At the end of November 2020, the Canadian government announced new rules and regulations for foreign vendors related to Goods and Services Tax/Harmonised Sales Tax (GST/HST) in its digital economy. In a period where Covid-19 has grabbed the headlines and other news has had less of a focus, time is now of the essence for companies to ensure compliance with these new and highly complex taxation requirements, which start to be applied from 1 July 2021.
Currently 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 – taxes that Canadian vendors selling these same products and services must charge. This has resulted in Canadian vendors' products and services being more expensive and therefore less competitive compared with their foreign rivals'. The new regulations seek to address this situation by also making foreign companies subject to GST/HST.
Michael Lichti, Country Leader, TMF Canada, believes the new regulations demonstrate the Canadian government's intention to create a framework for fair competition, while further governing the operation of the country's digital economy.
He says: "As is the case in a number of countries, the Canadian government is stepping into the online world with regards to taxation. This legislation is meant to level the playing field for Canadian companies that operate in these spaces, so that they are not at a cost disadvantage versus their foreign competitors."
The new regulations relate to:
- cross-border digital products and cross-border services
- goods supplied through fulfilment warehouses in Canada
- platform-based short-term accommodation.
What businesses would be affected by the measure relating to cross-border digital products and cross-border services?
Non-resident vendors supplying digital products or services (such as online subscription-based video streaming, and including traditional services such as legal and accounting services) to consumers in Canada would be required to register for GST/HST and to collect and remit the tax on their taxable supplies to Canadian consumers.
What businesses would be affected by the measure relating to goods supplied through fulfilment warehouses in Canada?
Non-resident vendors would be required to register under the normal GST/HST rules and to collect and remit the GST/HST in respect of sales of goods that are located in fulfilment warehouses in Canada.
What businesses would be affected by the measure relating to platform-based short-term accommodation?
The GST/HST would be required to be collected and remitted on short-term accommodation supplied in Canada through an accommodation platform by either the property owner or the accommodation platform operator.
The new regulations pertain to digital platforms – websites, mobile apps, electronic portals or any other similar electronic interface. Rates will be charged depending on the province of the consumer. The frequency of filing will depend on the volume of sales to Canadian consumers.
With less than two months before the regulations are due to come into force, foreign companies selling goods and services online in Canada do not have long to ensure that they comply with the new regime. This could include undertaking a significant interpretation of the regulations, an adjustment of accounting and billing systems, and testing to ensure compliance – highlighting that time is of the essence for companies currently not up to speed.
Mr Lichti explains that, particularly in light of the Covid-19 pandemic, the new regulations have somewhat passed under the radar, but need to be fully addressed on time.
"Due to Covid-19 overshadowing most governmental announcements, this new requirement has not garnered a lot of media attention. But the 1 July 2021 deadline is fast approaching, so make sure you are ready".
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