Imported Computer Software

From: Canada Revenue Agency

GST/HST Technical Information Bulletin B-037R
November 1, 1994

This bulletin does not replace the law found in the Excise Tax Act and its Regulations. It is provided for your reference. As it may not completely address your particular operation, you may wish to refer to the Act or appropriate Regulation, or contact any Revenue Canada Excise/GST district office for additional information. If you are located in the province of Quebec, please contact the ministère du Revenu du Québec (MRQ) for additional information.

INTRODUCTION

This bulletin provides guidelines and examples to determine the GST treatment of software imported into Canada on a physical carrier medium, as well as the electronic transmission of software, and access to on-line programs. It also announces a new policy for licensed custom software which is effective December 1, 1994.

Note: This publication supersedes Technical Information Bulletin B-037, Imported Computer Software, dated December 20, 1990.

The GST treatment of imported computer software depends on whether, at the time of importation, the software is an "off-the-shelf" or "custom product". For custom software, the GST treatment depends on whether the item is sold or licensed, and whether the non-resident supplier is registered for the GST.

Definitions

For purposes of this publication, a "carrier medium" refers to any goods capable of storing software. Examples are computer disks, tapes, and CD-ROMS.

"Software" refers to instructions or data to be processed by data processing equipment. Software supplied on a carrier medium is considered to be a supply consisting of the physical carrier medium (e.g., the disk) and the software stored on the disk (e.g., the instructions).

"Off-the-shelf software" refers to prepackaged, commercially-available software programs which are available to all customersand usable in a standard form, such as word processing and spreadsheet applications. Typically, off-the-shelf software is supplied with a standardized licence agreement (referred to in the industry as a "shrink-wrap" licence). Usually, the licence agreement advises the user that opening the sealed package or using the software constitutes acceptance of the terms of the agreement.

"Custom software" refers to all other types of software, such as software designed and developed to meet a particular customer's specific requirements. Custom software is often provided under a specific/signed licence agreement between a software licensor (or sub-licensor) and a customer (licensee). The software licensor retains extensive rights in the program and the user is granted only a licence to use the software, subject to certain conditions. In other words, the licensor does not dispose of the program to the licensee.

GENERAL

It is the view of Revenue Canada (the Department) that off-the-shelf and custom software sold outright to a user are subject to tax on their full value (that is, the value of the carrier medium plus the value of the software) as imported goods under Division III, Tax on Importation of Goods, of the Excise Tax Act. However, the Department wishes to clarify the GST treatment of custom software supplied by way of a specific licence agreement.

Effective December 1, 1994, the Department will treat the software component of a licensed custom software package imported into Canada as intangible personal property. The Department will charge GST under Division III on the value of the carrier medium only, while the software will be taxed separately in one of two ways:

  • under Division II, Goods and Services Tax, if the non-resident supplier is registered for the GST; or
  • under Division IV, Tax on Imported Taxable Supplies Other Than Goods, if the non-resident supplier is not registered and the software is an "imported taxable supply" within the meaning of paragraph 217(c) of the Excise Tax Act.

This treatment represents a change from the Department's previous position that all computer software imported into Canada from a non-resident supplier on a physical carrier medium is tangible personal property for purposes of the GST (i.e., that GST should be payable under Division III on the full value of the software).

Please refer to the chart at the end of this Bulletin to determine the appropriate Division of the Excise Tax Act under which the GST is payable for imported computer software.

Off-the-Shelf Software: Division III Tax Treatment

Imported off-the-shelf computer software is regarded as an import of goods made up of the physical carrier medium plus the software data or instructions. Off-the-shelf, prepackaged software is taxed under Division III at the time of importation based on its value for duty as determined by Canada Customs.

Customs will generally determine the value for duty as being the price paid or payable for the goods. The GST is charged on the full value of the goods, which is the value of the physical carrier medium (e.g., the disk) and the value of the software (e.g., the instructions or data stored on the disk).

Illustration #1

A Canadian resident imports an off-the-shelf software package from the United States. Customs requires this person to pay the GST at the time of importation based on the full value of the software package - that is, the value of the disk and the value of the software instructions stored on the disk. The value for duty of the software package is determined by Customs as being the price paid or payable for the goods.

Purchase price $350.00 (Canadian)

GST ($350 x 7%) $ 24.50

Custom Software

Supplies of custom software usually require that the customer pay ongoing licence fees for the right to use the software, as well as make an initial lump sum payment. On occasion, a customer who acquires custom software may wish to acquire the program outright and not just a licence.

It is the Department's view that the GST treatment of custom software differs depending on whether the customer acquires the software outright, or only under a licence.

Sale of custom software

When custom software is acquired outright from outside Canada, the Department will treat it as tangible personal property and will charge GST on its full value under Division III at the time of importation (i.e., the same treatment as off-the-shelf software).

Illustration #2

A U.S. supplier designs and develops a custom software package for the business needs of a registrant in Canada. The Canadianregistrant acquires the software outright and acquires full ownership rights to the program. The software is delivered on computer tapes. The Canadian registrant is the importer and is required by Customs to pay the GST at the time of importation.

The Department considers the custom software to be tangible personal property that is subject to tax under Division III at the time of importation in the same manner as imported off-the-shelf software. Customs will charge GST on the value for duty of the goods, which is based on the full value of the software package, i.e., the value of the tapes plus the value of the software. The value for duty of the software package will usually be the contract price paid or payable for the software.

Purchase price $1,000,000 (Canadian)

GST ($1,000,000 x 7%) $ 70,000

Licensed custom software

Effective December 1, 1994, the Department will treat custom software that has been acquired by way of licence as follows:

  • Customs will require that GST will be paid under Division III on the value of the carrier medium only (e.g., the disk). This is usually a value determined by Customs. The software program will be treated as intangible personal property and will be excluded from the value for duty.
  • Payments for the software program stored on the carrier medium, such as licence fees, lump sum payments, or other ongoing payments, will be subject to tax as follows:
    • under Division II (see illustration #3) if the non-resident supplier is registered for the GST, and the conditions in subparagraph 142(1)(c)(i) of the Excise Tax Act are met; or
    • under Division IV (see illustration #4) if the non-resident supplier is not registered for the GST and the software is not acquired for use exclusively in commercial activities.

Tax Treatment of Licensed Custom Software

Tax Treatment Under Division II

Under subparagraph 142(1)(c)(i) of the Excise Tax Act, a supply of intangible personal property is considered to be made in Canada if the property may be used in whole or in part in Canada and:

  • the recipient is a resident in Canada or registered for theGST; and
  • the supplier, even if a non-resident, is registered for the GST.

Effective December 1, 1994, the Department will require registered non-resident suppliers of licensed custom software to charge Division II tax to Canadian customers on the consideration for the licensed custom software if the software may be used in whole or in part in Canada.

Illustration #3

A Canadian registrant imports a custom software package from the United States for use in his or her business. The registrant acquires the software by way of a specific licence agreement with the U.S.supplier, who is also registered for the GST. The agreement requires the payment of a lump sum and an annual licence fee for the right to use the software. Under the terms of the licence agreement, the software can be used in Canada. The Canadian registrant imports the software on a CD ROM ("CD").

The Department considers the custom software to be intangible personal property for purposes of Division II, and the value of the CD should be separated from the value of the program stored on the CD at the time of importation. Customs will charge GST under Division III only on the value of the CD. The custom software is deemed to be supplied in Canada and the registered U.S. supplier must charge the GST under Division II on the amounts payable by the Canadian registrant (the licensee) under the terms of the specific licence agreement.

Division III - GST charged on the value of the carrier medium only

Value for duty of CD $18.00

GST ($18.00 x 7%) 1.26

Division II - charged on amounts payable under the terms of the licence agreement

The specific licence agreement calls for a lump sum payment of $300,000 (Canadian) and licence fees of $3,000 per month. The lump sum payment and the first month's licence fees are payable at the beginning of the licence period on the date specified in the licence agreement. The Canadian registrant may renew the licence agreement before the end of each year.

The registered non-resident supplier must collect the tax on the payments made by the Canadian registrant/licensee as follows:

First invoice issued for the lump sum payment:

Total paid $303,000 (Canadian)
GST collectible by registered non-resident
supplier ($303,000 x 7%) 21,210

Each subsequent invoice for the monthly fees:

Licence payment $ 3,000.00
GST collectible by registered non-resident
supplier ($3,000.00 x 7%) 210.00

The Canadian registrant may claim an input tax credit for the tax paid or payable to the extent that the software is for use in commercial activities.

Tax Treatment Under Division IV

If a non-resident supplier of licensed custom software is not registered for the GST, the Canadian customer may be required to self-assess the GST payable under Division IV on payments made for the software. Self-assessment is required if the custom software is not imported for use exclusively in the course of the customer's commercial activities, and it is not otherwise excluded from the definition of "imported taxable supply" in paragraph 217(c) of the Excise Tax Act.

If the Canadian customer imports the licensed custom software for use exclusively in the customer's commercial activities, GST does not apply under Division IV and the customer is not required to self-assess the GST on the payments made to the non-resident supplier for the software.

Illustration #4

A registrant in Canada imports a custom software package from the United States for use in the registrant's business, but not for use exclusively in commercial activities (for example, the registrant may be a financial institution, hospital, or university). The Canadian registrant acquires the software by way of a specific licence agreement with the U.S.supplier who is not registered for the GST and is not carrying on business in Canada. The agreement requires the payment of a lump sum and annual licence fees for the right to use the software in Canada. The Canadian registrant imports the software on a disk.

The Department will consider the custom software to be intangible personal property for purposes of Division III, and the value of the disk should be separated from the value of the program stored on the disk at the time of importation. Customs will charge GST only on the value of the disk. Since the custom software is not acquired for use exclusively in commercial activities, the Canadian registrant (the licensee) must self-assess the GST under Division IV on the amounts the registrant pays to the U.S.supplier for the software and remit the GST to Revenue Canada.

Division III - GST charged by Customs on the value of the carrier medium only

Value for duty of disk $18.00

GST ($18.00 x 7%) 1.26

Division IV - non-resident supplier is not registered for the GST and the software is not acquired for use exclusively in commercial activities

The specific licence agreement calls for a lump sum payment of $100,000 (Canadian) and an annual licence fee of $12,000 (for the first year). The licence fee and lump sum are payable together at the beginning of the licence period on the date specified in the agreement. The Canadian registrant may renew the licence agreement before the end of each year.

The Canadian registrant must self-assess the GST on the value of the consideration paid to the non-resident supplier under the software licence agreement. In this instance, the custom software is an "imported taxable supply" within the meaning of paragraph 217(c).

First payment (lump sum plus licence fee) $112,000

GST to be remitted ($112,000 x 7%) 7,840

Please refer to subsection 218(2) of the Excise Tax Act to determine when Division IV tax is payable.

Other Imported Computer Software Arrangements

Electronic transmission of software

A supply of computer software that is transmitted electronically is considered to be a supply of intangible personal property. Since nothing tangible is imported, the electronic transmission of software from outside Canada is not taxable under Division III. However, these supplies are taxable under Division II if the non-resident supplier is registered for the GST and the conditions in subparagraph 142(1)(c)(i) are met.

If the supply is made by an unregistered non-resident, the recipient of the supply must self-assess the tax under Division IV, if the software is not acquired for use exclusively in commercial activities. This is the same result as for custom software supplied on a hard carrier medium, as explained above.

Access to computer on-line programs

In some instances, a Canadian resident will access a computer on-line program by means of a modem and telephone in Canada. Although this is similar to the electronic transmission of software, on-line access to the software program is only for a specified period of time (i.e., for the period that the recipient is signed-on), andthere is therefore no transfer of property.

This means that the provision of an on-line computer program (which may include access to a variety of software programs) is a service, and not a supply of intangible personal property. Therefore, for the place of supply rules, either paragraph 142(1)(g) or 142(2)(g) may apply, depending on the facts, to determine the application of the GST.

If the non-resident supplier of the on-line service is registered, and the supply of the service is deemed by paragraph 142(1)(g) to be made in Canada, the supply is taxable under Division II. If the supply is made by an unregistered non-resident, the recipient of the supply is required to self-assess the tax under Division IV, if the on-line service is not acquired for use exclusively in commercial activities.

EFFECTIVE DATE

Division III Treatment

Customs will apply the policy relating to licensed custom software set out above as of

December 1, 1994, based on the release date of the goods. That is, for licensed custom software released on or after December 1, 1994, Customs will charge GST on the value of the carrier medium only.

Division II Treatment

As of December 1, 1994, a registered non-resident supplying custom software under a specific licence agreement will be required to collect tax from the Canadian licensee under Division II if the conditions in subparagraph 142(1)(c)(i) are met, except where there is evidence satisfactory to the Minister that tax on the full value under Division III has previously been paid in respect of supplies made under that software licence agreement. This requirement applies to existing licence agreements that call for ongoing periodic payments, as well as new agreements entered into on or after December 1, 1994.

Division IV Treatment

As of December 1, 1994, where an unregistered non-resident supplies custom software under a specific licence agreement to a person resident in Canada, the recipient of the supply will be required to self-assess the tax payable under Division IV, if the recipient does not acquire the software for use exclusively in commercial activities, except where there is evidence satisfactory to the Minister that the tax has previously been paid on the full value under Division III in respect of supplies made under that software licence agreement. This requirement applies to existing licenceagreements with ongoing periodic payments, as well as new agreements entered into on or after December 1, 1994.

HOW VALUE FOR DUTY IS DETERMINED

For an explanation of the rules used by Customs in determining value for duty of imported computer software, please refer to Customs Memorandum D13-11-6, Determining the Value for Duty of Computer Software. This memorandum reflects the new policy regarding the application of the GST to imported custom software supplied under a specific licence agreement.

IMPORTED COMPUTER SOFTWARE

Type of software and Terms of supply Software package treated as Status of non-resident supplier Use for which software is acquired Tax under
off-the-shelf tangible N/A N/A Division III on the value for duty (full value, usually the price paid)
custom software supplied outright tangible N/A N/A Division III on the value for duty (full value, usually the price paid)
custom software supplied by way of licence agreement carrier medium- tangible software - intangible unregistered not exclusively for commercial activities (paragraph 217(c)) carrier medium - Division III
software - Division IV
custom software supplied by way of licence agreement carrier medium- tangible software - intangible unregistered exclusively for commercial activities (paragraph 217(c)) carrier medium - Division III
software - not taxable (Division IV does not apply)
custom software supplied by way of licence agreement carrier medium- tangible software - intangible registered software may be used in Canada (subparagraph 142(1)(c)(i)) carrier medium - Division III
software - Division II
software (any type) transmitted electronically intangible unregistered not exclusively for commercial activities (paragraph 217(c)) Division IV
software (any type) transmitted electronically intangible unregistered exclusively for commercial activities (paragraph 217(c)) not taxable - Division IV does not apply
software (any type) transmitted electronically    intangible registered software may be used in Canada (subparagraph 142(1)(c)(i)) Division II
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