It is increasingly likely that Canada will move to change how the supply of digital services by foreign companies is taxed from 2021. Any move may follow the path of Canadian provinces Québec and Saskatchewan that both amended their sales tax rules in 2019 to extend to such supplies.
A number of factors such as a hard-hitting domestic report from the Auditor General, international taxation trends (including among Canadian provinces), and a Supreme Court decision in the United States have created an environment where such a federal move is now more than probable.
Canada missing out on substantial revenue boost
In May 2019, a significant report from Canada’s Office of the Auditor General (OAG) was published that estimated 2017 government revenue losses of CAD$169 million. These losses were in the form of uncollected GST on digital services supplied by foreign companies. Netflix, one of the foreign services alluded to in the OAG report, stated soon after the report’s release that it would pay Canadian federal sales taxes as it does across the globe.
The report’s overall message stated: “Overall, we found that the Canadian sales tax system did not keep pace with the rapidly evolving digital marketplace. On the basis of publicly available data, we estimated losses of $169 million in the GST on foreign digital products and services sold in Canada in 2017. In addition, the federal government could not assess and collect all sales taxes on e-commerce transactions.”
Quebec and Saskatchewan’s move to tax digital services
Previously, in January 2019, the Canadian province of Québec introduced new rules extending Québec’s sales tax system to the cross-border supply of digital services by non-resident companies. Saskatchewan did likewise.
These introductions have been considered a success with more revenue collected than expected. The new rules required foreign vendors without a PE or significant presence in Québec to register for and collect Québec sales tax (QST) on their sales to Québec-based consumers. They do so via a simplified registration system. More here on our Québec-specific blog.
According to the same OAG report referenced earlier, the Québec government estimated that in 2017, it lost a total of $270 million in QST from vendors that were doing business in the province but were without a physical or significant presence.
At the same time as Québec, the Canadian province of Saskatchewan also amended their existing rules to require non-resident companies to register and comply with its Provincial Sales Tax (PST) system. The previous rules required local consumers to self-assess and remit the PST on their purchases from non-resident suppliers of digital services to the Saskatchewan Ministry of Finance.
U.S. Supreme Court decision places pressure on Canada
Realistically, the Canadian authorities are more likely to look at such a federal-level move in 2020 for an implementation in 2021.
The pressure on Canada to change its rules is not just internal (OAG report) but also due to the rapidly-changing tax landscape across the border since the seminal ‘Wayfair’ U.S. Supreme Court decision in July 2018. The ground-breaking Wayfair case means that States in the U.S. can now apply sales taxes to the sales of out-of-state online retailers who have no physical presence in their State.
How does this impact Canada? Well, it means that Canadian companies with sales in the U.S. must now collect and remit the relevant sales tax to the State in which they have sales.
As a consequence of the Wayfair decision there is increased pressure on the Canadian government to act so as to level the playing field between domestic and international digital businesses.
Recommendations from the Organisation for Economic Cooperation and Development (OECD) provide one avenue of approach. One recommendation from published OECD guidelines is that non-resident (or foreign) suppliers should be tasked with collecting and remitting the sales tax (or VAT/GST) due on their sales. This collection and remittance should be facilitated by simplified registration systems to ease the burden of compliance on affected digital businesses.
Preparing for Canada: how to be ready for any potential change
Note: Comments below are valid as of November 22, 2019.
Canada is comprised of ten provinces and three territories (Northwest Territories, Yukon, and Nunavut) all with differing sales tax rates. What we discuss here are the rules that are currently in place if you have a permanent establishment in Canada.
These tax rates include Canada’s federal Goods and Services Tax (GST), Provincial Sales Tax (PST), Harmonized Sales Tax (HST) and Québec Sales Tax (QST). The GST rate in Canada is currently 5% while HST and PST vary depending on the location of the customer in Canada. The QST rate is currently 9.975%. It is also important to note that in some provinces tax rates can be combined. In British Columbia, for example, both the GST and PST rates apply to sales.
TABLE : Cumulative sales tax rates in Canada
|Canadian Province||GST||HST||PST/RST||QST||Cumulative rate|
|British Columbia (BC)||5%||-||7%||-||12%|
|New Brunswick (NB)||-||15%||-||-||15%|
|Newfoundland & Labrador (NFL)||-||15%||-||-||15%|
|Nova Scotia (NS)||-||15%||-||-||15%|
|Prince Edward Island (PEI)||-||15%||-||-||15%|
What does this all mean?
Well, it means that when you sell to a customer in Canada you not only need to know they are in Canada but you need to determine their location, down to province level. You need to know this so as to apply the correct tax rate - in real-time - to your sale.
It is important to note also that there is a sales threshold for registration that affected businesses need to be aware of. The threshold for registration in Canada is CAD$30,000 (circa USD$22,500, EUR€20,300). Once you exceed this threshold then you are responsible for registering with the Canadian tax authorities for the collection and remittance of tax on your sales to Canada-based customers.
The payment of tax in Canada can be a pain-free experience. In Québec, for example, foreign businesses can pay in CAD, in EUR, or in USD. It is the sole tax jurisdiction that Taxamo is aware of where taxes can be paid in a foreign currency.
For validating a GST/HST number for B2B sales there is a GST/HST Registry - which is free to use - available here. QST numbers can be validated here. Businesses can also call the CRA’s on a specific business enquiries line, more information is available here.
There is no exemption for B2B sales in the GST/HST and QST provinces but there is one in the PST/RST provinces (at provincial level only).
The information required by the Canadian tax authorities to be included on invoices depends on who is the recipient and value of the invoice. Invoice requirements are for sales to GST/HST registrants who wish to recover the GST/HST paid by claiming input tax credits (“ITRs”), the following are the information requirements for sales invoices:
- Business name or trading name Date of invoice or the date the tax is paid or payable
- The total amount paid or payable
- The total amount of GST/HST charged or an indication that the amount paid or payable includes the GST/HST at the applicable rate
- Indication of which items are taxed at the GST rate and which are taxed at the HST rate
- Business Identification Number (BN).
- The purchaser’s name or trading name or the name of their authorized agent or representative
- Brief description of the goods or services and the terms of payment.
If a supply is made to a person who is not GST/HST registered, the invoice must only include:
- The GST/HST rate that applies to the supply. If HST applies to the supply, show the total HST rate.
- The amount paid or payable for the supply separately from the amount of GST/HST payable on the supply or show that the total amount paid or payable for a supply includes the GST/HST.
NOTE: A French translation version of this blog will be published soon.