New GST/HST rules for remote sellers of services and digital products
INSIGHT ARTICLE |
Canada’s Fall Economic Statement released on Nov. 30, 2020, proposed several indirect tax changes designed to increase fairness and competitiveness between Canadian-based suppliers of digital property and services and similar suppliers located outside of Canada. These changes will also raise a significant amount of tax revenue by imposing a requirement on certain nonresident suppliers to register for GST/HST. Additionally, certain platform operators who facilitate sales of digital property or services (e.g., app stores) will be required to register for GST/HST and charge and collect GST/HST on sales made through their platforms.
Currently, nonresident vendors of digital products and services (i.e., mobile apps, online video gaming, and video and music streaming) that do not have a nexus or otherwise sufficient connection to Canada are generally not required to register for, charge or collect GST/HST on sales made to Canadian customers. Rather, Canadian purchasers of these digital products and services are required to self-assess the GST/HST and remit the tax to the CRA, including purchases by individual consumers.
These rules have put suppliers located in Canada at a competitive disadvantage compared to their nonresident competitors. The proposal aims to level the playing field by requiring all suppliers of digital property and services to register for GST/HST, irrespective of where the supplier is located.
This proposal is in line with recommendations of the Organisation for Economic Co‑operation and Development on the digital economy. These changes are proposed to take effect July 1, 2021. Businesses impacted by these changes should act as soon as possible to ensure they are set up to comply with these proposed rules. The Department of Finance (Finance) requested input from various stakeholders until Feb. 1, 2021, but to date, no revisions have been made. However, it is expected that the final draft legislation will be put forth in the spring federal budget, which date has not yet been announced.
How these changes impact remote sellers
Businesses that are not resident in Canada that supply services or digital products to Canadian residents, and digital platforms that facilitate such sales to Canadian residents will need to determine if they are required to register for GST/HST under the new rules. Businesses that are required to register for GST/HST should determine if a simplified registration as proposed by these rules should be completed, or if the business should instead register under the existing GST/HST registration mechanism.
The proposals are intended to apply to a wide range of digital or remotely provided products, services, and intangible personal property, including, but not limited to:
- Accounting, advertising, consulting, and legal services, amongst many others delivered remotely
- Investment management services
- Memberships in non-profit organizations
- Mobile apps
- Music and video streaming
- Online courses
- Video games
Businesses that are required to register for GST/HST should also determine how to update their systems in order to charge GST/HST where applicable, track the GST/HST registration status of purchasers, and track the country and province of residence of their customers. It is important to point out that the while theme of these changes were aimed at the traditional e-services such as streaming video and audit, the reach of these new rules goes much further, extending to many remotely provided services and intangible goods or services (e.g., offshore memberships) as noted above.
Of importance remote sellers of services or digital products, as well as distribution platform operators who are subject to this proposed change would not be required to charge and collect GST/HST on tangible personal property (i.e., goods) also sold by the supplier unless they are subject to other existing rules or subject to other proposals that were a part of the Fall Economic Statement.
The changes propose to amend the Excise Tax Act (ETA) to create a new requirement for nonresident and remote vendors of digital products and services to charge, collect and remit GST/HST on sales to consumers located in Canada. In addition, proposed changes impose a new requirement for operators of online platforms that facilitate sales of digital products and services supplied by nonresident vendors (e.g., app stores) to register for, collect and remit the GST/HST on sales made to consumers in Canada through their platforms.
The new rules apply to these persons if the total taxable sales of these digital products and services made to consumers (i.e. individuals not registered for GST/HST) in Canada exceed $30,000 over any 12-month period, whether historically (excluding periods prior to July 1, 2021) or prospectively. To minimize the compliance burden, the government proposes a simplified registration and reporting system where registration becomes necessary.
The proposed amendments are similar to the rules introduced for Quebec sales tax purposes that first became effective on Jan. 1, 2019, and follow a trend by other provinces to capture sales taxes on digital products and services purchased by both, businesses and consumers.
Services and digital products subject to the proposed rules
These changes apply to all taxable supplies of digital products and services made to any business, organization or individual resident in Canada who is not registered for GST/HST, other than:
- supplies of digital products that cannot be used in Canada, or digital products that relate to real property (i.e., land and buildings) or tangible personal property situated outside Canada; and
- supplies of services that can only be consumed or used outside Canada, are in relation to real property situated outside Canada, or are rendered in connection with litigation under the jurisdiction of a court or tribunal established under the laws of a country other than Canada.
Accordingly, these changes will capture digital products such as mobile apps, online video gaming, online training, music and video streaming services, and the supply of a right to use some else’s software, or a subscription to a website (e.g., paying a fee for the right to download financial reports or research material). In addition, services that may not be considered “digital”, including asset management services, architectural services, advertising and legal services, amongst many others, would also be subject to these proposals, subject to the restrictions set out above.
Verifying residence and GST/HST registration status of purchasers
To date, the proposed rules suggest that nonresident vendors may not be required to register where 100% of their sales are made to Canadian businesses that are registered for GST/HST. However, where a portion of their sales are made to Canadian consumers and businesses that are not registered for GST/HST, registration may be necessary based on the threshold noted above.
Therefore, remote nonresident suppliers and digital platform operators will need to determine the GST/HST registration status of each customer, and maintain this information to evidence why GST/HST was not charged. In addition, it may be prudent to confirm that any GST/HST registration numbers received are valid by accessing the CRA’s GST/HST Web Registry.
The proposal includes penalties for persons who attempt to evade the payment of GST/HST by providing false information or by providing a GST/HST registration number when the purchaser is an individual acquiring the property or service for their personal consumption or use. The proposal includes various indicators that can be used by a remote seller, to determine a purchaser’s ordinary place of residence, including the purchaser’s home or business address, IP address, or other information that may be specified in the future by the CRA. Where a supplier obtains two or more of the indicators that suggest the unregistered purchaser is resident in Canada, GST/HST will apply.
Persons required to be registered
These changes will require every person who is a specified nonresident supplier or a distribution platform operator to register for GST/HST under the new registration system if the person’s threshold amount exceeds $30,000 over any 12-month period, whether historically (excluding periods prior to July 1, 2021) or prospectively. As such, remote sellers will need to implement a process to monitor this threshold amount.
For the purposes of this proposal, a “specified nonresident supplier” is a person who:
- is not resident in Canada
- does not carry on business in Canada
- is not registered for GST/HST under the existing rules
A “distribution platform operator” is a person that operates a distribution platform, which facilitates the making of supplies of taxable services and digital products by specified nonresident suppliers, where through the platform, the operator:
- controls or sets the essential elements of the transaction between the supplier and the purchaser; or
- is involved in collecting or charging the consideration for the property or service and remitting all or part of that consideration to the supplier.
The proposals set a threshold amount of $30,000 CAD for any 12-month period beginning on or after July 1, 2021. Therefore, specified nonresident suppliers who do not supply their services or IPP through digital platforms, will be required to register for GST/HST if their sales of taxable digital products or services to consumers in Canada exceed $30,000 CAD over any 12-month period, whether historically (excluding periods prior to July 1, 2021) or prospectively. This test is similar to that used in British Columbia’s provincial sales tax changes.
Distribution platform operators will be required to register for GST/HST under these proposals if:
- supplies of services and digital products are made through their platforms;
- those supplies are made by nonresident suppliers who are not registered for GST/HST under the regular rules;
- the supplies are made to purchasers resident in Canada who are not registered for GST/HST under the regular rules; and
- consideration for such supplies exceeds $30,000 in any rolling historical or prospective 12-month period.
Similar to the rules for specified nonresident suppliers, these digital platform operators will need to track the types of purchasers using the platform (i.e., persons registered for GST/HST versus persons not registered for GST/HST). In addition, the digital platform operators will need to track the residence of its vendors, as well as the GST/HST registration status of vendors.
Registration, reporting, and remittances
The proposals provide for a simplified registration, reporting, and remittance framework to make compliance with these new rules, relatively straightforward compared to a typical GST/HST registration.
Nonresident vendors of services and digital products and distribution platform operators will be able to use a CRA administered online portal to register for GST/HST and make payments of tax collected.
Persons registered under this system would not be required to track GST/HST paid on inputs, given they will not be entitled to claim input tax credits to recover taxes paid on purchases, which is expected to be minimal for remote suppliers. However, businesses that anticipate paying significant GST/HST on their business inputs should assess this potential financial impact. If the impact is significant, remote sellers may want to instead register for GST/HST under the normal rules in order to recover GST/HST paid on inputs.
Practical considerations and takeaways
Nonresident suppliers of digital products and services may want to consider the following next steps:
- Determine if they are required to register for GST/HST
- Determine if a registration under the proposed simplified method is appropriate or if a normal GST/HST registration would be more beneficial, particularly in relation to claiming ITCs
- Ensure billing, online check-out and accounting systems can charge the correct rate of GST/HST and track the GST/HST collectible
- Ensure that systems can track and retain the GST/HST registration status of customers
- Ensure these systems can track and retain each customer’s country and province of residence
Businesses who operate digital platforms impacted by these proposals will need to take into consideration all of the above, as well as the GST/HST registration status of their nonresident and resident suppliers using the platform to make sales. Where supplies made through the platform are made by persons who are not registered for GST/HST, the platform operator will only have an obligation to charge and collect GST/HST on those sales, but not on sales made by persons who are already registered for GST/HST. These changes will lead to additional complexity for platform operators, and several industry groups have made recommendations to the Department of Finance to simplify this rule.
These proposed changes represent a long-anticipated shift for nonresidents of Canada who sell digital products and services to consumers, and those remote sellers that sell to Canadian consumers through a platform. Coupled with other changes that have taken effect in the last two years or are proposed to take effect this year (i.e., Quebec sales tax, Saskatchewan provincial sales tax, and British Columbia provincial sales tax), various remote nonresident suppliers may soon face significant sales tax compliance obligations in Canada.