19 February 2003 GST/HST Interpretation 42608 - Supplies of Self-help Exercises Made Via the Internet

Dear XXXXX:

Thank you for your letter XXXXX and subsequent letter XXXXX XXXXX XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the supply of a self-help exercise XXXXX made via the Internet. Attached to your letter was a copy of a letter XXXXX from XXXXX XXXXX (your client). Your letter was forwarded to us for reply and we apologize for the delay in responding to your request.

Our understanding from your letters and the copy of your client's letter is that your client consists of XXXXX XXXXX. The proprietorXXXXX created the XXXXX exercise.

XXXXX. The XXXXX exercise consists of sorting cards that have phrases typed on them. These cards are sorted underneath a heading titled "XXXXX XXXXX". There are XXXXX sub-headings to the initial heading. Results are determined depending on which cards the individual lines up and under which heading. The individual then has a session with your client which consists of being verbally advised of his/her results and is also given a computer printout of his/her personal results.

Currently, the individual comes into your client's office located in XXXXX to do the exercise. However, your client is in the process of completing an electronic version of this exercise, which will be available for individuals to do on a Web site. Individuals will be able to print out their own results and if they wish a consultation session, they may contact your client to book an appointment. This business will be conducted through XXXXX which is not currently registered for GST/HST purposes. This new entity will retain ownership of the patents, maintain the Web site and otherwise administer the business.

There will be four different XXXXX Packages. Package 1 consists of electronically sorting the items of the XXXXX exercise inputted by the individual on-line via the Internet and providing the individual with a computerized output of the results. The exercise software generates the results based on the input (i.e., there is no human involvement on the part of the supplier in arriving at a particular individual's results). There is no discussion of the results under this option (i.e., the input and results are all provided on-line). Package 2 consists of sorting the items and providing results as in Package 1 plus one hour of interpretation and discussion of the results with XXXXX. Package 3 consists of sorting the items and providing results as in Package 1 plus one hour of interpretation and discussion of the results with XXXXX. Package 4 consists of sorting the items and providing results as in Package 1 plus one hour of interpretation and discussion of the results with XXXXX XXXXX XXXXX[.]

Interpretation Requested

Does the GST/HST apply to supplies of the different XXXXX Packages where the XXXXX exercise is completed on-line via the Internet?

Interpretation Given

Based on the information provided, a supply of Package 1 is considered by the Canada Customs and Revenue Agency (CCRA) to be a supply of intangible personal property (IPP) and supplies of Packages 2, 3 and 4 are each considered to be a single supply of a service for purposes of the Excise Tax Act (ETA). We will discuss the GST/HST treatment of IPP and services separately.

Intangible Personal Property

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.

A supply of IPP can be deemed 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 such things as 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.

As it does not appear that the use of the XXXXX exercise is restricted to "in Canada" or "outside Canada", the supply of Package 1 is deemed to be made in Canada pursuant to subparagraph 142(1)(c)(i) of the ETA since the exercise may be used in Canada. A taxable (other than a zero-rated) supply of property or a service made in Canada is subject to the GST/HST at the rate of 7% or 15% if the supply is made in a participating province (Nova Scotia, New Brunswick and Newfoundland). A supply that is zero-rated is taxable at the rate of 0%.

There are no provisions in the ETA that would zero-rate the supply of Package 1 when supplied to a non-resident person. As such, the supply of Package 1 will be subject to GST at 7% when supplied to persons who are non-residents of Canada.

Since the supply of Package 1 is made in Canada and is not zero-rated, a further analysis with respect to the province in which the supply is made is necessary to determine the appropriate rate of GST/HST.

As the supply of Package 1 is IPP that is not related to real property, tangible personal property or services and there are no restrictions regarding the province or group 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 to determine 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 of the supply is in the province and the IPP may be used (i.e., is allowed to be used) otherwise than exclusively (90% or more) outside the province. Since there are no restrictions regarding the province in which the XXXXX exercise may be completed, it will always be the case that the exercise may be completed 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" 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, or to which that individual ordinarily reports, in the performance of the individual's duties in relation to the activities of the supplier in the course of which the supply is made ...".

Based on the information provided and the fact that the supplier's permanent establishment is in XXXXX, it appears that the place of negotiation of the supply is in XXXXX. As the place of negotiation of the supply of Package 1 is in XXXXX, subparagraph 2(d)(ii) of Part III of Schedule IX to the ETA deems the supply to be made in that province and, therefore, subject to the GST at the rate of 7% even if the recipient is located in a participating province.

Whether or not the supplier of Package 1 will be required to account for an amount of GST/HST on the supply will depend on whether or not the supplier is registered for GST/HST purposes or required to be registered. It should be noted that XXXXX may not be considered a small supplier by virtue of the world-wide taxable supplies of any associated persons.

Services

It should be noted that the GST/HST will apply to the supplies of Packages 2, 3 and 4 in the same manner as applied to your client's current services where the XXXXX exercise is administered in your client's office.

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. Given that all of the activities carried out in relation to the supplies of the services contained in Packages 2, 3 and 4 are carried out in your client's office in XXXXX, the services are deemed to be made in Canada pursuant to paragraph 142(1)(g) of the ETA.

Further, since all or substantially all of the portion of the services that is performed in Canada is performed in XXXXX, paragraph 2(a) of Part V of Schedule IX to the ETA deems the supplies to be made in that province. These supplies are, therefore, subject to the GST at the rate of 7% unless the services qualify as exempt XXXXX services under the provisions of XXXXX Schedule V to the ETA or are zero-rated.

Where it is determined that the supplies do not qualify as exempt XXXXX services, the services may be zero-rated. For example, subject to certain restrictions, section 23 of Part V of Schedule VI to the ETA zero-rates the supply of an advisory, consulting or professional service made to a non-resident person. Such taxable services when supplied to non-resident persons may be zero-rated under this provision. For additional information regarding the zero-rating of services, please refer to the enclosed section 4.5.3, Exports - Services and Intellectual Property, of the GST/HST Memoranda Series.

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) 954-7931.

Yours truly,

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