Foreign companies selling goods and services online in Canada will soon need to contend with new GST/HST rules for e-commerce transactions. Find out about the federal government’s proposals and CPA Canada’s suggestions for improving them.
With many Canadians locked down due to the COVID-19 pandemic in the past year, the number of us shopping online skyrocketed. In fact, the Government of Canada’s recent Fall Economic Statement says that retail e-commerce rose by nearly 70 per cent in the first eight months of 2020.
But the current sales tax rules for digital transactions date back to a time when our economy was strictly bricks-and-mortar, and the government is concerned that the existing rules put Canadian businesses at a disadvantage compared to their foreign competitors.
In its 2020 Fall Economic Statement, the federal government invited feedback on proposed legislation that aims to ensure the GST/HST applies fairly and effectively to the growing digital economy.
CPA Canada supports extending the GST/HST to digital platforms and supplies made by foreign businesses in general, but we have concerns about the new regime as currently proposed. We highlighted these concerns in a submission to the government – prepared with input from the CPA Canada Commodity Tax Committee and other key stakeholders.
In this tax blog, we present an overview of the proposed rules and highlights from our submission to the federal government on this topic. These rules are highly complex, so we encourage you to also review the commentary in the economic statement, draft legislation and the Canada Revenue Agency (CRA)’s Frequently Asked Questions page.
OVERVIEW: PROPOSED GST/HST RULES ON E-COMMERCE SUPPLIES
The proposed GST/HST rules would take effect on July 1, 2021 and generally apply when a foreign business sells to consumers in Canada, including:
- cross-border digital products and services
- goods supplied through Canadian fulfillment warehouses
- short-term accommodation through digital platforms
Cross-border digital products and services
Under current rules, foreign vendors with no physical presence in Canada who sell digital products or services to consumers in Canada generally do not have to collect GST/HST. Rather, it’s up to Canadian resident consumers to self-assess and pay the GST/HST to the CRA on the value of digital products or services consumed where required. By contrast, Canadian vendors who sell digital products and services do have to charge GST/HST, which makes their products and services more expensive and less competitive.
To level the playing field, the proposals would require foreign-based online vendors, and digital platform operators (i.e., online marketplaces) with no physical presence in Canada that exceed a $30,000 CAD registration threshold, to register, collect and remit GST/HST on certain taxable sales using a new simplified regime. These transactions include sales of digital products and services such as mobile apps and music/movie streaming to consumers in Canada.
The rules would require affected non-resident vendors and distribution platform operators to collect GST/HST on sales to Canadian customers who are not GST/HST-registered. These foreign businesses would have to set up processes to collect GST/HST registration information and identify the recipient’s residence so they can determine what GST/HST rate applies. This will be one complicating factor when compared with other countries which charge VAT as a single rate.
Under the proposed simplified regime, these non-residents would not be required to collect GST/HST from customers registered for GST/HST. However, they also would not be able claim input tax credits to recover the GST/HST paid on expenditures.
If a vendor or platform operator charges GST/HST to a registered customer in error, the customer will have to request a refund from the vendor or platform operator directly (and they will not be able to claim an ITC or rebate). This is one issue we asked the government to reconsider, as it has created difficulties under the tax that the Government of Quebec introduced previously.
The CRA has not yet released information on how the new simplified registration process will work. For example, it is unclear how the registration numbers under the simplified system will be issued or whether these registration numbers will differ from registration numbers issued under the normal GST/HST regime.
Non-resident vendors and platform operators falling under these rules can choose to register under the normal GST/HST rules so that all the standard GST/HST rules would apply.
Goods supplied through fulfillment warehouses
Similar fairness issues are at play when Canadians buy goods from online vendors or digital platforms who have no physical presence in Canada and hold their goods in Canadian fulfillment warehouses. Although GST/HST applies on import, it is not levied on the final price paid for the goods when sold in Canada. By contrast, Canadian-based online vendors selling goods on the same digital platforms, and using the same fulfillment warehouses, are required to charge GST/HST on the final price paid.
To address this issue, the proposals would impose GST/HST on all sales to Canadians facilitated by non-resident vendors or digital platform operators of goods located in Canadian fulfillment warehouses. The proposed rules would require such vendors and digital platform operators (with sales over $30,000 over a 12-month period) to register for GST/HST under the normal regime and collect and remit GST/HST on sales to Canadians of goods located in Canadian fulfillment warehouses.
Digital platform operators will be required to file an annual information return with the CRA for the calendar year by six months after the end of the calendar year. Fulfillment warehouses must notify the CRA that they are carrying on as a fulfillment business. They must also maintain records about their non-resident clients and the goods stored on their behalf.
Short-term accommodation through digital platforms
Many property owners use digital platforms to rent out their residences or other properties, but they don’t charge GST/HST because either they’re unaware of the rules or their rentals are below the $30,000 registration threshold. This poses fairness concerns for hotels and other traditional accommodation providers, which are compounded by the lack of GST/HST collection obligations on the digital platforms that facilitate these rentals.
The new rules propose to apply GST/HST on all platform-based short-term rental accommodation supplied in Canada by Canadian and foreign property owners alike. If the property owner is GST/HST-registered, they would have to collect and remit GST/HST on their short-term rentals. If the property owner is not registered, then the accommodation platform operator will be deemed to have made the supply and will be responsible for collecting and remitting the tax.
Accommodation platform operators would be able to register, collect and remit GST/HST under the simplified regime.
Short-term accommodation generally would include a rental of a residential complex or unit to a person for less than a month and for more than $20 a day.
To help the CRA administer these rules, accommodation platform operators would be required to maintain records and file an information return with the CRA for each calendar year by six months after the end of the calendar year.
WHAT WE RECOMMENDED
In our submission to the federal government in early February 2021, we highlighted legislative and administrative issues that we believe the Department of Finance Canada (Finance) and the CRA should address.
Most importantly, we observe that the proposals introduce a completely new regime. The legislation is complex and will need significant interpretation. Non-residents around the world and their advisors will need clear and comprehensive guidance to ensure compliance, and we have encouraged Finance and the CRA to provide as much guidance as they can as soon as possible.
We also urged Finance to review the proposals and our comments to see whether their objectives could be met through simpler means.
Here are some of the most significant issues we raised:
Tight implementation timeline
The July 1, 2021 implementation date may not give businesses enough time to prepare. Foreign businesses need sufficient time to ready themselves in three phases:
- They need to fully understand the rules and how they apply to them, so they would need guidance on the CRA’s administrative practices well before July 1.
- Once the final legislation and administrative material is available and understood, they would need to adjust their accounting and billing systems to properly administer the new rules.
- Businesses would then need to conduct testing to ensure they will be compliant.
The Organisation for Economic Co-Operation and Development (OECD)’s guidance on digital platform tax changes stresses the importance of giving non-residents reasonable timelines to comply with extended value added tax collection obligations and suggest a one-year timeline.
We have asked Finance to consider extending the proposed implementation date accordingly.
Tax charged in error
As occurred in Quebec, a variety of practical reasons may prevent Canadian registered businesses from recovering tax paid in error from non-resident platforms. For example, many non-resident suppliers’ systems are not designed to grant tax-only refunds to customers. Further, some digital platforms in other countries charge tax on all transactions made through their platform, regardless of whether tax is payable by the customer. As a result, registered Canadian businesses might bear unnecessary tax simply because they are registered under the normal regime.
We suggested that Finance should consider a rebate mechanism to alleviate these situations so that those who are overcharged can recover the tax directly from the CRA.
Clarifying registration obligations
The proposed threshold and collection obligations for digital platform operators as well as non-resident suppliers selling through the platforms are confusing and difficult to apply. Since the proposed legislation is designed for non-residents, it is important for the CRA to reduce tax uncertainty by providing clear, simple guidance.
Simplified registration number
To help registered Canadian businesses know what type of tax they are paying and whether they should be subject to the tax, the simplified registration number should be distinct. That way, businesses could easily identify whether they are dealing with a registrant under the simplified or regular system. Further, the CRA should clarify whether the non-resident would be obliged to advise their customers which regime they are registered for.
Recipient providing GST number to not pay tax
We asked the government for guidance on the extent of due diligence required by suppliers to determine the validity of a GST/HST number provided to them.
WATCH FOR FURTHER DEVELOPMENTS
In addition to these concerns, our submission raised additional technical and interpretive issues for Finance and the CRA to consider and clarify. We will continue to keep you informed as issues develop in this area.
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