Canada: Taxation And The Internet

Last Updated: September 6 2000

The evolution of the Internet, and more particularly the evolution of electronic commerce, is arguably the most radical force of change our economy has ever encountered. The pace at which the Internet has evolved has allowed e-commerce to go virtually unregulated since its inception. Only now have government bodies begun to react to the e-commerce phenomenon and much to the chagrin of many on-line businesses, the Government has commenced discussions on the taxation of the Internet.

Consumption taxes in Canada, such as the Goods and Services Tax (G.S.T.), the Harmonized Sales Tax (H.S.T.) and the various provincial sales taxes (P.S.T.) have traditionally been applied on the basis of residence. Subject to exceptions, if a vendor is located in Canada or any of its provinces, it is required to collect both G.S.T. and P.S.T. (or in some cases, H.S.T. alone). Although G.S.T./H.S.T. is collected by Canada Customs and Revenue Agency ("CCRA") on goods being brought across the border, it is difficult to assess the true value of goods and often less than the full potential amount of the tax is collected. As such, the increased ability to acquire products directly from non-resident vendors has some taxation authorities worried that it may result in the disappearance of some of the collection points on which consumption regimes currently rely to collect and remit tax. Canadian businesses, on the other hand, are concerned that the lack of a level playing field when it comes to consumption taxation is leaving them at a competitive disadvantage. In many cases, the problem arises from the jurisdictional uncertainty created by the Internet. Although non-resident businesses are required to collect G.S.T./H.S.T. if they are deemed to be carrying on business in Canada, it is often difficult to make that determination. Therefore, G.S.T./H.S.T. is not collected by the great majority of non-resident vendors.

An additional difficulty that arises stems from the sale of services and intangibles over the Internet. Since the way in which a transaction is characterized is often crucial to the application of tax on the transaction, the downloading of software and the selling of other services over the Internet will continue to cause interpretation difficulties.

In a report submitted by the Minister of National Revenue's Advisory Committee on Electronic Commerce, in April 1998, the Committee recommended a system of self assessment by consumers. Consumers purchasing goods or services from businesses outside of Canada would be required to remit the amount of G.S.T. or P.S.T. payable on the purchased products.

The Committee also discussed the feasibility of encouraging non-resident vendors to register to collect and remit consumption taxes. The Committee also announced that it is awaiting recommendations from the Organization for Economic Cooperation and Development which should be released shortly. However, the most invasive of the Committee's findings is its recommendation to consider the role of transaction intermediaries in the collection and remittance of both G.S.T. /H.S.T. and provincial sales tax. To date, CCRA has refused to elaborate on the potential role of financial intermediaries. Not surprisingly, this has several electronic commerce entrepreneurs worried since an additional step in the e-commerce process has the potential of creating additional administrative costs, thus driving up prices and eroding profits. The Committee's final recommendation was that CCRA attempt to work with other countries to adopt a common strategy for the administration of consumption taxes world wide.

Although the Canadian government has announced its commitment to not creating taxation regimes that single out Internet business, many industry analysts are concerned that the Government will abandon its "laissez-faire" attitude and impose new collection and registration requirements. The fear that the Government will involve itself more prominently in the taxation of the Internet also stems from the predicted increased inability to collect consumption taxes on Internet sales of goods and services. As the Government witnesses the erosion of its tax base, many fear that it will have no choice but to enact specific legislation dealing with electronic commerce.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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