From July 1, Canada’s GST/HST rules will change how tax is applied to online sales from non-resident digital businesses. Canada is a major market and the taxation changes will introduce additional layers of complexity that are not instantly obvious. Here, we outline the difficulties that will surface from Canada’s GST/HST rule changes.
Canada has taken the decision to change its GST/HST rules as the current situation “can often result in the GST/HST not being collected on online purchases from non-resident vendors or made through digital platforms, also known as online marketplaces. The non-collection of the GST/HST presents equity, economic and fiscal concerns.” This is a common theme across the world when jurisdictions introduce similar rules.
From July 1, foreign suppliers of digital services to consumers based in Canada will be required to register for GST/HST and to collect and remit the tax to the Canada Revenue Agency (CRA) on affected sales. The CRA page explaining the registration process is here. The simplified registration system went live on Friday, June 25.
To facilitate affected businesses selling physical goods and digital services (or both) a simplified GST/HST registration and remittance framework will be available. This will include an online registration portal. It is also important to note that online platforms will also, generally, be required to register for GST/HST and to collect and remit the tax on the supplies these platforms facilitate from foreign sellers to Canadian consumers.
Canada's Digital Services Tax (DST) plan
On April 19, Canada's 2021 budget presentation revealed the plans for a 3% DST to come into effect on January 1, 2022.
As is common with other implementations the threshold levels for the proposed DST is two-fold:
- Global revenue of EUR750 million or more in the previous calendar year, and
- Revenue associated with Canadian users of more than CAD20 million in the particular calendar year.
We have published a detailed blog on the recent proliferation of DSTs/digital levies and the background to their introduction by multiple tax administrations worldwide.
Additional information on Canada's proposed DST design is contained in Annex 7 of Canada's 2021 budget publication.
Canada's complex reporting duties
Canadian provinces have already changed rules regarding foreign-supplied digital services. Québec and Saskatchewan moved first back on January 1, 2019, and have been followed by British Columbia (from April 1 this year) with Manitoba obligations to be added from December 1, 2021.
This means that non-resident digital businesses with sales in all these Canadian provinces will soon be faced with five reporting obligations. The five potential reports are for:
- GST/HST at the federal level
- Québec Sales Tax (QST) in Québec
- Provincial Sales Tax (PST) in British Columbia
- PST in Saskatchewan
- Retail Sales Tax (RST) in Manitoba
No threshold or filing frequency consistency
There is an added complexity as there is no consistency with sales threshold levels or with the required filing frequency for the reports.
For example, at the federal level and in Québec the sales threshold before registration obligations kick in is CAD30,000 per annum - this figure takes in worldwide sales, not just sales in Canada. In Saskatchewan, however, there is no threshold meaning businesses have tax liabilities from their very first sale to a consumer in Saskatchewan.
In British Columbia (BC), the filing frequency depends on the PST collected per year while in Manitoba the RST tax return filing frequency is based on the average RST collectable per month.
It should be noted that the Québec Government has just announced that it will make amendments to its rules to harmonize them with the GST/HST measures. The draft legislation has not yet been introduced by Québec, so the extent of this harmonisation is still unclear.
Canada tax rates background
Canada comprises ten provinces and three territories (Northwest Territories, Yukon, and Nunavut) all with differing sales tax rates.
These tax rates include Canada’s federal Goods and Services Tax (GST)/Harmonized Sales Tax (HST), Provincial Sales Tax (PST) (called Retail Sales Tax (RST) in Manitoba), and Québec Sales Tax (QST).
The applicable rates depend on the place of the supply in Canada, which varies by type of supply (e.g., physical goods, services, intangibles). Under the general registration regimes, the place of supply of a physical good is the delivery address. The place of supply of a service and of an intangible property that can be used anywhere in Canada is the business or home address of the customer. For the simplified GST/HST and QST registration regimes, the place of supply depends on the location of the customer.
The GST rate applies in all provinces where the provincial and federal tax have not been harmonized. In those non-harmonized provinces, other than Alberta, a provincial sales tax also applies. In provinces where the two taxes have been harmonized, only the HST applies.
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.
For validating a GST/HST number for B2B sales there is a GST/HST Registry - which is free to use. QST numbers can also be validated online. PST and RST work similarly to a sales tax with exemption for resale - there is no online verification tool.
The information required by Canada’s authorities to be included on invoices depends on who is the recipient and on the value of the invoice. It will also depend on the province and there will, potentially, be a need to show two registration numbers: a Canada GST registration number and a provincial tax registration number, e.g. QST.
A mix of registrations and payments
To conclude, Canada is a complex mix between a VAT system and a sales tax system and there will be multilevel registrations and payments. For digital businesses, as mentioned, this can potentially mean up to five registrations and the resultant filing and reporting obligations that these registrations bring.
This mix of tax rules in Canada, however, means digital businesses must have precise knowledge of their customer’s location as this will impact upon thresholds and filing frequencies (which are not consistent across the Canadian provinces). These necessary responsibilities for affected businesses will add up to more time and resources spent on determining the correct handling of each sale to a Canadian customer.
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