The Issue with Taxing Digital Goods and Services
Under the current rules, non-resident vendors register and remit Canadian Value Added Tax (VAT) known as Goods and Services Tax (GST), Provincial Sales Tax (PST), Québec Sales Tax (QST) or Harmonized Sales Tax (HST) where the non-resident vendor carries on business in Canada. The phrase "carrying on business in Canada" is not defined in the Excise Tax Act. Instead, whether a vendor carries on business in Canada is determined based on a series of factors including:
- The place where services or manufacturing are performed, transactions are solicited and/or business contracts are made
- The location where employees are located, branch or offices are located, the bank account is located and/or inventory is located.
- The place where purchases and/or delivery are made.
When it comes to non-resident vendors of digital goods and services such as Netflix, AirBnb, Amazon and Spotify, these factors often lead to foreign companies being determined to not be carrying on business in Canada even though Canadians may utilize their services or goods regularly. For example, digital goods do not have a physical location or a Canadian office of non-resident vendor may not be related to the provision of the digital service. As a result, the non-resident vendors of digital goods and services are not required to register and remit GST/HST.
Technically speaking, where the non-resident vendor does not pay GST/HST, the consumer of those digital goods and services is intended to self-assess and pay the GST/HST themselves. Very few taxpayers actually report or pay this tax. Furthermore, the Canada Revenue Agency (CRA) does not generally pursue enforcement of this rule. Enforcement would likely cost the CRA and Canadian government more than it would generate in tax revenue.
The end result of the current system is many thousands of uncollected tax dollars as the existing rules do not allow the CRA to collect from the non-resident vendors, and the CRA chooses not to collect from consumers. However, this could change next year. On November 30th 2020, the Liberal Government revealed its upcoming fiscal plan which includes a proposal to tax non-resident vendors of digital goods and services on their supplies into Canada, regardless of where they are deemed to carry on business.
The Proposed Changes To The Sales Tax Rules for Digital Companies
Under the proposed changes, non-resident vendors will be required to register and remit GST/HST on digital goods and services to consumers in Canada. Digital distribution platforms/marketplaces that supply digital products and services will also be required to register and remit GST/HST. These non-resident vendors and digital distribution platforms/marketplaces will register and remit GST/HST under a simplified method to be consistent with the Organisation for Economic Co-operation and Development's (OECD) recommendations and other countries which are now charging sales tax on digital goods and services.
Similarly to the current system, non-resident vendors and digital distribution platforms/marketplaces will have to match or exceed a minimum threshold of $30,000 Canadian in taxable sales or supplies in a 12-month period to be required to register. For non-resident vendors, the $30,000 threshold is deemed to exclude sales made to Canadian consumers through a distribution platform which is registered to collect and remit Canadian sales tax.
Most notably, GST/HST will only be applied to sales or supply of services to Canadian consumers, not Canadian businesses. Whether a consumer is Canadian will be defined based on their usual place of residence as identified by particular indicators. These indicators will include home address, billing address, Internet Protocol address of the device used, bank or payment information, and subscriber identification module (SIM) card. The same indicators will be used to determine which province or territory the consumer usually resides in. The responsibility to identify a consumer's usual place of residence will fall primarily on the non-resident vendors and digital distribution platforms/marketplaces. Where the indicators do not provide a clear indication of a consumers' residency for these purposes, the Minister of National Revenue is tasked with making the final determination of the consumer's usual place of residence. Taxpayers can assume the CRA will be tasked with making these determinations.
There will be an exception to this usual place of residence rule. Where the digital good or service is tied to a specific physical location, the amount of tax applied will depend on that location instead of the consumer's usual place of residence. For example, services related to real property such as a condo, cottage or home, located in Ontario will be taxed under the Ontario sales tax rates even if the consumer is located in British Columbia. No Canadian sales tax would apply if the real property owned by this hypothetical British Columbia resident was located in another country.
Non-resident vendors and digital distribution platforms will not be permitted to claim input tax credits under the simplified system. If these non-resident vendors and digital distribution platforms would like to claim input tax credits, they will need to register and operate under the ordinary GST/HST system.
Provincial Sales Tax
Québec and Saskatchewan have already amended their QST and PST rules respectively to require non-resident companies to register and remit provincial sales tax on digital services. British Columbia has introduced similar amendments which will come into force in April 2021. Non-resident vendors who provide digital services to Canadian consumers in any of these three provinces may be required to register and remit sales tax both provincially and federally.
Pro Tax Tips: Evolving Tax Law Requires Informed Representatives
Taxation in Canada started with the Income Tax War Act, a temporary measure during World War 1 to collect money to fund the war effort. Since then, taxation in Canada has continued to evolve on a nearly annual basis as the government attempts to keep pace with changing business and close taxation gaps. Other changes to Canadian tax law and administration are happening more rapidly, such as the development of the CERB and other COVID-19 measures. Businesses and individual taxpayers need as representatives Canadian tax lawyers who are current on the tax laws and issues facing their businesses and personal affairs. Our experienced Canadian tax lawyers can advise you on the proposed and recent changes to tax laws which impact on you.
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.