Intangible Personal Property 

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Intangible Personal Property

A change to the Excise Tax Act ushers in zero-rating of GST for IPP.

FROM: NOV-DEC 2007 ISSUE | BY R. JASON RICHE

The law that specifies when intangible personal property (IPP) can be zero-rated for GST purposes changed in June, providing much-needed clarity on the matter.

Section 10.1 of Part V of Schedule VI of the Excise Tax Act received Royal Assent on June 22, 2007, and zero-rates all supplies of IPP made to non-residents that are not registered for GST. There are, however, certain exceptions, which generally concern supplies of IPP that are closely connected to Canada. The exceptions are akin to other such exceptions found in similar zero-rating provisions for services.

The provision applies to supplies of IPP made after March 19, 2007 and retroactively to supplies made before that time if GST wasn’t charged.

Before the change, section 10 of Part V in Schedule VI only permitted certain types of IPP, specifically the subset of IPP known as intellectual property (IP), to be zero-rated when supplied to non-residents, and had generally been recognized as being too restrictive. IPP supplied in Canada and not qualifying under section 10 (e.g., customer lists and distribution rights) generally required that GST be charged when supplied to non-residents. When recipient non-residents were not registered for GST, this tax represented an unrecoverable cost.

Case in Point

A high-profile court case illustrated the difficulty that existed in interpreting the application of section 10. The Dawn’s Place case was originally heard by the Tax Court of Canada on June 14, 2005, and dealt with the interpretation of this zero-rating provision. Dawn’s Place Ltd. (DPL) operated an adult content website selling subscriptions to customers primarily outside Canada. It was assessed for not collecting GST on these subscriptions. DPL thought it was providing a right to use copyrighted material and believed these supplies were zero-rated pursuant to section 10. Justice J.M. Little of the Tax Court of Canada agreed with DPL and overturned the assessment.

The Crown, unhappy with this reasoning, appealed the decision. The Federal Court of Appeal agreed with the Crown and overturned the Tax Court’s decision by pointing out that a distinction must be made between the supply of or right to use a copyright and the supply of or right to use images that are subject to copyright, and that only the former fell within the ambit of section 10. Accordingly, the precedent set by this decision was that section 10 was to be read restrictively with only the supply of a “bundle of rights that comprises the copyright” being eligible for zero-rating. Since DPL was only supplying customers with the right to view images that were subject to copyright and not a bona fide right to use the copyright itself, its supplies were unable to be zero-rated. DPL applied for leave to appeal to the Supreme Court of Canada, but it is not likely that this appeal will be heard given the change in the law. Notably, DPL’s supplies would have been zero-rated pursuant to new section 10.1.

More Guidance

To facilitate application of section 10.1, the CRA has released GST/HST Info Sheet GI-034 Exports of Intangible Personal Property, which provides further detail on this new rule. The publication offers several helpful examples of supplies of IPP that qualify for zero-rating under section 10.1 (all of which concern e-commerce-related transactions). It does not provide examples of where the exceptions apply.

Suppliers previously assessed for not collecting GST on such supplies can apply for a refund before June 22, 2009.

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