In a recent case, Dawn’s Place v. R 2006 FCA 349, the Federal Court of Appeal (FCA) ruled against Dawn’s Place, an adult-oriented Web site, for failing to collect GST from non-residents for fees earned in 2001. Dawn’s Place had won its case before the Tax Court of Canada on the premise that the money it was making for supplying digital content to those outside of Canada should be “zero rated,” under the GST, which means it falls under a clause in the Excise Act that relates to the supply of intellectual property.In response, the Canadian Association of Internet Providers (CAIP) sent out a legislative alert via e-mail to its members criticizing the court’s move and suggesting it could have an impact on many other companies that deliver content electronically through their Web sites.

“Perhaps in a fit of pique over its inability to tax Canadians’ consumption of digital pornography the Crown appealed the decision,” the CAIP briefing said. “It highlights the government’s narrow view of the scope of the zero-rating rule, but, more importantly, it undercuts the basic principle of the tax.”

CAIP estimated that Canadian Web sites could be exposed to assessments for the past four years on their transactions with non-residents, and could face difficulty in collecting GST so long after the fact.

“The Excise Tax Act does not provide an exemption for GST or HST for subscription fees for access to information on a server to Canada – even when the subscriber is physically located outside of Canada,” said Ottawa-based CRA spokesperson, Ariane Boyer in an e-mail response to the CAIP briefing.

CAIP feels the spectre of assessment flies in the face of the spirit of the GST, which is designed to make Canadian exports more competitive by removing tax. “It puts Canadian firms at a disadvantage,” said CAIP’s John Reid.

The CRA would not comment on this, saying only, “It’s part of Canadian law” to collect GST from digital media subscribers, regardless of their place of residence.

CAIP has engaged legal counsel and wants the appeal overturned. There’s a particular rule in the law which removes tax from copyright, said Jonathan Spencer of tax law firm Thorsteinssons LLP. And there was an assumption that it would apply to digital media. But the FCA ruling calls this into question, he said.

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