GST/HST Rules for the Supply of Digital Products or Services
The Government of Canada has proposed new measures surrounding the registration and collection and remittance of the goods and services tax / harmonized sales tax (“GST/HST”) for cross-border digital products and services. This comes at a time of accelerated digital shopping and growth in e-commerce as public health measures surrounding COVID-19 remain in place.
Current Rules for the Supply of Digital Products or Services
Under the current rules in Canada, any business or company is required to register, collect, and remit the GST/HST on their sales when they exceed $30,000.00 over a 12-month period, are selling taxable supplies, and are carrying on a business in Canada.
Currently, non-resident vendors who are not considered to be “carrying on business” in Canada but are supplying digital products or services to consumers in Canada, are not required to register for the GST/HST and collect and remit GST/HST.
Whether a taxpayer is “carrying on business” in Canada is a factual test. Factors include whether the company is located in Canada, whether the activity is continuous, whether the company has some physical presence, or uses Canadian warehouses or other infrastructure to hold its assets. Currently, a non-resident online marketplace with only a place of contract, solicitation and payment would not be considered to be carrying on business in Canada despite exceeding the sales threshold.
The current rules place Canadian vendors at a disadvantage since large scale non-resident vendors do not have to charge the GST/HST if they do not carry on business in Canada. This allows non-resident vendors to provide competitive pricings since the inclusion of tax does not pass to the consumer.
Proposed New Rules for the Supply of Digital Products or Services
On November 30, 2020, Minister of Finance, Chrystia Freeland, tabled the Fall Economic Statement 2020, with proposed amendments and draft legislation for new GST/HST registration requirements for non-residents of Canada who do not carry-on commercial activities in Canada. The proposals are effective July 1, 2021. The government consultation period ended February 1, 2021.
Under the proposed legislation, non-resident vendors that supply digital products or services to consumers in Canada would be required to register for the GST/HST and be responsible for collecting and remitting same.
The proposed legislation applies regardless if the non-resident vendor carries on business in Canada or has a permanent establishment in Canada.
Furthermore, digital distribution platform operators, such as the online marketplace which facilitate the sales of the non-resident vendors, would also be required to register for and collect and remit the GST/HST on the sales of goods located in Canadian fulfilment warehouses if the sales to Canadians exceed a certain threshold.
These non-resident vendors and distribution platform operators can register under a new simplified registration system. However, the option to register for the normal GST/HST system remains open.
Input Tax Credits
Input tax credits (“ITCs”) allow GST/HST registrations to recover the GST/HST paid on business expenses. However, ITCs can only be claimed under the normal GST/HST system and not the simplified GST/HST system.
The simplified GST/HST system provided in the proposals do not allow for registrants to claim ITCs.
Whether a non-resident vendor should register under the normal or simplified system depends on a variety of factors. A qualified tax lawyer or professional should be consulted prior to the July 1, 2021 effective date to determine a compliance plan accordingly.
The new rules surrounding the supply of digital products or services are among some of the new amendments proposed by the Government of Canada in late 2020. Given the complexity of the GST/HST rules and amendments in light of a changing economic landscape, speaking with a qualified tax lawyer or tax professional can assist in ensuring compliance with new or continuing business operations in Canada. Contact us today to learn more!
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.