GST and the Place of Supply of Prepaid Telecommunication Products

Consider prepaid products that entitle the final purchaser to future telecommunication services—for example, personal identification numbers (PINs) and prepaid calling cards associated with a PIN, which provide for a certain number of minutes of inbound or outbound calling, in Canada or internationally. How does one determine whether the sale of such a product requires the collection of GST (as an in-Canada supply) and, if so, which provincial rate applies? The CRA’s present position on this question is challenging to apply: it requires one to make many assumptions about the ultimate use of the telecommunication services.

Telecommunication service is defined in part in ETA subsection 123(1) as “the service of emitting, transmitting or receiving signs, signals, writing, images or sounds or intelligence of any nature by wire, cable, radio, optical or other electromagnetic system, or by any similar technical system.” According to ETA paragraph 142.1(2)(b), the place of supply of the telecommunication service is located in Canada if at least two of the three listed functions are fulfilled—that is, the property must have been emitted in Canada, the property must have been received in Canada, or the billing location of the telecommunication service must be in Canada (the two-out-of-three rule). The billing location is the location of the telecommunication facility used to initiate the telecommunication service—for example, a cellphone (ETA subsection 142.1(1)). Note that the two-out-of-three rule is also used to determine the applicable provincial tax, in particular the HST and the QST (see Revenu Québec’s letter of interpretation 03-0106892, December 16, 2003).

With respect to prepaid products, the CRA’s longstanding position is that the amount paid is consideration paid in advance for the supply of a telecommunication service, with the result that the specific rules on the place of supply under ETA section 142.1 apply (see CRA Headquarters Ruling RITS Interpretation no. 8404, March 28, 2002). Thus, a registrant who sells prepaid telephone cards or PINs to a sub-distributor or a final purchaser must first determine—or even presume on the basis of the location of the sale—where the telecommunication will be emitted or received, or the location of the cellphone that will be used to initiate the telecommunication, even before the telecommunication has been effectively received or emitted by the final purchaser of the prepaid product. Given the uncertain application of the two-out-of-three rule, applying the GST—and, in particular, the HST or the QST—to the interprovincial supply of prepaid products between distributors becomes all the more complex. At present, no court has ruled on the validity of the CRA’s position.

A legislative amendment to clarify the taxes applicable to various prepaid telecommunication products, whether telecommunication services, incorporeal movable property, or gift cards, is both desirable and feasible. One possibility is to give prepaid products the same tax treatment as that currently provided to gift certificates, since the two products appear to have the same economic characteristics. This policy would require a change to the CRA’s April 2012 GST/HST Policy Statement P-202 on Gift Certificates, in which the CRA states that the specific ETA rules pertaining to gift certificates do not apply to the supply of a telephone card to be redeemed against future telecommunication services.

Stéphanie Jean
De Chantal D’Amour Fortier s.e.n.c.r.l., Montreal

Canadian Tax Focus
Volume 5, Number 2, May 2015
©2015, Canadian Tax Foundation