Tax Treatment of Imported Computer Software
GST/HST Policy Statement P-150
Please note that the following Policy Statement, although correct at the time of issue, may not have been updated to reflect any subsequent legislative changes.
Date of Issue
July 14, 1994
Subject
Tax Treatment of Imported Computer Software
Legislative Reference(s)
Section 142, subsections 143(1), 165(1), section 212, subsection 215(2), section 217, subsection 218(1), 221(1) of Part IX of the Excise Tax Act, section 8 of GST Regulations (SOR/91-30).
National Coding System File Number(s)
11645-3, 11645-4
Effective Date
December 1, 1994
Text
Issue and Decision:
To establish an official policy on the question of whether computer software imported on a physical medium should be treated as tangible personal property or intangible personal property for the purpose of the GST and to explain whether the imported software is taxable under Division III, Division II or Division IV.
The Department's current administrative position is that all computer software imported on a physical medium is taxable on its full value (that is, the value of the carrier medium and the value of the program stored on the medium) under Division III at the time of importation, except in those limited circumstances where section 8 of the Value of Imported Goods (GST) Regulations applies.
The Department has also taken the position that software supplied on a physical medium by a non-resident supplier is tangible personal property for the purpose of section 142. This position was questioned by some professional advisers who are of the opinion that custom software (i.e. software supplied subject to a specific licence agreement between the licensor and a particular customer or software that is specially designed and developed for a particular customer) should be characterized as intangible personal property for the purpose of section 142 regardless of how the software is delivered (i.e. on a physical medium or transmitted electronically). They have advised their clients on this basis and have requested an official policy statement from Revenue Canada on this issue.
The tax consequences under the Excise Tax Act can be quite different depending on whether software delivered on a physical medium is characterized as tangible personal property or intangiblepersonal property. For example, if software stored on a disk were to be characterized as intangible personal property,
- subparagraph 142(1)(c)(i) would deem the supply to be madein Canada if the software may be used in whole or in part in Canada and the recipient is resident in Canada or registered.
- a registered non-resident supplier would be required to charge its Canadian customer Division II tax if the software may be used in whole or in part in Canada.
- if the non-resident supplier is not registered or not carrying on business in Canada, subsection 143(1) would deem the supply to be made outside Canada. In these circumstances, the recipient may be required to self-assess the tax under Division IV on the payments made for the software (that is, if the software is an "imported taxable supply" within the meaning of section 217).
On the other hand, the Department's current administrative position of characterizing software supplied on a physical medium as tangible personal property means that
- generally a registered non-resident supplier is not required to charge Division II tax in respect of a software package shipped to a customer in Canada (in most cases, section 142 deems this supply to be made outside Canada),
- the full value of the software is subject to the GST under Division III at the time of importation; the tax is paid by the importer (usually the Canadian customer).
Software terminology
- The term "off-the-shelf" software is used to indicate pre-packaged, commercially-available software programs, such as, WordPerfect or Lotus 1-2-3. Off-the-shelf software is supplied with a standardized licence agreement (referred to in the industry as a "shrink-wrap" licence). Usually the document contains a notice advising the purchaser that opening the sealed package or using the software constitutes acceptance of the terms of the licence agreement.
- The term "custom software" refers to other types of software that is specially designed, developed or modified or a particular customer. Where the supply is made pursuant to a specific licence agreement between the software licensor (or sub-licensor) and a specific customer (licensee), the software producer retains extensive ownership rights in the program and grants theuser a licence to use the software subject to certain conditions. Custom software usually involves the payment of periodic licence fees for the right to use the software, and frequently, an initial lump sum is also payable. On occasion, a party acquiring custom software may wish to acquire of the program outright and not just under a licence.
Review of GST treatment of imported software
In addition to the issue of the correct characterization for the purpose of the GST of software imported on a physical medium, problems were encountered by Customs in determining the value for duty of custom software for the purpose of Division III.
Essentially, the value for duty is the amount on which the GST under Division III is charged by Customs.
The treatment of off-the-shelf software has been relatively problem-free, since the method of valuation used by Customs in determining the value for duty of these imports is the transaction value method, that is, the price paid or payable. However, in the case of custom software that is licensed to the recipient, an alternative method of valuation must be used, such as the computed value method. This method of valuation has resulted in inconsistencies and uncertainly for importers.
Because of these difficulties, Excise/GST, in close consultation with Customs, has developed a new approach to assessing the GST on licensed custom software imported on a physical medium.
New Rules For Imported Software
The following new rules for the treatment of software imported on a physical medium will be effective as of December 1, 1994.
Division III treatment
The treatment will depend on whether the package is off-the-shelf software or custom software and if custom software, whether the contract between the parties is a software licence agreement or for an outright acquisition.
Off-the-shelf software
(a) off-the-shelf, pre-packaged software will be taxed on its full value (generally the price paid or payable for the goods) under Division III at the time of importation. This is the current administrative treatment.
Acquisition of custom software
(b) where custom software has been acquired outright by a Canadian resident from outside Canada, GST under Division III will be charged on its full value (i.e. sametreatment as off-the-shelf software). This is the current administrative treatment.
Licensed custom software
(c) where custom software has been acquired by way of licence from a non-resident, tax under Division III will be charged on the value of the carrier medium only as determined by Customs. The software program will be treated as intangible personal property which Customs will exclude in determining value for duty for the purpose of Division III. This represents a change from current treatment. Payments (licence fees, lump sum or other payments) for the software program stored on the carrier medium will be taxable under Division II or under Division IV, depending on whether or not the non-resident supplier is registered for the GST and on whether the software may be used in whole or in part in Canada.
Division II treatment
Licensed custom software
If the non-resident supplier of licensed custom software is registered, the non-resident supplier must collect from the recipient and remit tax on the consideration for the software supply under Division II, if pursuant to the provisions of subparagraph 142(1)(c)(i), the supply is deemed to be made in Canada.
Division IV treatment
Licensed custom software
(i) where the non-resident supplier of licensed custom software is not registered or not carrying on business in Canada, the recipient will be required to self-assess the tax under Division IV on the payments made for the software, if the custom software is not acquired for use exclusively in the course of commercial activities of the recipient and not otherwise excluded from the definition of "imported taxable supply" in section 217.
(ii) if the licensed custom software is imported for use exclusively in the course of commercial activities of the recipient, there is no requirement to self-assess the tax under Division IV on the payments made to the non-resident supplier for the software.
Registered non-resident suppliers
Required to charge Division II tax
Subparagraph 142(1)(c)(i) deems a supply of intangible personalproperty to be made in Canada if the property may be used in whole or in part in Canada and the recipient is resident in Canada or registered. Accordingly, as of December 1, 1994, registered non-resident suppliers of licensed custom software will be required to charge Division II tax when invoicing Canadian customers for the licensed software if the software may be used in whole or in part in Canada.
SAMPLE RULINGS
Example 1
Statement of Facts
A software package, such as WordPerfect or Lotus 123, is imported from a U.S. supplier by a person resident in Canada. The Canadian purchaser is the importer and therefore responsible for paying the GST under Division III of the Excise Tax Act if the software is considered to be "imported goods" within the meaning of section 212.
Ruling Requested
Is the software package subject to the GST under Division III of the Excise Tax Act at the time of importation?
Ruling Given
Being off-the-shelf, commercially-available software, the package is taxed under Division III 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. In this case, the value for duty of the software package would be the price paid or payable for the goods (the transaction value method of valuation).
E.g.
Division III - GST charged by Customs
Purchase price | $350.00 (Canadian) |
GST ($350 x 7%) | $24.50 |
Example 2
Statement of Facts
A custom software package is specifically designed and developed by a U.S. supplier for the business needs of a person resident in Canada (Company A). The activities of Company A include the making of exempt supplies. The software program is not acquired for use exclusively in the course of commercial activities of the recipient.
Company A acquires the software outright from the U.S. supplier and imports the software on a physical carrier medium (disk).
The U.S. software supplier is not registered for the GST and is not carrying on business in Canada.
Rulings Requested
(a) Is the custom software package subject to the GST under Division III of the Excise Tax Act at the time of importation?
or
(b) Is Company A required to self-assess and remit the GST under Division IV in respect of the purchase price paid to the non-resident for the custom software?
Rulings Given
(a) In these circumstances, the custom software is taxed under Division III at the time of importation based on the full value of the software package, that is, the value of the carrier medium and the value of the software. In this case, the value for duty of the software package would be the price paid or payable for the goods (the transaction value method of valuation).
(b) Since the custom software in these circumstances is treated as if it were tangible personal property, Division IV has no application. The tax treatment is similar to that of imported off-the-shelf software.
E.g.
Division III - GST charged by Customs
Purchase price | $1,000,000(Canadian) |
GST ($1,000,000x7%) | $70,000 |
Example 3
Statement of Facts
A custom software package is imported from a U.S. supplier by a person resident in Canada for use in the resident's business.
The software is supplied by way of a specific licence agreement entered into between the U.S. supplier and the Canadian licensee. The agreement calls for a lump sum payment of $300,000 (Canadian) and licence fees of $3,000 per month for the right to use the software. The initial invoice will be for the lump sum payment and the first month's licence fee. Under the terms of the licence agreement, the software may be used in Canada. The software is delivered on a physical carrier medium (disk).
The U.S. software supplier is registered for the GST.
Rulings Requested
(a) Is the licensed custom software subject to the GST under Division III of the Excise Tax Act at the time of importation?
or
(b) Is the registered non-resident supplier of the custom software required to charge Division II tax in respect of the amounts payable by the Canadian licensee pursuant to the terms of the software licence agreement?
Rulings Given
(a) As of December 1, 1994, where licensed custom software is imported, the value of the carrier medium is separated from the value of the program stored on the carrier medium. Division III tax is payable only on the value of carrier medium as determined by Customs.
E.g.
Division III - GST charged by Customs
Value for duty of disk | $18.00(Canadian) |
GST ($18.00x7%) | $1.26 |
(b) Since the supply of custom software in this case is deemed by subparagraph 142(1)(c)(i) to be a supply made in Canada, the registered non-resident supplier is required to charge Division II tax in respect of the amounts payable by the Canadian licensee pursuant to the terms of the software licence agreement.
E.g.
Division II - Tax collected by registered non-resident
First invoice
Total payable | $303,000 (Canadian) |
GST collected by supplier ($303,000x7%) |
$21,210 |
Each subsequent invoice for monthly fees
Licence payment | $3,000.00 |
GST collected by supplier ($3,000x7%) |
$210.00 |
Example 4
Statement of Facts
A custom software package is imported from a U.S. supplier by a
person resident in Canada for use in the resident's business. The importer, a financial institution, is a registrant whose activities include the making of exempt supplies. The software program is therefore not acquired for use exclusively in the course of commercial activities of the recipient.
The software is supplied by way of a specific licence agreement
entered into between the U.S. supplier and the Canadian licensee.
The agreement calls for a lump sum payment of $100,000 (Canadian) and an annual licence fee of $12,000 for the right to use the software in Canada. The licence agreement is for a period of three years and may be renewed at the end of that period. The software program is delivered on a physical carrier medium (disk).
The U.S. software supplier is not registered for the GST and is not carrying on business in Canada.
Rulings Requested
(a) Is the licensed custom software subject to the GST under Division III of the Excise Tax Act at the time of importation?
or
(b) Is the importer required to self-assess the GST under Division IV in respect of the licence fees or other amounts paid to the non-resident for the custom software?
Rulings Given
(a) As of December 1, 1994, where licensed custom software is imported, the value of the carrier medium is separated from the value of the program stored on the carrier medium. Division III tax is payable only on the value of carrier medium as determined by Customs.
E.g.
Division III - GST charged by Customs
Value for duty of disk | $18.00(Canadian) |
GST ($18.00x7%) | $1.26 |
(b) Since the licensed custom software is considered to be intangible personal property and this supply is not acquired for use exclusively in the course of commercial activities of the recipient, the Canadian licensee (the financial institution) is required to self-assess the tax under Division IV on the amounts paid to the non-resident supplier in respect of the software. The custom software is an "imported taxable supply" within the meaning of paragraph 217(c).
NOTE - Subsection 143(1) deems this supply to be made outside Canada (i.e. because the supply of the intangible personal property was made by an unregistered non-resident); hence the need to consider the application of Division IV.
E.g.
Division IV - Self-assessment of the GST by the recipient
First payment (lump sum plus licence fee) | $12,000 |
GST to be remitted ($112,000x7%) | $7,840 |
Second year (annual licence fee) | $12,000 |
GST to be remitted | $840 |
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