Revenue Canada has introduced new GST/HST regulations for digital economy businesses as of July 1, 2021. Digital business such as music or video streaming services or mobile apps have not been previously required to charge Canada’s sales tax when making sales in Canada. It has now changed, and Canadians might have already noticed GST/HST charges when they purchase from affected businesses.
Background
Traditionally, non-resident vendors who were selling taxable supplies to Canada did not have to register for and charge GST/HST on the supplies if they were not considered to be “carrying on business in Canada”. This was putting Canadian businesses that are required to collect GST/HTS at a competitive disadvantage. A Canadian consumer who is typically not registered for GST/HST would prefer to purchase the same good from a foreign vendor that does not charge sales tax. Unlike GST/HST registrant buyers, the ordinary Canadian consumer cannot recover sales taxes paid on purchases, hence not being charged sales tax would impact their consumer’s behavior.
The new rule
To level paying ground for Canadian and foreign vendors of digital products and services, the Federal Government introduced new GST/HST tax obligations under three proposed measures effective July 1, 2021. The indicator of “carrying on business in Canada” is no longer a requirement.
Type of businesses affected by introduced changes:
- Cross-border digital products and services
- Supply of qualifying goods in Canada
- Platform-based short-term accommodation
Cross-border digital products and services
The new rules apply to non-resident vendors and non-resident platform operators who sell taxable digital products or services to Canadian individuals or entities who are not registered under the normal GST/HST regime (known as “specified Canadian recipients”).
A non-resident vendor/platform distributor is required to register under the simplified GST/HST regime if taxable supplies to non-GST/HST-registered Canadian consumers exceed $30,000 over a 12-month period that begins on/after July 1, 2021.
Sales facilitated through a platform distributor are included in the platform distributor’s threshold calculation, not the vendor’s.
Triple M Tip: If a non-resident vendor only sells digital products and services through a platform distributor (none on its own), then it is not required to register for GST/HST.
- Who charges and collects GST/HST under the simplified GST/HST regime? A non-resident vendor would charge and collect the appropriate GST/HST on the digital products and services it sells directly to specified Canadian recipients. A non-resident platform distributor would do the same on the digital products and services facilitated through the platform. GST/HST paid on Canadian expenses cannot be recovered since input tax credit is disallowed.
- Opting for registration under the normal GST/HST regime. If a non-resident vendor meets certain conditions, it can voluntarily register for normal GST/HST. Under the normal regime, a non-resident vendor must charge and collect GST/HST on digital products and services to specified Canadian recipients, whether these are sold directly by the vendor or facilitated by the platform distributor. In other words, supplies facilitated by the platform distributor are deemed to be sold directly by the non-resident vendor. A non-resident vendor must ensure to collect GST/HST on all taxable supplies (not only digital products and services sold to specified Canadian recipients) made in Canada. However, it can recover GST/HST paid on Canadian expenses since input tax credit is allowed under normal GST/HST.
Supply of qualifying goods in Canada
Affected businesses are non-resident vendors who sell “qualifying goods” (taxable tangible personal property delivered or made available in Canada, such as goods located in a fulfillment warehouse or goods shipped to a purchaser in Canada) and non-resident platform distributors who facilitate such supplies through their platform.
A non-resident vendor/platform distributor is required to register under the normal GST/HST regime if taxable supplies to non-GST/HST-registered Canadian consumers exceed $30,000 over a 12-month period that begins on/after July 1, 2021.
Sales facilitated through a platform distributor are included in the platform distributor’s threshold calculation, not the vendor’s.
- Who charges and collects GST/HST under the normal GST/HST regime? A non-resident vendor would charge and collect the appropriate GST/HST on the taxable goods, whether sold directly or through a platform distributor. The platform distributor would collect GST/HST on the supplies if the vendor is not GST/HST registered. GST/HST paid on Canadian expenses are recoverable as input tax credit is allowed under the normal GST/HST regime.
How Triple M can assist:
Our Firm assist your business to comply with introduced GST/HST requirement changes and identify potential tax consequences. If you have any questions, please reach out to our tax professionals, and we will assist with GST/HST registration and other possible tax implications.
