27 May 2003 GST/HST Interpretation 30860 - Supplies Made Over the Internet

Dear XXXXX:

Thank you for your letter XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the type of supplies made by XXXXX We apologize for the delay in responding to your enquiry.

Our understanding of the facts based on the information provided is as follows:

1. XXXXX is a XXXXX software development and Internet services company that is registered for GST/HST purposes and is located in XXXXX. XXXXX has developed XXXXX software that is used by XXXXX firms in XXXXX countries.

2. XXXXX supplies XXXXX software to its clients by way of licence. The software is supplied by electronic means to customers who download it over the Internet.

3. XXXXX also supplies access to what is referred to as an "on-line service" intended to assist clients in managing XXXXX. This supply is made to customers by way of subscription. Subscribers may access the "on-line service" from anywhere by logging on to the XXXXX Web site. Subscribers can access various XXXXX calculation applications, comprehensive XXXXX data, reports and XXXXX XXXXX. The "on-line service" also allows subscribers to organize and store XXXXX XXXXX data and to deal and trade data collected from multiple users.

4. Customers that have obtained XXXXX software by way of licence as described in fact #3 above can also subscribe to the "on-line service".

Interpretation Requested

You have requested whether GST/HST applies to the supply of software and to the supply of access to the "on-line service" where those supplies are made to non-resident customers.

Interpretation Given

Based on the information provided, both the supply of software supplied electronically by way of licence and the supply of access to the "on-line service" by way of subscription are supplies of intangible personal property (IPP) for GST/HST purposes.

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

Pursuant to paragraph 142(1)(c) of the Excise Tax Act (the "Act"), a supply of IPP 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. Pursuant to paragraph 142(2)(c) of the Act, a supply of IPP is deemed to be made outside Canada if it may not be used in Canada. A supply of IPP can be considered to be made in Canada even if it is not actually used in Canada. The fact that the supply may be made to a recipient who is outside Canada has no bearing on whether the supply is made in Canada.

In determining whether IPP may be used in Canada, reference may be made to any written agreement for the supply that contains terms governing the place of use of the IPP or a general restriction that may be explained on the supplier's Web site as to the use of the IPP, to which the recipient agrees either expressly or implicitly upon acquisition of the supply. If there are no restrictions regarding the place where XXXXX customers may use the software that it supplies by way of licence or the supply of access to its "on-line service", it is considered that those supplies of IPP may be used in Canada.

Pursuant to section 10 of Part V of Schedule VI of the Act, the supply of intellectual property or any right, licence or privilege to use any such property is zero-rated when supplied to a recipient who is not resident in Canada and who is not registered for GST/HST purposes at the time the supply is made. A supply of software made by way of licence, such as the supply of software made by XXXXX by way of licence, is a supply that qualifies for zero-rating under this provision when made to a non-resident recipient who is not registered for GST/HST purposes. When making supplies of the software, XXXXX must verify and maintain evidence that the recipient is not resident in Canada and is not registered for GST/HST purposes.

We have enclosed a copy of GST/HST Memoranda Series Chapter 4.5.1 Exports - Determining Residence Status for your review. The documentation that the CCRA will generally accept as proof that the customer is both a non-resident and is not registered is described in Appendix B of this Memorandum.

There is no provision that would zero-rate the supply of access to the "on-line service" made by way of subscription. As a result, where that supply is deemed made in Canada, as previously explained, XXXXX is required to collect GST at a rate of 7% or HST at a rate of 15% in respect of that supply depending on whether the supply is made in participating province.

Whether a supply of IPP made in Canada is made in a participating province or a non-participating province is determined by applying the rules in section 144.1 of the Act 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, made in the province. A supply that is made in Canada and that is not made in a participating province is deemed to be made in a non-participating province.

Pursuant to subparagraph 2(d)(i) of Part III of Schedule IX, 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 property may be used only in that particular province. The "Canadian rights" refers to that part of the IPP that can be used in Canada. Pursuant to subparagraph 2(d)(ii) of Part III of Schedule IX, a supply of IPP is also considered to be made in a particular province if the "place of negotiation" of the supply is in the province, and the property may be used otherwise than exclusively outside that province. The "place of negotiation" is defined as "... 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 use of the IPP in a particular province, it will always be considered that the property may be used otherwise than exclusively outside the province where the place of negotiation occurred. In this case, where the place of negotiation is in a non-participating province, the supply will be deemed made in that province and the supply will consequently be subject to GST at a rate of 7%.

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 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) 952-8810.

Sincerely,

Patrick McKinnon
Manager
Border Issues Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate