Foreign Buyers from Canadian Web Sites Must Pay Canadian Tax

As a result of a recent Federal Court of Appeal decision (Her Majesty The Queen v Dawn's Place Ltd, 2006 FCA 349), federal goods and services tax (GST) must be collected on subscription or access fees charged to foreigners via Canadian web sites. Canadian web site owners are therefore now facing an obligation to collect GST on membership subscriptions to their web sites from residents and non-residents alike. The appellant, Dawn's Place Ltd (DPL), operated a web site permitting the downloading of adult content images and video files on payment of a subscription fee. During 2001, DPL received fees amounting to almost $345,000, 90% of which was from non-resident subscribers. When challenged by the Canada Revenue Agency, DPL was initially successful before the Tax Court of Canada in arguing that it was supplying a zero-rated service (exempt from GST collection) because, under the Excise Act, the service amounted to "a supply of copyright … or other intellectual property or any … right … to use any such property where the recipient is a non-resident person". In the Federal Court of Appeal therefore, the issue was "whether access to an internet website operated by a Canadian enterprise (which is a supply of intangible personal property) is a zero-rated supply to any non-resident recipient (who is not a GST registrant), because the recipient has the right to download and retain a copy of copyrighted material accessed on the website." The three-judge panel decided that this exemption applied only if the copyright itself was transferred, or there was an agreement that the recipient was entitled to use the copyright – as would be the case, for example, with a transaction allowing the user to make commercial use of the material in a limited geographic area. The language in the license at issue, however, was much more restrictive: "Dawn's Place grants [the subscriber] a non-exclusive, limited and revocable license to download and view the content of this Web Site on your computer for your own personal and non-commercial use … " The Court of Appeal found that merely allowing copying of the copyrighted material was not sufficient to come within the scope of the exemption and be a zero-rated supply. Therefore Dawn's Place was required to charge GST on the subscription fees charged to all subscribers, regardless of where in the world they were located. This case has been widely criticized in the e-commerce community. Web site charging access or subscription fees would be well advised to talk to their tax advisors about the serious implications of this case. For the full text of the Federal Court of Appeal decision, see: http://decisions.fct-cf.gc.ca/en/2006/2006fca349/2006fca349.html Summary by: The Editor