Please note that the following document, although correct at the time of issue, may not represent the current position of the Canada Revenue Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence du revenu du Canada.
GST/HST Rulings Directorate
5th floor, Tower A, Place de Ville
320 Queen Street
Ottawa ON K1A 0L5
[Addressee]
Case Number: 240640
Business Number: […]
Dear [Client]:
Subject: GST/HST ruling and GST/HST interpretation
Application of GST/HST on […][digitized products] […]
Thank you for your correspondence of [mm/dd/yyyy], concerning the application of the goods and services tax/harmonized sales tax (GST/HST) on […][digitized products] […]. […].
The HST applies in the participating provinces at the following rates: 13% in Ontario; and 15% in New Brunswick, Newfoundland and Labrador, Nova Scotia, and Prince Edward Island. The GST applies in the rest of Canada at the rate of 5%.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
STATEMENT OF FACTS
We understand the following:
1. You are registered for GST/HST purposes as a sole proprietorship with effective date of [mm/dd/yyyy], and Business Number […].
2. You operate as a […][digital artist] […] creating […][digital files] that contain designs […].
3. The designs are based on […].
4. You fund the creation of these […][designs] using projects on […] (the Platform), a reward-based crowdfunding website.
5. Each project on the Platform is independently created […] by the person or team behind it (i.e. […][project initiator]). Each [project initiator] has complete control and responsibility over their projects such as building their project pages on the Platform’s website and deciding what rewards to offer […][supporters] and the pledge amounts. […]. [Supporters] are individuals who are interested in supporting the [project initiator]’s project in exchange for a reward such as a copy of […][a product], a limited edition, or a custom experience related to the project. The Platform is “reward-based”.
6. [Supporters] make pledges […]. The Platform is […] open to [supporters] from around the world […]. […] the [supporters] are charged the amount of their pledges on their credit card and entitled to the corresponding reward.
7. […] the [project initiator] receives the funds less the Platform and payment processing fees. […].
8. […]
9. […] the terms of use of the Platform creates a contract between the [project initiator] and its [supporters]. A [project initiator] posting a project is making an offer and anyone […][supporting] the project is accepting the [project initiator]’s offer and forming that contract. […].
10. […] the terms of use of the Platform also require the [project initiator] to take responsibility for paying any additional fees or taxes […]. […].
11. The Platform […][does not accept projects with] incentives like equity, revenue sharing or investment opportunities.
12. You indicated that you are able to identify the country in which a [supporter] is located but not the province.
13. […], you have [#] successful projects(footnote 1) between [mm/dd/yyyy] and [mm/dd/yyyy] receiving the following pledge amounts […]
[…][amounts exceeding $30,000 over four calendar quarters]
14. The elements offered as rewards for the projects are described as [digital files] […], […][physical products] or […]. […].
15. The pledge amounts ranged from $[…] to $[…]. […]. The pledge amounts increased for […][reward packages] with a higher number of [digital designs].
16. The first two [projects] had rewards that offered the option of receiving [physical products] […] with an additional amount for shipping costs.
17. […]
18. […]
19. […]
RULING REQUESTED
You would like to know the following:
1. If you are required to be registered for GST/HST purposes and remit the GST/HST?
2. What rate you should charge the GST/HST.
RULING GIVEN
Based on the facts set out above, we rule that
1. You are required to be registered for GST/HST purposes and are therefore required to collect and remit GST/HST on your taxable supplies.
EXPLANATION
Generally, all supplies of property and services made in Canada are taxable unless an exemption from the GST/HST applies. Taxable supplies are supplies made in the course of a commercial activity and may be taxable at the rate of 0% (zero-rated supplies), 5%, 13%, or 15% on the value of the consideration for the supply depending on the province in which the supply is made. Zero-rated supplies are included in Schedule VI. Exempt supplies are not subject to the GST/HST and are included in Schedule V.
Subsection 123(1) defines key terms as follow:
“Supply” as the provision of property or a service in any manner, including sale, transfer, barter, exchange, licence, rental, lease, gift or disposition.
“Property” to mean any property, whether real or personal, movable or immovable, tangible or intangible, corporeal or incorporeal, and includes a right or interest of any kind, a share and a chose in action, but does not include money.
“Service” to mean anything other than property, money, and anything that is supplied to an employer by a person who is or agrees to become an employee of the employer in the course of or in relation to the office or employment of that person.
“Taxable supply” is a supply that is made in the course of a commercial activity.
“Commercial activity” is defined to include a business carried on by a person except to the extent to which the business involves the making of exempt supplies.
The Platform provides a mechanism to fund creative projects. When a [project initiator] posts a project on the Platform, they’re inviting other people to form a contract with them. Anyone who [supports] a project is accepting the [project initiator]’s offer, and forming that contract. The Platform is not a part of this contract - the contract is a direct legal agreement between [project initiator] and their [supporters]. The [project initiator] is solely responsible for fulfilling the promises made in their project. If they’re unable to satisfy the terms of this agreement, they may be subject to legal action by [supporters].
You are a GST/HST registrant and operate a business that is a commercial activity. […]. The rewards provided by you for these projects are taxable supplies. As the supplier, you are required to account for the tax in the reporting period that is the earlier of the day the consideration is paid or becomes payable.
[…].
INTERPRETATION GIVEN
Characterization of Supply
A supply made by electronic means is characterized as either a supply of intangible personal property (IPP) or a supply of a service. A number of factors are considered in determining whether a particular supply made by electronic means is a supply of IPP or a service. This approach considers the nature of the agreement between the supplier and the customer, and whether the agreement is in substance for work (or work and materials), or for property (including a right or interest of any kind).
Supplies that involve a customer downloading a digitized product from a supplier, or receiving a right to sell a product, are generally characterized as supplies of IPP. The supply of a physical item would be a supply of tangible personal property (TPP). Please refer to GST/HST Technical Information Bulletin B-090, GST/HST and Electronic Commerce, for more information on the characterization of supplies made by electronic means.
Tax Extra or Tax Included
Subsection 223(1) of the Act imposes disclosure requirements on a registrant who makes a taxable supply. Essentially, where the tax is charged on a tax-extra basis, the registrant must indicate the total amount of tax payable in respect of the supply. Where the tax is included in the amount charged for the supply, the registrant must indicate that the amount charged includes the tax payable in respect of the supply.
As per section 165 of the Act, GST/HST is calculated on the value of the consideration for the supply. It is a question of fact whether tax has been added to the value of consideration or if the GST/HST is extra.
[…] the Platform’s terms requires you to pay any taxes associated with the use of the platform, […].
GST/HST Policy Statement P-118R, Assessments on a Tax Extra or Tax Included Basis (P-118R), may provide you with some guidance as to whether GST/HST should apply to the pledge amounts on a tax-included or tax-extra basis. P-118R provides that the determination of whether a tax-extra or tax-included assessment should be made is a question of fact to be resolved by the auditor based on the facts and the circumstances of the particular situation. Factors such as the invoicing practices, industry practices and supporting documentation will be pertinent and used in the determination.
Place of Supply
The GST (or federal part of the HST) is imposed under subsection 165(1) in respect of taxable supplies that are made in Canada. The provincial part of the HST is imposed under subsection 165(2) in addition to the federal part of the HST in respect of taxable supplies that are made in a participating province.
Subparagraph 142(1)(c)(i) of the ETA deems a supply of IPP to be made in Canada if the IPP may be used in whole or in part in Canada. As such, the place of supply is determined based on where the rights can be used and not where they are actually being used at a particular time. In determining whether IPP may be used in Canada, reference may be made to the terms of a written agreement to determine if there are any restrictions regarding the place of use of the IPP. Where there are no such restrictions, it will always be the case that the IPP may be used in whole or in part in Canada.
In determining whether a supply of IPP is made in a province, the place of supply rules require a determination of the extent, if any, to which the use of the Canadian rights is restricted to one or more provinces. The Canadian rights in respect of IPP means that part of the IPP that can be used in Canada.
If there are no restrictions with respect to where the Canadian rights can be used than paragraph 8(b) of the New Harmonized Value-Added Tax System Regulations (the Regulations) would deem the supply of the IPP to be made in a province if:
* in the ordinary course of business of the supplier, the supplier obtains an address that is:
o if the supplier obtains only one address that is the home or business address in Canada of the recipient, the home or business address in Canada obtained by the supplier,
o if the supplier obtains more than one such address, the address in Canada that is most closely connected with the supply, or
o in any other case, the address in Canada of the recipient that is most closely connected with the supply;
* the address is in the province, and
* the IPP can be used in the province.
If no address of the recipient is obtained, such as the case may be where a [supporter] is receiving a digital file electronically and no address was requested or obtained, paragraph 8(c) or section 11 of the Regulations would determine where the supply is made. Paragraph 8(c) provides that the supply is made in the participating province for which the tax rate is the highest among the tax rates for the provinces in which the property can be used.
However, if the property can be used in two or more participating provinces with the same highest tax rate, then section 11 of the Regulations would determine the province where the supply is made. Section 11 of the Regulations specifies which one of the participating provinces with the same highest tax rate (known as the specified provinces) will be the province where the supply is made. Where section 11 applies, the supply is made in the specified province where the supplier’s business address most closely connected with the supply is located. If the business address is not located in one of the specified provinces, then the supply is made in the specified province closest in proximity, determined in any reasonable manner, to the supplier’s business address of the supplier that is most closely connected with the supply.
Where the address of the [supporter] is obtained, the supply of the IPP would be made in the province if the address of the [supporter] is in that province. Otherwise, paragraph 8(c) or section 11 of the Regulations would determine where the supply is made.
A supply of [digital files] and a right to sell a product are considered to be a supply of IPP. Under subsection 6(1) of the Regulations, a supply of IPP (other than IPP that relates to real property or to TPP) in respect of which the Canadian rights can only be used primarily in participating provinces is made in a participating province if an equal or greater proportion of those Canadian rights cannot be used in another participating province. Conversely, under section 7 of the Regulations, a supply of IPP (other than IPP that relates to real property or to TPP) in respect of which the Canadian rights can only be used primarily in non-participating provinces is made in a non-participating province.
A supply of IPP made to a non-resident who is not registered for GST/HST when the supply is made may be zero-rated pursuant to section 10.1 of Part V of Schedule VI if certain conditions are met. Please refer to GST/HST Info Sheet GI-034, Exports of Intangible Personal Property, for additional information.
A supply of TPP, such as a [physical product] is deemed to be made in Canada pursuant to paragraph 142(1)(a) if the property is or is to be delivered or made available in Canada to the recipient of the supply. Whether a supply made in Canada is made in a participating province or non-participating province is determined by section 144.1 and Schedule IX. Section 144.1 provides that a supply is deemed to be made in a province if it is made in Canada and is, under the place of supply rules set out in Schedule IX, made in a province. Further, under section 144.1, a supply made in Canada that is not made in a participating province is deemed to be made in a non-participating province.
Pursuant to section 1 of Part II of Schedule IX, a supply of TPP is made in a province if the supplier delivers the property or makes it available in the province to the recipient of the supply. This rule is generally based on the province in which legal delivery of the property occurs. For purposes of this rule, under section 3 of Part II of Schedule IX, property is deemed to be delivered in a particular province if certain conditions are met, including if a supplier sends the property by mail or courier to an address in the particular province.
Timing of Tax Payable
Whether the amounts collected from [supporters] […] of a reward-based crowdfunding project are an advance payment is a question of fact.
As per subsection 168(1), tax in respect of a taxable supply is 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.
Under section 133, the entering into of any agreement to supply any property is deemed to be a supply of the property made at the time the agreement is entered into. The provision of the property under the agreement is treated as being a part of the same supply and not as a separate supply. As a result, the tax applies to any prepayment or part payment of the consideration for a supply even if, at the time payment is made, property has not in fact been transferred.
Generally, an advance payment is an amount paid on account of a payment to become due under an obligation and recorded in the supplier’s books and records as income. GST/HST is payable at the time the advance payment is made, pursuant to paragraph 152(1)(c), assuming that the advance payment did not become due at an earlier time. If under a written agreement, a customer is required to make an advance payment equal to 100% of the consideration for property to be supplied in the future, the customer would be required to pay, and the supplier would be required to collect, the GST/HST calculated on the amount at the earlier of the time the advance payment became due under the agreement or was paid.
Consideration is defined under subsection 123(1) to include any amount that is payable for a supply by operation of law. A [supporter] is required to pay GST/HST on the full consideration payable for the pledge amounts that was supplied by you. Tax is calculated on the pledge amount and not the amount received by you after the fees are deducted from the Platform and the payment processor.
DISCLAIMER
In accordance with the qualifications and guidelines set out in GST/HST Memorandum 1-4, Excise and GST/HST Rulings and Interpretations Service, the Canada Revenue Agency (CRA) is bound by the ruling(s) given in this letter provided that: none of the issues discussed in the ruling(s) are currently under audit, objection, or appeal; no future changes to the ETA, regulations or the CRA’s interpretative policy affect its validity; and all relevant facts and transactions have been fully and accurately disclosed.
CONTACT
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 226-751-4719.
Should you have additional questions on the interpretation and application of the GST/HST, please contact a GST/HST Rulings officer at 1-800-959-8287 or by fax to 1-418-566-0319.
Sincerely,
Charles Newell
Senior Rulings Officer
Services and Intangibles Unit
General Operations and Border Issues Division
GST/HST Rulings Directorate
FOOTNOTES
1. […]
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