With their most recent economic update, the federal government announced several new sales tax measures aimed at levelling the playing field between Canadian-owned and operated businesses and non-resident businesses that operate outside of Canada. Principally, these announced changes focus on foreign digital content services and supplies of intangibles in Canada. While these supplies have historically attracted sales tax, typically they have required the consumer to self-assess, which has led to a low rate of compliance. In announcing these new measures, the federal government is looking to recapture this lost revenue by requiring non-resident businesses to become GST/HST registrants to collect and remit this tax to the Canada Revenue Agency (CRA).
The proposed changes will affect:
- Cross-border digital products and services,
- Fulfillment warehouses, and
- Short-term accommodations.
Cross-border digital products and services
The federal government has spent the past few years studying the effectiveness of taxing digital products and services in provinces like Quebec and British Columbia. While there was some initial pushback by foreign-based companies, by and large, these provinces have been successful in getting non-resident companies to comply with new legislative rules.
In light of these successes, the federal government has proposed changes that would require non-resident companies making supplies of digital products and services (including digital and traditional services) for Canadian consumers to register for GST/HST and collect and remit tax on such supplies. The CRA has defined a Canadian consumer to be any person whose usual place of residence is in Canada and who is not registered for GST/HST.
Similar to the one in Quebec, the proposed legislation would create a simplified registration system for non-resident companies and distribution platform operators that are not considered to be carrying on business in Canada and do not have a permanent establishment in Canada. Revenue Canada has defined a distribution platform operator as “a person (other than the supplier or an excluded operator in respect of the supply) that, in respect of a supply of property or a service made through a specified distribution platform, either controls the essential elements of the transaction or the person who collects, receives or charges the consideration.”
Under these new rules, a specified distribution platform is a digital platform (such as a website, electronic portal, gateway, store, or distribution platform or similar electronic interface other than an electronic interface used solely to process payments) through which a person facilitates:
- The making of supplies of intangible personal property or certain services by another person that is an unregistered non-resident that does not make supplies in the course of a business carried on in Canada, or
- The making of certain supplies of tangible personal property (TPP) that are to be delivered or made available to the recipient in Canada (other than supplies from outside of Canada that are delivered by mail or courier) by another person that is not registered for GST/HST. Note that the aforementioned supplies are “Qualifying Supplies”.
As with the Québec program, registrants would not be able to claim input tax credits (ITCs) and distribution platform operators would only be required to collect and remit tax on supplies made directly to a Canadian consumer.
To determine what tax rate will apply to these transactions, the CRA will use two (or more) indicators to identify the consumer’s normal residence as Canada and determine its place of supply. Indicators include a home address, billing address, Internet Protocol address of the device used, subscriber identification module (SIM) card and bank or payment information.
A $30,000 annual threshold would apply before any non-resident would be required to register and these new rules will be effective July 1, 2021.
Fulfillment warehouses
Generally, a fulfillment service is a third-party warehouse that prepares and ships orders to purchasers for other businesses that cannot provide this service on their own. It does this from a fulfillment center or warehouse.
Distribution platform operators (e.g., Amazon, eBay, etc.) who operate a fulfillment centre in Canada will generally be required to register for GST/HST and collect and remit tax where they make Qualifying Supplies of TPP including sales of goods made by other non-registered vendors over their distribution platforms where the goods are delivered from a location in Canada to a purchaser in Canada.
Where a sale of goods is made by a non-resident vendor and the goods are delivered to a purchaser in Canada (other than by mail or courier) from outside of Canada, and the sale is not made over a distribution platform, the non-resident vendor will generally be required to register.
Fulfillment businesses will be required to notify the CRA that they are carrying on a fulfillment services and maintain certain records. These new rules would apply to supplies made on or after July 1, 2021, and supplies made before July 1, 2021, where the consideration is payable on or after July 1, 2021.
Short-term accommodation
The proposed legislation will apply GST/HST to supplies of short-term accommodation in Canada facilitated through a digital platform (e.g., AirBnB). Generally, where the property owner is registered for GST/HST, the property owner will be required to collect and remit the tax. However, where the property owner is not registered, the accommodation platform operator will be deemed by the CRA to be the supplier and will be responsible for registering, collecting and remitting tax. Note that the tax will not apply on service fees charged by accommodation platform operators to non-registered third-party property owners but will apply to fees charged by accommodation platform operators to guests.
Additional record-keeping requirements will also be imposed on accommodation platform operators.
Similar to cross-border digital products, the CRA has laid out a simplified registration framework for short-term accommodation operators using an online portal. Accommodation platform operators will only be required to collect and remit tax on supplies of short-term accommodations made in Canada to Canadian consumers. Registrants under this simplified framework would also not be able to claim ITCs.
A $30,000 annual threshold will apply before an accommodation platform operator will be required to register and these new rules will apply after July 1, 2021.
How we can help
Given this evolving landscape, if you operate a digital distribution platform, are unsure if you meet any of the conditions described above or have clients that need assistance in understanding these changes/require help filing their returns, Baker Tilly Windsor has dedicated specialists to help you with any GST/HST matters. Please reach out to either Sameer Noormohamed or Mark Bloch for more information.
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