On November 30, 2020, Canada’s Minister of Finance announced, as part of the government’s Fall Economic Statement (available here), proposals to amend Canada’s GST/HST system with respect to non-residents, proposed to come into effect July 1, 2021 and to tax non-resident digital service providers. The government has invited comments on the GST/HST proposals (including draft legislation) by February 1, 2021. The GST/HST proposals are broadly in line with changes that have recently become effective or are proposed to come into effect at the provincial level, requiring non-residents to register for and collect provincial taxes. Such changes are generally designed to target the digital economy. This article provides a high-level overview of these changes.
It should be noted that the proposals to tax non-resident digital service providers echo similar developments in the United States. As we have discussed previously, several states have considered taxes targeted at digital advertising or the digital economy, including Washington state (available here), Maryland, New York and Nebraska (available here), and other jurisdictions, including West Virginia and D.C. In fact, New York is actively considering a new bill on this issue. See New York S. 302. With the trend already in Europe, and now the United States and Canada, it is unlikely to end soon.
Furthermore, the requirement to collect and remit on non-residents resembles the Wayfair case in the United States. Prior to 2018, retailers without physical presence in a state were generally not required to collect and remit sales and use tax. In 2018, the U.S. Supreme Court held that states could require out-of-state retailers to collect and remit sales and use tax if the retailer made sales into the state in an amount exceeding a threshold. South Dakota v. Wayfair, Inc., 138 S.Ct. 2080 (2018).
I. GST/HST Proposals
Background – The GST/HST is a broad-based value-added tax on supplies made in Canada levied at a rate of 5%-15% (depending on the province). The proposed changes include new GST/HST registration and collection obligations for supplies in respect of:
- Services (both digital and traditional) and intangible property supplied by non-residents
- Goods supplied from Canadian inventory (e.g., fulfillment warehouses)
- Short-term accommodations
Services and intangible property supplied by non-residents – Under current GST/HST rules, non-residents who do not carry on business in Canada are generally not required to register for and collect GST/HST on their supplies made in Canada. The proposals would require such non-residents to register for and collect GST/HST on their supplies of services (both digital and traditional) and intangible property made to Canadian-resident consumers under a simplified registration system. The collection obligation would generally only apply to B2C transactions, insofar as the collection obligation would only apply on sales made to Canadian-residents who are not GST/HST-registered. Vendors would generally be allowed to determine a customer’s usual place of residence on the basis of two specified indicators (including home address, billing address, IP address, bank/payment information, SIM card, landline). Input tax credits (effectively, credits for GST/HST incurred by suppliers on their inputs) would not be available for vendors registered under the simplified registration system.
In addition to non-resident suppliers, operators of digital platforms that facilitate sales by third-party suppliers (“Distribution Platforms”) would also be required to register for and collect GST/HST on supplies of services and intangible property made by third-party, non-resident vendors to Canadian consumers through the platform. Such supplies would be deemed to be made by the Distribution Platform operator.
These proposals for non-resident collection of tax on supplies of services and intangibles are generally in line with amendments made to the Quebec sales tax (“QST”) effective January 1, 2019. QST is a broad-based value-added tax that applies in addition to GST, on supplies made in the province of Quebec levied at a rate of 9.975%.
Goods supplied through fulfillment warehouses – Tax registration and collection obligations would also be increased with respect to the supply of tangible goods by non-residents. Namely, under the proposed rules, Distribution Platforms would be required to register under the current GST/HST registration system and collect GST/HST on goods that are located in inventory in Canada (e.g., at fulfillment warehouses in Canada) and sold by non-GST/HST-registered vendors through the platform. Distribution Platform operators would be deemed suppliers of such goods under the proposed rules. In addition, non-resident vendors would be required to register under the current GST/HST registration system and collect GST/HST on goods that are located in Canadian inventory that they sell to Canadian-residents, where the goods are not supplied through a Distribution Platform.
Short-Term Accommodations – Under the proposals, GST/HST would be required to be collected on short-term accommodations (“STA”) by either property owners or accommodation platform operators (“STA Platform”). The STA Platform would be deemed to be the supplier of the STA (and thus required to collect GST/HST) where the property owner is not GST/HST-registered. GST/HST would not apply on services supplied by STA Platforms to owners who are not GST/HST-registered; however, STA Platforms would be required to collect GST/HST on service fees charged to guests.
Logistics – In general terms, the applicable registration threshold amount for the above measures would be CAD 30,000 of actual or expected sales over a 12 month period (e.g., sales made by the person required to register, sales made by a third-party through the person’s platform). Persons registered under simplified registration regimes described below would be assigned calendar quarter reporting periods and would be able to apply for authorization to report and remit GST/HST in USD or Euros. Registration under the simplified regimes would be completed through an online portal.
II. DST Proposal
The Economic Statement also noted that the government proposes to implement a tax on corporations providing digital services (typically referred to as a digital services tax or “DST”) to apply starting January 1, 2022, in the event a consensus solution on a DST is not reached at the OECD prior to that time. The proposal indicates that the DST would apply until such time as an acceptable common approach comes into effect. Unlike for the GST/HST measures discussed above, the Economic Statement did not include draft DST legislation or other specifics but noted that further details will be announced in Budget 2021 (the federal budget is typically released in or about March).
III. Saskatchewan PST Changes
The province of Saskatchewan imposes a 6% provincial sales and use tax (“PST”) that applies to retail sales of tangible property and certain taxable services. New rules passed into law July 3, 2020 (but retroactive to January 1, 2020) purport to require online marketplace facilitators and online accommodation platforms to register for and collect PST on retail sales made through their marketplaces/platforms. These changes follow changes made in 2017 and 2018, purporting to expand obligations on non-resident vendors to register for and collect PST on retail sales in Saskatchewan.
IV. British Columbia PST Changes
The province of British Columbia (“BC”) imposes a 7% PST that applies to retail sales of tangible property, software and certain taxable services. New rules passed into law in early 2020 and set to come into effect on April 1, 2021 purport to require non-resident vendors of software and telecommunication services made for the use on or with an electronic device situated in BC to register for and collect PST on such sales, even if the vendor has no physical presence in BC. Notably, a “telecommunication service” is defined broadly for BC PST purposes to include, inter alia, downloading and streaming of music and videos.