A non-resident who sells software into Canada may be required to
levy Canada's Goods and Services Tax
("GST"—Canada's VAT) even though the
non-resident does not carry on business in Canada. This depends on
whether the software is "off the shelf" or custom,
whether it is licensed or sold and whether the non-resident is
already a GST registrant. To skip this analysis and register for
GST out of an abundance of caution can therefore subject a sale to
GST when GST would not otherwise apply.
Off-the-shelf software is pre-packaged, commercially available
software that one may pull "off the shelf" in a shop.
Such software typically comes with a standardized ("shrink
wrap") licence agreement which binds the customer by reason of
the customer having opened the box or loaded the software. This
kind of software is considered to be tangible personal property
and, as such, is always subject to GST on importation. The key,
then, for the supplier is to ensure that delivery is made outside
Canada, i.e., Ex Works—before
Off-the-Shelf software that is sold online is considered to be
intangible property. Unlike tangible personal property, it
is not taxed upon importation. Instead, the supply is deemed to
have been made in Canada. The supplier is therefore required to
levy the GST without the Ex Works alternative available to
bricks and mortar suppliers.
Customized software is altogether different. If a client
commissions the supplier to (a) program new software which the
client will own outright or (b) modify the client's existing
software, the Canada Revenue Agency focuses on the fact that the
client owns the software and so considers the supplier to charge
for the programming service rather than the program. Since
services are only subject to GST if performed in Canada,
programming services performed abroad are
exempt—unless the supplier is a GST registrant.
It is therefore important to understand the GST implications before
rushing to become a registrant.
In practice, suppliers of custom software will often send
employees to Canada to install the software and provide training.
If, in doing so, the supplier is considered to carry on business in
Canada then the supplier must become a GST registrant and levy GST.
Thus, not only will the installation and training services
become taxable, but so also will the software, for the reasons just
described. However, a good Canadian tax advisor can enable the
supplier to perform installation and training services in Canada
without being considered to carry on business in Canada.
It is therefore essential to consult a Canadian tax advisor
prior to entering into any agreement so that the non-resident
supplier can avoid those GST registration, withholding and
remittance requirements that are so commonly and unnecessarily
incurred by the unwary.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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