Fair Taxation of Cross-Border Digital Products and Services
Foreign-based vendors with no physical presence in Canada currently do not have to charge the GST/HST on sales of digital products or services (i.e., mobile apps, online video gaming and video and music streaming). This has put Canadian vendors of digital products and services at a distinct competitive disadvantage.
In order to level the playing field, the government proposes that foreign-based vendors selling digital products or services to consumers in Canada be required to register for, collect and remit the GST/HST on their taxable sales to Canadian consumers. Canadians also often purchase digital products or services through digital marketplace platforms (e.g., “app stores”).
To ensure that the GST/HST applies equally to these sales, the government proposes that digital marketplace platforms be required to register for the GST/HST, and to collect and remit the tax on the sale of digital products or services of foreign-based vendors to Canadians that the platform facilitates. This will ensure greater fairness for Canadian retailers.
To help promote compliance, the government proposes that foreign-based vendors and digital marketplace platforms be able to register and account for the GST/HST under a special simplified regime.
These changes are proposed to be effective July 1, 2021, which will provide time for the government to consult stakeholders on the proposed changes and for stakeholders to comply with these proposals.
The proposed GST/HST changes relate to three types of supplies:
- Sales of cross-border digital products and cross-border services
- Sales of goods supplied through fulfillment warehouse
- Supplies of platform-based short-term accommodation through digital platforms
Sales of cross-border digital products and cross-border services
Foreign-based digital businesses that sell digital products or services to Canadian customers, as well as distribution platform operators that facilitate such sales of products and services of third-party vendors through their platforms will be subject to new GST/HST rules. Foreign-based vendors and non-resident distribution platform operators that are not registered under the normal GST/HST registration rules and that meet the registration threshold of $30,000 of Canadian revenue over a 12-month period will be required to register for, collect and remit GST/HST on their qualifying taxable sales under a new simplified GST/HST registration and remittance system, even though they may not have a presence or be considered to be “carrying on business” in Canada.
How does the new simplified regime work?
The new simplified regime will operate as follows:
There will be a simplified process for online registration and remittances through an online portal.
Registrants under the new regime will only be required to collect and remit GST/HST on business-to-consumer sales of digital products and services. Further, an entity or person that is registered for GST/HST and provides its GST/HST registration number to the registrant will be considered a business, and any other entity or person will be considered a consumer under the simplified regime.
In general, the application of tax will be based on the consumer’s usual residence, which will be determined by specified indicators that identify that place as the consumer’s normal location or residence.
Where the consumer’s usual place of residence is in Canada, the GST/HST collected is based on the GST/HST rate that applies in the specified province of usual residence. However, there will be exceptions to the general rule for transactions where a consumer’s usual place of residence is not an appropriate basis to determine the application of tax, as illustrated by the following example:
If a non-resident supplier provides remote security monitoring services for a cottage or condominium in Alberta to a consumer whose usual place of residence is in Ontario, the non-resident would be required to collect 5% GST because the service relates to real property situated in Alberta.
Non-resident vendors and non-resident distribution platform operators registered under the simplified regime cannot claim input tax credits (ITCs) to recover GST/HST paid on their business inputs.
These vendors and platform operators may also choose to register instead under the normal GST/HST rules in order to claim input tax credits (ITCs) for GST/HST paid on their expenditures.
Vendors and platform operators that choose to register under the normal registration would be subject to all the normal GST/HST rules. For example, they would have to collect tax from all Canadian recipients, even those registered for GST/HST purposes. Registrants under the simplified regime can apply to remit and report taxes in a foreign currency.
These GST/HST changes are proposed to apply to supplies of cross-border digital products and services for which consideration becomes due after June 30, 2021 or is paid after June 30, 2021 without having become due.
If a vendor or platform operator registers under the simplified registration system and charges GST/HST to a registered customer in error, that customer will not be able to claim an ITC or a rebate for such an amount. Instead, the customer will have to request a refund directly from the vendor or platform operator.
Distribution platform operators
Distribution platform operators that are residents or non-residents of Canada will be subject to the new rules where they have non-registered vendors selling goods through their platforms and those goods are located in fulfillment warehouses in Canada, or are shipped from a location in Canada to consumers and business in Canada. A distribution platform operator would be subject to these proposed rules if the platform operator controls certain key elements of the transactions.
Under these proposals, platform services fees that distribution platform operators charge to non-registered vendors related to certain sales of goods will not be subject to GST/HST. This measure is intended to limit the extent to which GST/HST costs are embedded in the prices of these goods. In addition, distribution platform operators that facilitate sales of qualifying goods through their platform will be required to file an annual information return with the CRA. This return must be filed for the calendar year no later than six months after the end of the calendar year.
Non-resident vendors selling on their own
In general, non-resident vendors will also have to register under the normal GST/HST registrations rules if they sell, on their own, goods that are located in fulfillment warehouses in Canada or that are shipped from Canada to a purchaser in Canada (i.e., sales not made through a distribution platform).
The update proposes that fulfillment warehouses will be required to notify the CRA that they are a fulfillment warehouse and maintain records on their non-resident clients and their stored goods.