Digital Sales – Proposed GST/HST Rules In E-Commerce Supplies
In May 2019, Canada’s Office of the Auditor General published a report that estimated the country lost CA$169 million in indirect taxes on “foreign digital products and services sold in Canada in 2017.” The report also found that Canada’s sales tax system led to unfair competition between businesses based in Canada and their foreign counterparts, and therefore warranted a significant change.
As part of the 2020 Fall Economic Statement, the government announced a new series of tax measures that will make cross-border digital services and products subject to goods and services tax (GST)/harmonized sales sax (HST). These measures will significantly impact non-resident vendors and online platform operators. Effective July 1, 2021, the proposed changes will require certain non-resident vendors and operators of online platforms to register for, collect, and remit Goods and Services Tax (GST)/Harmonized Sales Tax (HST) on:
- sales of digital products and services provided to Canadian customers,
- goods supplied through fulfillment warehouses located in Canada and made by non-resident vendors directly through websites,
- supplies made via short-term accommodation platforms.
Sales of digital products and services provided to Canadian customers
Under current rules, foreign vendors with no physical presence in Canada who sell digital products or services to consumers in Canada generally do not have to collect GST/HST. However, Canadian vendors who sell digital products and services do have to charge GST/HST, which makes their products and services more expensive and less competitive. An example is Netflix which is currently not viewed as carrying on business in Canada and not required to register for GST/HST. Under the new measures, Netflix will be required to register to collect tax from customers in Canada that are not registered for GST/HST, putting Netflix on equal footing with Canadian resident streaming service vendors already required to collect tax from customers.
To level the playing field, the new measures would require foreign-based online vendors and digital platform operators with no physical presence in Canada that exceed a CA$30,000 CAD revenue from taxable supplies over a 12-month period, to register, collect and remit GST/HST on certain taxable sales. These transactions include sales of digital products and services such as mobile apps and music/movie streaming to consumers in Canada.
Goods supplied through fulfillment warehouses located in Canada and made by non-resident vendors directly through websites
The new measures would impose GST/HST on all sales to Canadians facilitated by non-resident vendors or digital platform operators of goods located in Canadian fulfillment warehouses. The proposed measures would require such vendors and digital platform operators (with sales over CA$30,000 over a 12-month period) to register for GST/HST under the normal regime and collect and remit GST/HST on sales to Canadians of goods located in Canadian fulfillment warehouses.
Digital platform operators will be required to file an annual information return with the CRA for the calendar year by six months after the end of the calendar year. Fulfillment warehouses must notify the CRA that they are carrying on as a fulfilment business. They must also maintain records about their non-resident clients and the goods stored on their behalf.
Supplies made via short-term accommodation platforms
Many property owners use digital platforms (i.e. Airbnb) to rent out their residences or other properties, but they don’t charge GST/HST because either they’re unaware of the rules or their rentals are below the CA$30,000 registration threshold. This poses fairness concerns for hotels and other traditional accommodation providers.
The new rules propose to apply GST/HST on all platform-based short-term rental accommodation supplied in Canada by Canadian and foreign property owners alike. If the property owner is GST/HST-registered, they would have to collect and remit GST/HST on their short-term rentals. If the property owner is not registered, then the accommodation platform operator will be deemed to have made the supply and will be responsible for collecting and remitting the tax.
Accommodation platform operators would be able to register, collect and remit GST/HST under the simplified regime.
To help the CRA administer these rules, accommodation platform operators would be required to maintain records and file an information return with the CRA for each calendar year by six months after the end of the calendar year.
GST/HST rates – Provincial considerations
Canada’s GST/HST rates are determined by the consumer’s residence. A person is considered a Canada resident for tax purposes in this case if two or more of the following are used at the time of the relevant transaction:
- Canadian home or billing address
- Canadian internet protocol
- Canadian bank or payment
- Canadian subscriber identification module card
The location of the consumer will determine the relevant provincial sales tax (PST), Quebec sales tax (QST) in addition to the GST and HST in specific cases.
Currently, three among the provinces in Canada have developed their own provincial sales taxes (PST), which include some form of digital taxation:
- Quebec has been taxing out-of-province providers (excluding small suppliers) of digital services at a rate of 9.975% since 2019.
- In 2020, Saskatchewan introduced rules targeting non-residents making e-commerce sales to purchasers in the province. Unlike Quebec, Saskatchewan sets no threshold of taxable supplies made in the province, so any out-of-province supplier selling to Saskatchewan consumers is required to register, collect and remit PST.
- As of 1 April 2021, British Columbia’s PST of 7 percent applies if annual sales of goods, software and telecommunications services exceed CA$10,000. British Columbia’s PST differs from those of Quebec and Saskatchewan (as well as the federal tax) in that it applies to both B2B and B2C sales.
The new simplified regime
The new simplified regime will operate as follows:
- There will be a simplified process for online registration and remittances through an online portal.
- Registrants under the new regime will only be required to collect and remit GST/HST on business-to-consumer (B2C) sales of digital products and services. For these purposes, an entity or person that is registered for GST/HST and provides its GST/HST registration number to the registrant will be considered a business, and any other entity or person will be considered a consumer.
- The application of tax will be based on the consumer’s usual residence.
- Where the consumer’s usual place of residence is in Canada, the GST/HST collected is based on the GST/HST rate that applies in the specified province of usual residence.
- Non‑resident vendors and non‑resident distribution platform operators registered under the simplified regime cannot claim input tax credits (ITCs) to recover GST/HST paid on their business inputs. If they wish to claim ITCs to recover GST/HST paid on their business inputs, they may register under the regular GST/HST regime.
How can PKF help?
We can assist you to determine how these new and changed tax regimes impact your business. Contact us today!