With their Fall (2020) Economic Statement, Canada appears ready to take some important steps in joining much of the rest of the world in recognizing the dramatic shift in the fundamentals of indirect tax compliance by enacting rules effective July 1, 2021 which would:
- Abandon their traditional “carrying on business” test for determining whether a non-Canadian seller is obligated to collect tax in Canada for at least some common scenarios
- Require a wide swath of non-resident sellers of goods, digital products and services to collect tax on sales made to Canadian customers
- Compel online marketplaces (distribution platform operators) to collect on behalf of their clients
- Enable simplified registration and remittance for some newly obligated taxpayers and platforms
Over the last several years, we have seen changes (both radical and incremental) by governments across the globe directed at ensuring that all transactions are taxed equally, regardless of where the seller may be located and in so doing abandoning traditional notions of “physical presence” and “permanent establishment” which have long dominated our understanding of tax compliance obligations.
While much remains to be understood, the Economic Statement makes many elements of their new tax requirements abundantly clear:
Digital Products and Services
Non-Canadian sellers of digital products and services (whether electronically supplied or otherwise) will be required to collect GST and HST on Business to Consumer (B2C) supplies to Canadian residents beginning on July 1, 2021 assuming their annual total taxable supplies to consumers in Canada (excluding sales distributed through digital platforms) to Canadian customers exceeds or is expected to exceed $30,000 over a 12-month period.
As the Canada federal GST is harmonized/combined with provincial taxation (HST) in New Brunswick, Newfoundland & Labrador, Nova Scotia, Ontario and Prince Edward Island, the rules also specify that the local component of HST is applied based on the residence of the consumer. Whether similar rules will prevail in Quebec is yet to be determined.
The government also recognizes the significant role that online marketplaces play in connecting sellers of services and digital products to a global customer base and accordingly will compel marketplaces (which Canada calls “Distribution Platform Operators”) to register to collect and remit GST/HST for supplies made by non-Canadian vendors that are facilitated on their platforms regardless of where the platform is located. A Distribution Platform Operator located outside of Canada will be required to collect if the sum of their direct or facilitated taxable supplies meets or exceeds the $30,000 threshold noted above. Platforms located inside Canada must collect if their annual world-wide taxable supplies exceed $30,000.
The Government proposes to create an online portal allowing for simplified registration and tax remittance for newly obligated non-Canadian taxpayers. However, the Economic Statement provides that any businesses using the simplified system will be restricted from claiming input tax credits for GST/HST paid on their business purchases. If a seller or platform makes limited or no purchases in Canada, this impact of this limitation will be minimal.
Suppliers of Physical Goods
Transactions involving goods are a little more complex because of existing rules and procedures which apply GST and other duties when goods cross the border into Canada. Under the new requirements effective 7/1/21 this would remain the case. All sales, whether made directly to a customer in Canada or sent into Canada for temporary storage (in a fulfillment warehouse or otherwise) would continue to be subject to taxation based on the value of the goods when they cross the border. The new rules, which apply specifically to goods that are imported but temporarily stored at a location in Canada before the final sale, are intended to ensure that tax is charged on the final retail selling price, which is generally higher than the import value.
If the sale is facilitated by a Distribution Platform Operator (whether resident in Canada or otherwise) they would be deemed to be the supplier to the purchaser for any sale facilitated on behalf of a non-registered vendor. As such, they would be obligated to collect and remit GST/HST based on the final sale price of the item.
- The obligation extends to all platforms including those not located in Canada assuming supplies exceed or are expected to exceed the $30,000 threshold
- Platform obligations only kick in when the goods are already in Canada at the time of sale (e.g., located in a fulfillment warehouse)
- This obligation exists regardless of whether the final customer is registered for GST/HST (B2B) or not (B2C).
- If the seller is already registered in Canada, the platform has no GST/HST obligations.
An obligated non-Canadian Distribution Platform Operator will be required to register for GST/HST under the normal protocols (no simplification) and as such would have full ability to reclaim any applicable input tax credits, meaning that any tax paid at the border when goods are imported by a non-registered seller can be reclaimed by the platform.
Additional Obligations for Platforms
To assist the Canada Revenue Agency in tax administration, Distribution Platform Operators report “information” on third party vendors using their platform. Likewise, Operators maintaining fulfillment warehouses in Canada will be required to disclose this practice. The particulars as to how that reporting is to be effectuated is yet to be detailed.
A seller from outside of Canada is likewise required to register to collect for GST/HST if their sales meet or are expected to exceed the $30,000 threshold and if they use a fulfillment house in Canada. Likely, this means that sellers will pay GST (and other duties) at the border based on the import value of the good but then also collect GST/HST from their customer. This obligation exists regardless of the nature of the buyer (B2B or B2C). As normal registrant, the seller will be able to reclaim the tax they paid at the border as an input tax credit.
The digitization of the economy has given governments no choice but to re-think taxation. With these changes, Canada begins its journey in following the global trend towards destination-based taxation and expanded responsibility for sellers regardless of their physical connection to the jurisdiction. Companies wishing to sell their products and services to a global constituency must ensure they have scalable solutions in place that not only meet their compliance obligations as they exist today but as may exist tomorrow and, in the days, to come.