXXX[.]

•   XXXXX[.]

Interpretation Requested

What is the tax status of the supply of the services XXXXX as described above, provided to the non-resident companies?

Interpretation Given

The supplies made XXXXX to the non-resident companies, as described above, are considered to be supplies of advertising services for GST/HST purposes.

The term "advertising" is not defined in the Excise Tax Act (ETA). However, the Canada Customs and Revenue Agency (CCRA) has provided an explanation as to what is generally considered to be an advertising service for GST/HST purposes in section 4.5.3, Exports — Services and Intellectual Property of the GST/HST Memoranda Series, a copy of which is enclosed for your review. The explanation in this section refers to a service of creating a message and a service directly related to the communication of such a message. Further, the message must be oriented towards soliciting business, attracting donations, or calling public attention in the form of an information notice, a political announcement or other similar communication.

There are occasions when the person communicating a message will not be the same person creating or supplying the message. Generally, the person supplying the broadcast or communication service will be in possession of the message or will have received sufficient information as to the content of the message prior to the supply of the service to know that the message is in the nature of advertising. In these situations, the supply of the broadcast or communication service will be considered to be a supply of an advertising service.

A taxable supply that is made in Canada is subject to GST at the rate of 7%, or HST at a rate of 15% where the supply is deemed to be made in a participating province unless the supply is zero-rated (taxed at 0%). The three participating provinces are Nova Scotia, New Brunswick, and Newfoundland and Labrador.

Paragraph 142(1)(g) of the Excise Tax Act ("the Act") deems a supply of a service to be made in Canada if the service is, or is to be, performed in whole or in part in Canada. Conversely, paragraph 142(2)(g) of the Act deems a supply of a service to be made outside Canada if the service is, or is to be, performed wholly outside Canada.

Whether a service is performed in whole or in part in Canada is a question of fact to be determined on a case-by-case. A supply of a service is performed at least in part in Canada if:

•   the service requires a person to perform a task (i.e., the supplier acts through one or more of its employees), and the person performing or physically carrying out the task is situated in Canada at the time the activity is done;

•   the service includes operations performed by a supplier's equipment (e.g., computer equipment), and the equipment is located in Canada;

•   the supply involves doing something to or with a recipient's equipment by accessing it from a remote location, and the recipient's equipment is located in Canada; or

•   any activity related to the performance of the service is undertaken in Canada.

A supply of an advertising service that is made in Canada, to a non-resident person who is not registered for purposes of the GST/HST, is a zero-rated supply pursuant to section 8 of Part V of Schedule VI to the Act. As such, your supplies of advertising services to non-resident non-registered companies are taxed at 0%.

If the non-resident recipient is registered for GST/HST at the time the advertising service is performed, the service may still be zero-rated under the general zero-rating provision for the export of services found in section 7 of Part V of Schedule VI to the Act. Section 7 of Part V of Schedule VI to the Act zero-rates a supply of a service when made to a non-resident person provided none of the exclusions of the provision apply. For example, the supply of a service to a non-resident is zero-rated provided it is not rendered to an individual while that individual is in Canada or made to an individual who is in Canada at any time when the individual has contact with the supplier in relation to the supply.

It is the supplier's responsibility to verify that the recipient is a non-resident and to ensure that all of the remaining zero-rating criteria are satisfied. For your information, please find enclosed GST/HST Memoranda Series Section 4.5.1, Exports — Determining Residence Status. Appendix A of this Memorandum describes the documentation that the CCRA will generally accept as proof that the recipient is not resident in Canada. Also enclosed is GST/HST Memoranda Series Section 4.5.3, Exports — Services and Intellectual Property.

Where a taxable supply is made in Canada and is not a zero-rated supply, a further analysis with respect to the province in which the supply is made or deemed to be made is necessary to determine the appropriate rate of tax. Whether a supply of a service made in Canada is made in a participating or non-participating province is determined by applying the rules in section 144.1 and Schedule IX to the Act. Section 144.1 of the Act 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 to the Act, made in the province. Section 144.1 of the Act 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 rule for determining whether a supply of a service, such as an advertising service, is made in a particular province is set out in Part V of Schedule IX to the Act. Paragraph 2(a) of Part V of Schedule IX to the Act provides that a service is considered to be supplied in a particular province if all or substantially all (i.e., 90% or more) of the service is performed in that province. The "Canadian element" of a service is the portion of the service that is performed in Canada.

A supply of a service can also be considered to be made in a particular province, pursuant to paragraph 2(b) of Part V of Schedule IX, if the place of negotiation for the supply is in the province, and all or substantially all of the service is not performed outside that province. The "place of negotiation" of a supply means the location of the supplier's permanent establishment at which the individual principally involved in negotiating an agreement for the supplier ordinarily works or reports to in the performance of his or her duties relating to the supplier's activities in the course of which the supply is made. "Negotiating" includes the making or acceptance of an offer. The meaning of "permanent establishment" for this purpose is as defined in various provisions of the Income Tax Regulations of the Income Tax Act, based on the type of person. For more information, please refer to the enclosed Section 3.4, Residence, of the GST/HST Memoranda Series.

For your further information regarding the application of GST/HST to supplies made by electronic means, please find enclosed GST/HST Technical Information Bulletin B-090, GST/HST and Electronic Commerce.

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) 952-6743.

Yours truly,

Cheryl R. Leyton
Border Issues Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate