Canada-cross-border-digital-sales-tax

The Canadian Government has confirmed that it will change how the supply of digital services by foreign companies is taxed from July 2021.

The Canadian Government has confirmed that it will change how the supply of digital services by foreign companies is taxed from July 2021. This move follows a similar path already taken by Canadian provinces Québec and Saskatchewan back in 2019 and, from April 2021, in British Columbia.

The announcement was made on November 30 in the Canadian Government's Fall Economic Statement 2020. The reasoning behind the move is explained in the Statement (under Sales Tax Measures): "To improve the collection of the GST/HST and level the playing field between resident and non-resident vendors, the Government proposes that non-resident vendors supplying digital products or services (including traditional services) to consumers in Canada be required to register for the GST/HST and to collect and remit the tax to the CRA [Canada Revenue Agency] on their taxable supplies to Canadian consumers."

Impact on digital marketplaces

The expansion of Canada's GST/HST system will apply (as stated above) to "digital products or services" provided by non-residents. The proposed rule change will also cover obligations for digital marketplaces and short-term accommodations booked online (e.g. AirBnB).

Digital marketplaces should be liable for GST/HST on the sale of digital services but also for the sale of goods when the goods are located in Canada at the time of the sale. Indeed, Canada is one of the world’s first tax jurisdictions to introduce simultaneously GST/HST collection obligations on digital marketplaces for both product types. Taxamo expects this approach to become more common.

There was a public consultation on all aspects of the tax proposals contained in Canada’s Fall Economic Statement. This consultation closed on Monday, February 1, 2021.

Multiple Canadian tax registrations for foreign suppliers of digital services

The result of extending Canada’s GST/HST system will mean that foreign digital service suppliers will, from July 2021, potentially require four separate Canadian registrations: for Canada GST/HST; for Québec Sales Tax (QST), and for Provincial Sales Tax (PST) in Saskatchewan and British Columbia. There is the possibility that the number of potential registrations increases to five in 2021 if Manitoba proceeds with plans to extend its PST system to taxing foreign-supplied digital services.

A number of factors such as a hard-hitting domestic report from the Auditor General, international taxation trends (including among Canadian provinces), and a Supreme Court decision in the United States have created an environment where such a federal move became inevitable.

Canada missing out on major revenue boost

In May 2019, a significant report from Canada’s Office of the Auditor General (OAG) was published that estimated 2017 government revenue losses of CAD$169 million. These losses were in the form of uncollected GST on digital services supplied by foreign companies. Netflix, one of the foreign services alluded to in the OAG report, stated soon after the report’s release that it would pay Canadian federal sales taxes as it does across the globe.

The report's overall message stated: “Overall, we found that the Canadian sales tax system did not keep pace with the rapidly evolving digital marketplace. On the basis of publicly available data, we estimated losses of $169 million in the GST on foreign digital products and services sold in Canada in 2017. In addition, the federal government could not assess and collect all sales taxes on e-commerce transactions.”

Quebec, Saskatchewan, and B.C. moves to tax digital services

Previously, in January 2019, the Canadian province of Québec introduced new rules extending Québec’s sales tax system to the cross-border supply of digital services by non-resident companies. Saskatchewan did likewise.

These introductions have been considered a success with more revenue collected than expected. The new rules required foreign vendors without a PE or significant presence in Québec to register for and collect Québec sales tax (QST) on their sales to Québec-based consumers. They do so via a simplified registration system. More here on our Québec-specific blog.

According to the same OAG report referenced earlier, the Québec government estimated that in 2017, it lost a total of $270 million in QST from vendors that were doing business in the province but were without a physical or significant presence.

At the same time as Québec, the Canadian province of Saskatchewan also amended their existing rules to require non-resident companies to register and comply with its Provincial Sales Tax (PST) system. The previous rules required local consumers to self-assess and remit the PST on their purchases from non-resident suppliers of digital services to the Saskatchewan Ministry of Finance.

British Columbia followed these provincial moves with the introduction of similar rules. These rules were originally due to become effective in July 2020 but were delayed due to the impact of COVID-19 to April 2021.

U.S. Supreme Court decision placed significant pressure on Canada

Realistically, the Canadian authorities were always more likely to look at such a federal-level move in 2020 for implementation in 2021, now confirmed for July 2021.

The pressure on Canada to change its rules was not just internal (OAG report) but also due to the rapidly-changing tax landscape across the border since the seminal ‘Wayfair’ U.S. Supreme Court decision in July 2018. The ground-breaking Wayfair case means that States in the U.S. can now apply sales taxes to the sales of out-of-state online retailers who have no physical presence in their State.

How does this impact Canada? Well, it means that Canadian companies with sales in the U.S. must now collect and remit the relevant sales tax to the State in which they have sales.

As a consequence of the Wayfair decision there was increased pressure on the Canadian government to act so as to level the playing field between domestic and international digital businesses (the exact wording used by the Canadian Government in its Fall Economic Statement 2020).

Recommendations from the Organisation for Economic Cooperation and Development (OECD) provided one avenue of approach. One such recommendation from published OECD guidelines is that non-resident (or foreign) suppliers should be tasked with collecting and remitting the sales tax (or VAT/GST) due on their sales. This collection and remittance should be facilitated by simplified registration systems to ease the burden of compliance on affected digital businesses.

Preparing for Canada: how to be ready for any potential change

Note: Comments below are valid as of November 22, 2019, based on local Canadian rules. We intend to update this section once there will be more information available on the exact obligation of foreign suppliers.

Canada comprises ten provinces and three territories (Northwest Territories, Yukon, and Nunavut) all with differing sales tax rates. What we discuss here are the rules that are currently in place if you have a permanent establishment in Canada.

These tax rates include Canada's federal Goods and Services Tax (GST), Provincial Sales Tax (PST), Harmonized Sales Tax (HST) and Québec Sales Tax (QST). The GST rate in Canada is currently 5% while HST and PST vary depending on the location of the customer in Canada. The QST rate is currently 9.975%. It is also important to note that in some provinces tax rates can be combined.

TABLE : Cumulative sales tax rates in Canada

Canadian Province GST HST PST/RST QST Cumulative rate
Alberta (AB) 5% - - - 5%
British Columbia (BC) 5% - 7% - 12%
Manitoba (MB) 5% - 7% - 12%
New Brunswick (NB) - 15% - - 15%
Newfoundland & Labrador (NFL) - 15% - - 15%
Nova Scotia (NS) - 15% - - 15%
Ontario (ON) - 13% - - 13%
Prince Edward Island (PEI) - 15% - - 15%
Quebec (QC) 5% - - 9.975% 14.975%
Saskatchewan (SK) 5% - 6% - 11%
Territories          
Northwest Territories  5% - - - 5%
Nunavut 5% - - - 5%
Yukon 5% - - - 5%

What does this all mean? 

Well, it means that when you sell to a customer in Canada you not only need to know they are in Canada but you need to determine their location, down to province level. You need to know this so as to apply the correct tax rate - in real-time - to your sale.

Thresholds

It is important to note also that there is a sales threshold for registration that affected businesses need to be aware of. The threshold for registration in Canada is CAD$30,000 (circa USD$22,500, EUR€20,300). Once you exceed this threshold then you are responsible for registering with the Canadian tax authorities for the collection and remittance of tax on your sales to Canada-based customers.

The payment of tax in Canada can be a pain-free experience. In Québec, for example, foreign businesses can pay in CAD, in EUR, or in USD. It was one of the first jurisdictions that allowed payments in a foreign currency.

B2B validation

For validating a GST/HST number for B2B sales there is a GST/HST Registry - which is free to use - available here. QST numbers can be validated here. Businesses can also call the CRA’s on a specific business enquiries line, more information is available here.

There is no exemption for domestic B2B sales in the GST/HST and QST provinces but there is one in the PST/RST provinces (at provincial level only).

We will have to confirm this particular point for sales from foreign suppliers. In Québec, for example, foreign suppliers do not charge QST to Québec business customers.

Invoicing

The information required by the Canadian tax authorities to be included on invoices depends on who is the recipient and value of the invoice. Invoice requirements are for sales to GST/HST registrants who wish to recover the GST/HST paid by claiming input tax credits (“ITRs”), the following are the information requirements for sales invoices:

  • Business name or trading name Date of invoice or the date the tax is paid or payable
  • The total amount paid or payable
  • The total amount of GST/HST charged or an indication that the amount paid or payable includes the GST/HST at the applicable rate
  • Indication of which items are taxed at the GST rate and which are taxed at the HST rate
  • Business Identification Number (BN).
  • The purchaser’s name or trading name or the name of their authorized agent or representative
  • Brief description of the goods or services and the terms of payment.
  •  

If a supply is made to a person who is not GST/HST registered, the invoice must only include:

  • The GST/HST rate that applies to the supply. If HST applies to the supply, show the total HST rate.
  • The amount paid or payable for the supply separately from the amount of GST/HST payable on the supply or show that the total amount paid or payable for a supply includes the GST/HST.

There is no requirement to show the local currency value on the invoice. However, it may be required by consumer protection law when dealing with consumers.

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