Membership has it Privileges:   Dawn’s Place & GST on Website Access

(As originally published in GST & Commodity Tax Journal, December 2005)

The scope of the zero-rating provision for “intellectual property” in section 10 of Part V of Schedule VI of the Excise Tax Act (“section 10”, and the “ETA”) has been complicated from the get go.

When first introduced, as part of the 1991 original GST legislation, many observers noted that the section did not zero-rate all exports of “intangible personal property” (“IPP”), but only a sub-class of intangible property, being certain listed “intellectual property”.  And when read in light of the encompassing “place of supply” rules for IPP (where the mere ability to use the IPP in Canada – even if no actual use ever occurs – makes the IPP “supplied in Canada” and therefore subject to Division II GST), the apparent limitations of section 10 grew even more significant.

In the recent Dawn’s Place (2005 TCC 721) case, the Tax Court has considered the ambit of section 10, and the interpretative provisions in the  Copyright Act which colour the zero-rating provided for in section 10 – concluding that paid access to a business website involved the supply of copyright, which could be zero-rated in certain instances under section 10.

It is required reading for anyone interested in determining the potential ambit of section 10, and the possible zero-rating of other supplies of intellectual property to non-registrant non-residents.

Facts

The appellant in the case, (“Dawn”), operated an “adult content” website (“Dawn’s Place”), granting access to the website to residents and non-residents of Canada , all for a monthly fee – styled by Dawn as a “membership fee”.

In return for their membership fees, Dawn’s customers were each treated to video and still images of Dawn, in what can be aptly described as a wide variety of compromising situations.

While Dawn appeared willing to do many things, the one thing Dawn did not do, was charge GST on the membership fees paid to her by her customers.

The issue for the Tax Court was the GST status of the membership fees, and the differing treatments as between fees paid by the residents and the non-residents of Canada .

The Issue

Since it was fairly clear that the fees paid by residents of Canada would be taxable for GST purposes, the real issue in the case was the possible zero-rated status of the fees paid by the non-residents. 

Dawn relied on section 10, which zero-rates the following types of supplies:

A supply of an invention, patent, trade secret, trade-mark, trade-name, copyright, industrial design or other intellectual property or any right, licence, or privilege to use any such property, where the recipient is a non-resident person who is not registered under Subdivision d of Division V of Part IX of the Act at the time the supply is made.  

Specifically, Dawn indicated that she was supplying copyright, or other intellectual property.

The Decision

In considering the proper ambit of section 10, the Tax Court first enumerated the three branches to the application of the zero-rating under that provision:

(1)   The supply must be of “an invention, patent, trade secret, trade-mark, trade-name, copyright, industrial design or other intellectual property or any right, licence or privilege to use any such property”;

(2)   The supply must be to a non-resident person; and

(3)   The non-resident must not be a GST registrant at the time the supply is made.

With respect to the first branch of the three part test, and the meaning of the words “copyright” and “intellectual property”, the Court started with the definitions of those words in Black’s Law Dictionary, and then moved to consider any special meanings in the Canadian Copyright Act – in an effort to determine whether the information and images on Dawn’s website could at law be the subject of a copyright.  The Court considered that definitions of key terms in the Copyright Act, including “artistic work”, “photograph”, and “compilation”, suggested that Dawn’s original photographs, her digitally enhanced photographs, drawings and logos, were “artistic work”, as that term is used in the Copyright Act.  As the Copyright Act required “artistic work” to be original for copyright to be claimed, the Court looked to related jurisprudence to determine what constituted “originality” within the meaning of that Act. 

After applying those principles, and determining that the information on the website was “original” work, the Court concluded that the website was the subject of copyright (as that term is used in the Copyright Act), and concluded that the supply of access to the website did meet the first branch of the section 10 test. 

With respect to the second and third requirements, the Court ordered the CRA to review the taxpayer’s records to determine how many of the subscribers were non-residents and non-GST registrants, with supplies to residents being taxable, and supplies to “non-residents” being (potentially) zero-rated.

Commentary

Dawn’s Place is interesting in a number of respects (not the least of which is the amount of money that this type of website generates – e.g., for Dawn, some Cdn $344,000 in calendar year 2001 alone), and bears three separate comments.

First, the case demonstrates that in interpreting the requirements of the ETA, other related jurisprudence often comes directly into play, and often “carries the day” in terms the meaning of the words used in the ETA.  With respect to the ambit of section 10, Dawn’s Place aptly demonstrates that related statutes and jurisprudence like those found in the Copyright Act will be relevant, and presumably, that means that statutes and jurisprudence developed under the Patent Act, Trademarks Act,  and Industrial Design Act will also be relevant to future cases.

Second, and while not expressly dealt with by the Court, it would also have been an interesting discussion as to whether the supply of the “membership” was in the nature of a supply of a “service” rather than a supply of “intangible personal property”.  While it is likely that the Tax Court rightly concluded that the supplies were supplies of IPP, and more specifically “copyright”, some discussion on that bed-rock point would have rounded out what was generally a very good discussion on the issues underlying the case.

Finally, and in terms of the ultimate application of section 10 to the facts of the case, it may well be that Dawn is still in for some tax difficulties, as the Tax Court was not prepared on the (rather bare) evidence before it to conclude that the supplies were in fact zero-rated – leaving it instead to the CRA to determine if Dawn’s records substantiated supplies to “non-residents”, who were not “GST registrants”.  While credit card and billing information would likely be able to answer the former question, it would be unlikely that Dawn would have been asking her customers whether or not they were “GST registrants”.  On the other hand, and assuming that her customers were all acting in their “personal” and not “business” capacities when acquiring their particular supplies, it might well be a reasonable conclusion that they were all likely not “GST registrants”.

Authors:

Robert G. Kreklewetz & Vern Vipul

Millar Kreklewetz LLP