Canada's GST/HST impact on distribution platform operators
Marketplaces, remote sellers may be required to register for GST/HST
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 and nonresident suppliers of taxable goods supplied through fulfilment warehouses, online marketplaces or remote seller websites. Along with these proposed rules come new rules for suppliers of digital property and services located outside of Canada.
The changes will also raise a significant amount of tax revenue by imposing a requirement on certain nonresident suppliers to register for GST/HST. The proposed rules are similar to measures introduced by many OECD countries and other tax jurisdictions in Canada, including Quebec, British Columbia and Saskatchewan, and proposed to take effect July 1, 2021.
Therefore, nonresident businesses impacted by these changes should soon be assessing the impacts these rules will have. The Department of Finance received feedback and input from various stakeholders through Feb. 1, 2021; to date no revisions have been made. However, it is expected the final draft legislation will be put forth in the spring Federal budget, which is now slated for April 19, 2021.
Current landscape and rationale for proposed changes
Vendors are increasingly using online marketplaces facilitated by distribution platform operators (DPOs) to sell physical goods as well as digital goods and services to customers worldwide. In some instances, the online marketplaces or their third-party sellers on these platforms, ship and store the goods in Canadian fulfilment warehouses prior to the goods being sold to Canadian customers.
Notwithstanding the use of DPOs, nonresident remote sellers of goods using any type of fulfilment warehouse for the storage and subsequent sale from such stock, may have already been required to register for GST/HST prior to these rules, based on the CRA’s current policy. This could include a remote seller that shipped inventory to Canada and maintained an inventory of its own goods in third-party warehouses, or as consignment inventory on retailers’ shelves. These new rules intend to clarify the GST/HST outcome for many sellers of goods into Canada, particularly where such remote sellers also sell goods to Canadian customers from their own out-of-country website.
The Canada Border Services Agency (CBSA) generally collects GST (and the provincial portion of the HST on casual or non-commercial imports plus applicable provincial sales taxes), when taxable products are brought into Canada. However, it is possible that indirect tax leakage can occur based on the difference between the value declared to CBSA at the time of import and the subsequent final sales price charged to the consumer, where the remote seller has not been required to register and collect GST/HST.
Under the current GST/HST rules, nonresident DPOs not registered for GST/HST are generally not required to charge and collect the GST/HST on their own goods, or goods sold through their platforms by third-party nonresident vendors, that are not registered for GST/HST. Similarly, nonresidents selling taxable products to Canadian customers from their own websites instead of, or in addition to, selling through a DPO, are not generally required to register for GST/HST under the current regime.
In order to bring certainty to the registration requirements and mitigate the competitive advantage unregistered nonresidents (including DPOs) have over vendors that are registered for GST/HST, the proposed rules will affect:
- Most DPOs
- Nonresident vendors selling through fulfillment warehouses
- Canadian fulfillment warehouse operators
- Nonresidents selling taxable products to Canadian customers
The proposed changes for distribution platform operators
Under the proposed rules, a DPO is deemed to be the supplier of goods sold by third-party vendors that are not registered for GST/HST (whether resident or not) through the distribution platform if the goods are held in Canadian fulfillment warehouses or any other place in Canada. Such transactions are defined as “qualifying supplies”.
Accordingly, DPOs must register for GST/HST under the normal rules once sales of qualifying supplies (i.e., those of unregistered third-party sellers) plus any of the DPOs’ own sales of goods to Canadian consumers (i.e., purchasers not registered for GST/HST) exceed, or are expected to exceed, $30,000 over any rolling 12-month period. Once this threshold is surpassed, all sales of taxable goods made to any person for delivery in Canada (whether the person is registered for GST/HST or not) will be subject to GST/HST and must be reported and remitted by the DPO and not the unregistered remote seller.
GST/HST will generally not apply on fees charged by DPOs for services supplied to nonresident vendors in respect of goods sold through the platform. This rule will avoid causing unrecoverable GST/HST to be charged to nonresident vendors who are not registered for GST/HST.
GST/HST-registered DPOs will be permitted to claim input tax credits (ITCs) in respect of the GST paid by the third-party unregistered vendors upon importation of the goods into Canada. In order to do so, the unregistered remote seller will need to provide evidence (e.g., customs import documents) to the DPO, which may inadvertently provide the DPO with information, such as the value of the goods that the remote seller may not want to divulge.
Lastly, DPOs will need to obtain and retain, various information related to third-party sellers using the platform. It is expected that the CRA will outline these requirements through administrative policy and could include the legal name, business address and other information of the remote seller, including as to whether they are registered for GST/HST or not. Further details on the nature and extent of these information requirements, is expected prior to July 1, 2021 and could evolve over time.
Practical considerations, insights and takeaways for DPOs
Under the CRA’s current administrative policy, a nonresident supplier who carries inventory in Canada and makes a qualifying supply of goods in Canada through a distribution platform is likely already considered to be carrying on business in Canada. The proposed rules shift the responsibility and liability for registration, collection and remittance from the nonresident suppliers to the DPOs.
Upon enactment of the proposed rules, DPOs will be faced with potentially significant additional administrative responsibilities. For instance, it will be necessary for DPOs to confirm the GST/HST registration status of every third-party seller using the platform. This is necessary as the DPO would need to collect the applicable GST/HST and flow it through to any registered third-party seller to report and remit on the third-party seller’s own account versus the DPO reporting and remitting GST/HST on the DPO’s account on behalf of unregistered sellers.
To mitigate potential uncertainty or liability, DPOs will want to confirm that the GST/HST number of each registered third-party seller is valid by checking the CRA GST/HST Registry. Further adding to the administrative burden, DPOs may need to continuously monitor the registration status of its suppliers for any changes. There is a lack of clarity on how much due diligence the DPOs are required to perform, and whether liability rests solely with the DPO under the proposed rules. Furthermore, DPOs may have to update their billing and online check-out systems to collect information about the registration status of Canadian consumers to monitor the registration threshold.
We understand that several industry groups have provided comment to the Department of Finance regarding these proposals and have recommended that DPOs be able to report and remit on their own GST/HST returns the GST/HST collected on behalf of GST/HST-registered vendors. The ability to do this currently exists under the GST/HST legislation through the use of a special agent election, however the proposed rules in their current form, will not operate to allow this election to apply.
In addition, because the federal rules will not be fully harmonized with similar legislation enacted in Quebec (for now), British Columbia and Saskatchewan, DPOs that are required to register in any of these jurisdictions, must address the additional complication of different registration, taxable status, and procedural rules in each province where registration may already be required.
GST/HST registrants making sales through DPOs
Under the proposed rules as currently drafted, GST/HST-registered vendors will continue to be responsible for collecting and remitting GST/HST on sales made through the DPO, instead of the DPO handling the reporting and remittance.
GST/HST-registered nonresidents importing their own goods into Canada for direct sale or through a DPO would be entitled to claim ITCs for GST paid upon importation, based on the existing rules. These sellers would generally also be entitled to claim ITCs for GST/HST payable on any taxable costs incurred in Canada, including fees and charges from the DPO.
Nonresident vendors selling through own websites
Remote sellers not selling goods through a DPO (e.g., selling through their own websites) must register for GST/HST under the general rules once sales of qualifying supplies to consumers exceed, or are expected to exceed $30,000 over any rolling 12-month period. Sales made through the mail or courier stream would not be considered “qualifying supplies” for purposes of the above threshold calculation. In order to be considered having imported through the mail or courier stream, the remote seller would need to maintain “evidence satisfactory to the Minister that the property was so sent”. However, no indication has been made on what these documentation requirements will entail.
Once a remote seller is required to register upon exceeding this threshold, all taxable supplies of goods delivered or made available in Canada (including goods delivered through the mail/courier stream) are subject to GST/HST, including sales made to Canadian customers that are registered for GST/HST. Such remote sellers of goods also selling taxable goods via a DPO, would similarly be required to report on their own GST/HST return the GST/HST charged through the DPO.
As a registrant under the normal rules, nonresident vendors selling taxable goods from their own website will be eligible to recover as an ITC any GST/HST paid or payable on purchases and expenses, including GST paid to CBSA on imported goods that is related to the vendors’ commercial activities of making GST/HST taxable supplies in Canada.
Registration, reporting, and remittance
Unlike the proposals for digital goods and various remotely supplied services, including those supplies on a distribution platform, the proposed rules for registration of remote suppliers and DPOs selling goods require these sellers to register using the regular GST/HST registration mechanism. These persons will also report using the existing GST/HST reporting system.
As such, all the normal rules related to security deposits for nonresidents are expected to apply, whereby all such remote sellers without a permanent establishment in Canada, must provide cash or other security to the CRA. It is expected that the requirement to maintain books and records in Canada, will also apply under these proposals.
Further, all third-party fulfilment warehouses and similar businesses that intake, store and subsequently ship and distribute goods of such nonresident sellers, must maintain records regarding their nonresident clients and the goods they store on behalf of their nonresident clients.
Proposed changes to drop shipment provisions
To align with existing drop shipment rules, a new rule is proposed in order to provide GST/HST relief for unregistered nonresidents that provide a new form of the drop shipment certificate to a GST/HST-registered vendor. This rule and the certificate prevents the registered vendor from charging GST/HST to the unregistered nonresident and acknowledges that the registered DPO will collect and report the applicable GST/HST where and when required.
Canadian trade and customs interplay considerations
Currently, goods imported into Canada, enter under one of two main import streams administered by the CBSA. These include commercial imports where duties and GST are collected by CBSA, and casual (i.e., non-commercial) imports where duties, GST/HST and provincial sales taxes are collected by CBSA.
Goods imported through the commercial stream are intended for resale in Canada, and therefore, the presumption of the CRA and CBSA is that GST/HST and other provincial sales taxes are generally captured upon sale in Canada to a customer by a registered seller, whether resident or nonresident.
Under current CBSA policy for casual importations, where goods enter into Canada that are not intended for sale or for any commercial, industrial, occupational, institutional or other similar use by the purchasers, applicable GST/HST, QST and PST must be levied by CBSA on these goods as required for casual importations. It is unclear whether the Department of Finance will make changes to the proposed legislation to mitigate the potential for double taxation that has persisted for many years.
The proposed GST/HST changes (and recent PST changes) do not yet align well with current CBSA policy and therefore have not addressed the potential of double taxation unless further regulation or policy amendments are implemented. The potential for double taxation is especially prevalent in instances where DPOs and remote sellers will be shipping goods that were sold to a Canadian customer prior to the goods being imported into Canada through transportation methods other than mail or courier.
Proposed rules follow global value-added tax (VAT) and customs trends
The move by Canada is the latest in a series of global VAT and GST changes in the e-commerce industry such as changes in the UK following the end of their withdrawal agreement from the European Union (EU). On Jan. 1, 2021, the UK introduced new VAT rules for certain e-commerce transactions. These made certain marketplaces liable for the VAT on transactions involving the sale of goods of non-UK sellers, as well as the sale of goods in connection with an import below 135 GBP in value.
In addition, effective July 1, 2021, the EU will also introduce sweeping e-commerce VAT reforms that largely mirror those introduced in the UK (with a 150 EUR threshold for imports). This continues the trend that we have seen in other countries, such as Australia, New Zealand, and Norway that have legislated specific rules for “low value imports” over the past several years.
The significant difference between Canada’s proposed changes and other jurisdictions, relates to the sale of goods in connection with an import. The UK and EU rules have abolished the low value import exemption for goods below a certain threshold, and instead made the nonresident supplier (or DPO/marketplace) liable for any VAT due on the transaction under a certain value, by increasing the VAT base and removing customs duties on low value goods.
What should remote sellers do now?
Given the wide-reaching application of these proposed changes, and the propensity to affect many global remote sellers of taxable goods, such businesses should begin to assess the overall impact on their daily operations, accounting and online check-out systems, shipping and logistics processes, amongst other potentially affected areas of their business.
While these rules are only in draft and not yet passed into law, additional refinements are expected in advance of July 1, 2021 and it is important to note that the Department of Finance does not currently anticipate extending this enactment date.