A Web Designer’s Guide to Understanding Canadian Tax Laws – Part 1

I am not an accountant, a tax lawyer, or an employee of the Canada Revenue Agency, I am a web designer, and I wrote this article because I wanted to help other Canadian web designers who might also be searching for the answer to the same question I had when I first started my web design business: “Should I be charging tax for my web design services?”.

This article is divided into two parts. Part 1 will address the Provincial Tax Laws as they apply specifically to Web Design Services, and Part 2 will address the Federal Tax Laws – The Goods and Services Tax (GST) and the Harmonized Sales Tax (HST).

Part 1 – Provincial Sales Tax (PST) / Retail Sales Tax (RST)

Should I be charging Provincial Sales Tax (PST) or Retail Sales Tax (RST) for my web design services?

This question cannot be answered with either a “YES” or “NO” because the answer completely depends on the Province you live and work in. Each Province approaches the issue of Provincial Sales Tax ( as it applies to Web Design Services) in different ways. We are going to be looking at each Province and outlining the criteria that determines whether you have to charge Provincial Sales Tax on your web design services or not. That being said, it is important to remember that when it comes to charging a client Provincial Sales Tax, it can only be for clients that live in the same Province you do. If I live and conduct my Web Design business in Ontario, and my client lives outside of the province, or even the country, I would not be charging them Provincial Sales Tax.

For starters, let’s get Alberta, North West Territories, Nunavut and Yukon out of the way since they do not have Provincial Sales Tax. If you live and work in any of these Provinces then by all means please continue reading the rest of this article, or you can jump right to Part 2 since that covers Federal Tax Laws.

Newfoundland and Labrador, Nova Scotia or New Brunswick have amalgamated both their Provincial and Federal Sales Tax into what is called the Harmonized Sales Tax (HST). If you live and work in any of these Provinces I will be dealing with the HST in Part 2 of this article; but please feel free to continue reading.

Unfortunately Prince Edward Island and Quebec had absolutely no comprehensible information regarding Web Design Services and whether Provincial Sales Tax applies to it or not. If anyone reading this article lives in either of those two Provinces and is able to shed some light on this issue please CONTACT me, it would be most appreciated.

That leaves Ontario, British Columbia, Manitoba and Saskatchewan.

Ontario (8% RST)

In Ontario the Provincial Sales Tax is actually referred to as the Retail Sales Tax (RST). This RST only applies to services that are deemed taxable by the Province. The creation of a website is deemed a non-taxable service as long as the following criteria are met[1]:

1. The design is transferred to the client electronically, or placed directly on a server which is connected to the internet, AND
2. You do not provide the client with a hard copy version of the design, AND
3. The website does not contain a taxable computer program.

Let’s look a bit deeper into those criteria.

Criteria 1 – If I email my client all the files for the final design, or if I upload them to the server where the client’s website resides, I will have satisfied this criteria.

Criteria 2 – As long as I do not provide the client with some type of hard copy of the final design I will have satisfied this criteria. For example, if I placed all of the necessary files for the final design onto a CD-ROM, DVD-ROM, floppy disk (if people still use those), or even if I printed the final design out onto a piece of paper and provided that to the client, all of these are considered a “hard copy” of the final design and would violate this criteria.

What about design proofs and approval sheets? Are they considered a “hard copy” of the design?

Ontario states that “you are not required to charge RST on proofs or approval sheets sent to your customer before the concept is agreed upon. However, if you provide a hard copy of your final design the RST applies to the total charge.”[2]

Criteria 3 – As long as the website that you design for you client does not contain a “taxable computer program” you are satisfying this criteria.

What is a taxable computer program?

Ontario considers all computer programs to be taxable, unless the program qualifies as a custom computer program. Examples of taxable computer programs[3]:

• packaged, pre-written, ‘canned’ or ‘off-the-shelf’ programs
• system programs or operating systems
• application programs, such as word processors, spreadsheets, databases,Internet browsers and games
• computer program modules and interface programs
• upgrades that are provided in a ready-to-install format

If you design a website for your client and it contains a taxable computer program then you must charge RST on the entire price of the design. You cannot charge the client separately for the design and the computer program to avoid paying the RST. The RST will be charged on the price of the web design service as a whole.

What is a custom computer program?

Ontario considers a computer program to be “custom” under the following circumstances[4]:

• It is designed and developed specifically for one person, and that person will be the only one to use it.
• You can develop a custom computer program from scratch, or from extensively modifying a computer program that was pre-written, or by using pre-developed code from a library maintained and owned by the programmer.

If you design a website that contains a “custom computer program” the you are not required to charge RST on the price of the web design.

What about something like a Java applet, is that a taxable computer program?

Ontario does not consider a applet to be a taxable computer program “because it is not in an executable format and requires a web browser to interpret it.”[5]

*For more detailed information regarding taxable computer programs and custom computer programs please refer to the following guide “RST Guide 650 – Computer Programs and Related Services”

All three of the main criteria that we have just examined must be met; failure to satisfy any one of them results in you having to charge your client RST on the entire price of the web design. For example, say you have designed a website for a client, it doesn’t contain a taxable computer program and you emailed all the files for the final design to the client, however, the client still wants you to provide them with a CD-ROM that contains all the files so that they have a “hard copy” of the final design. Because of this clients request you would have to charge them RST on the entire price of the design. This is why it is very important to explain everything to your client before hand, and clearly outline in your contract or Project Agreement exactly how the final design will be delivered to the client, whether the design contains any custom computer programs, and if the client will be receiving a hard copy of the final design or not.

British Columbia (7% PST)

In British Columbia, Web Hosting, Web Design or Domain Registration are non-taxable services, and as such you do not charge PST on those services.[6]

The logic behind this is that when you produce a website design “you are not producing a tangible product for your client. In this case, you are providing a non-taxable service even if you deliver a copy of the original electronic product on a tangible medium.”[7] This tangible medium (i.e. CD-ROM, disk, etc.) is considered incidental to the service you are providing. However, “only the original copy, or first final version, of a design provided to your client on a tangible medium qualifies as incidental. You charge PST on any subsequent copies provided to your client.”[8] If you do have to charge PST it is for the full price (tangible product + design services).

Manitoba (7% PST)

Manitoba gets quite detailed when it comes to taxation and Web Design services. Some of the Web Design services that Manitoba considers tax exempt are[9]:

• Consulting services to discuss design, options or benefits of a web page with potential customers.
• Design and production of the web page – regardless of whether the product is placed directly on the internet or delivered on a disc, CD-ROM, or electronically to the customer.
• Domain name search, application or registration
• Website hosting services
• Custom software programs – developed specifically for the client’s web page (applets)

If the computer program is pre-written then it is not considered a custom software program and PST applies. This is where things can get a bit complicated though. If I am the web designer and I went and purchased the prewritten program and then included the price of the program in the price of the web design, technically I am the consumer of the program and I have to pay PST on its purchase price; the client does not get charged PST for the program.

For example, my client wants a website design with specific functionality. I don’t have the skills to code a program that will provide the client with what they want but I do know of an existing program that will. I go out and buy the program with my own money but make sure that I get my money back by including the cost of the program into the overall price for the web design. I was the initial consumer of the computer program, not the client, so I will have to pay PST on the price of the computer program. However, if I end up charging the client separately for the computer program, not including it in the overall web design price, then I must charge the client PST on the cost of the computer program. This is considered resale of the computer program, meaning that I purchased the program for resale to the client, so I wouldn’t pay PST when I purchased it but I will charge the client PST when I sell it to them. In either scenario Manitoba still collects PST on the sale of the computer program.

Saskatchewan (5% PST)

If you live and run your Web Design business in Saskatchewan you have to charge your client PST for your services. In Saskatchewan, tax must be collected on all charges for software and computer services: “Web site and web page design and creation”[10] are considered Computer Services and are subject to PST, regardless of how the service is delivered to the client (i.e. electronically, CD-ROM, disk, etc.)

Provincial Sales Tax (PST) / Retail Sales Tax (RST) – Recap

Hopefully I haven’t confused anybody, I realize it may be a lot to digest, which is why I have broken this article into two parts.

Just a reminder that I am not an accountant, a tax lawyer, or an employee for the Canada Revenue Agency, I am a Web Designer and this article is my own interpretation of the exhaustive material that is out there. If you require any expert or legal advice please contact the appropriate Ministry in your Province. I am including the links below:

• Ontario – Ministry of Finance
• British Columbia – Ministry of Small Business and Revenue
• Manitoba – Ministry of Finance
• Saskatchewan – Ministry of Finance

References:

(click the reference # to return to its location in the article)

[1]

Ontario Ministry of Finance “RST Guide 651 – Internet Related Services”
http://www.rev.gov.on.ca/english/guides/rst/pdf/651.pdf

[2]

Ontario Ministry of Finance Interpretation Letter AGD-0006
http://www.rev.gov.on.ca/english/interp/rst/pdf/agd0006.pdf

[3]

Ontario Ministry of Finance “RST Guide 650 – Computer Programs and Related Services”
http://www.rev.gov.on.ca/english/guides/rst/pdf/650.pdf

[4]

Ontario Ministry of Finance “RST Guide 650 – Computer Programs and Related Services”
http://www.rev.gov.on.ca/english/guides/rst/pdf/650.pdf

[5]

Ontario Ministry of Finance Interpretation Letter AGD-0006
http://www.rev.gov.on.ca/english/interp/rst/pdf/agd0006.pdf

[6]

British Columbia Ministry of Small Business and Revenue – Bulletin SST 133
http://www.rev.gov.bc.ca/ctb/publications/bulletins/sst_133.pdf

[7]

British Columbia Ministry of Small Business and Revenue – Bulletin SST 128
http://www.rev.gov.bc.ca/ctb/publications/bulletins/sst_128.pdf

[8]

British Columbia Ministry of Small Business and Revenue – Bulletin SST 128
http://www.rev.gov.bc.ca/ctb/publications/bulletins/sst_128.pdf

[9]

Manitoba Finance Taxation Division – Bulletin No.032

http://www.gov.mb.ca/finance/taxation/bulletins/032.pdf

[10]

Saskatchewan Finance Revenue Division – Information Bulletin PST – 7

http://www.gov.sk.ca/finance/revenue/pst/bulletins/pst7.pdf