The Canadian Association of Internet Providers are telling Web site owners they can rest easy in knowing that they will most likely not have to charge their foreign customers GST for accessing paid intellectual property content.
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.
This resulted in some associations — including CAIP and its parent organization Canadian Advanced Technology Alliance, the Canadian Institute of Chartered Accountants, and the Tax Executives Institute — rallying against what they saw as a blow against Canada’s competitiveness. “It’s almost an export tax,” said John Reid, president and CEO of CATA. “We came from the perspective of the fact that this was against Canadian competitiveness.”
This advocacy seems to have paid off. The recent federal budget contains a proposed amendment to the CRA legislation that would grant Web site owners GST relief for their foreign customers, both in the future, and retroactively to 1990 (when GST came into effect). The CRA also, according to the legislative briefing note, “had taken the view that the rule designed to remove GST from intellectual property provided to non-residents should be read narrowly…(now) the budget include(s) a proposal which removes GST from a broader class of intellectual property.”
“This really clarifies things,” said Jonathan Spencer, a Toronto-based tax lawyer with Thorsteinssons LLP who helped draft the legislative briefing note. “Before there was the concern that (the law) wasn’t broad enough.”
Reid thinks that this is a significant victory for Web site owners. “If you’re trying to enhance the competitiveness of industry, this would be contradictory to that,” said Reid. Such an environment would risk hindering business growth, as a business could, at any time, owe four years’ worth of GST (four years being the generally accepted timeframe that an audit can take place within) or lose non-Canadian customers who don’t want to pay the extra fees.
Muskoka, Ontario-based search engine optimization expert and web designer Linda Lynch is just wary of how long this new legislation could take. She said, “This has a future impact on the IT sector, and now we’re swaying on a limb with a possible election coming and the opposition so we have to wait to see whether we pay or not?”
Spencer expects the amendments to go through “shortly,” with general audits to “ramp up at the end of the year.”
According to the CAIP legislative briefing alert, “Canadian Web sites must be able to ensure that, where access rights are purchased by a non-resident individual, that individual is outside Canada at the time.” Reid wants to get the word out to Web site owners that they should be able to track where their clients are accessing the information from in case of an audit.
But this raises some serious privacy issues, according to Lynch. “I don’t see how you can disclose (your client’s point of origin) without violating your privacy agreement,” she said, pointing out that, if customers are presented with a choice between a company that keeps track of and could disclose their information and an American one that, due to differing tax laws, does not, they could very well go with the non-Canadian business, hurting competitiveness in the process.
Another issue raised is the lack of clarification of whether, according to the legislative briefing note, “providing non-residents with access to the Internet is taxable.” The CRA groups Internet access under “telecommunications facility,” even though the term is probably in reference to mobile phones and tax concerns such as whether to tax users while roaming away from Canada, according to Spencer.
The new proposal wouldn’t apply to some “telecommunications facilit(ies),” thus allowing a possible loophole through which the CRA could charge GST, Spencer said.
Reid plans to call for clarification on this issue, which could be resolved by a clarification note from the CRA.