The Canadian Government has announced a new policy for the GST/HST application on digital services and platforms. The announcement was part of the Fall Economic Statement (FES) 2020 last year. The Canadian authorities have stated that new regulations will come into force by July 2021.
The new GST/HST for digital services is in line with the already implemented policy of Quebec province. The Canadian government also wants to tax the global tech companies providing services in Canada by 2022.
The proposed rule is set to make the playing field level when local digital service providers are subjected to GST/HST and third-party service providers and non-residents are exempted. The new regulation aims to bring the non-resident digital service providers into the tax net of Canada.
The rule is intended to apply to non-resident digital service providers from July 1, 2021, specifically when:
- Providing cross-border digital services and products.
- Goods supplied through Canadian warehouse services.
- Short-term accommodation through digital Platforms.
Key Points to Note with new Digital Tax Rule
Here are some key points to note with the proposed digital tax rules:
- A platform operator means, “any person who controls or sets the essential elements of a transaction between a third-party vendor and purchaser”.
- The platform operator is responsible for collecting the GST/HST on sales of tangible personal products if the sales take place from a vendor inside Canada and to a buyer in Canada.
- The non-resident digital service providers will not be responsible for collecting the GST/HST from buyers. However, they will not be able to claim input GST/HST as well. Any error on tax calculations would be irredeemable as well.
- Platform operators selling intangible digital products/services through a digital platform will need to register for GST/HST.
- Special rules apply to the platform operators who facilitate short-term accommodation services. Supplies of residential/commercial accommodation inside Canada for less than one month are subject to GST/HST under the new rules. The digital platform operator will be responsible for collections of tax only if the platform is a non-resident of Canada.
- Non-Resident vendors and operators can register for tax in Canada for standard GST/HST rules.
Implications for Digital Marketplace in Canada
The resident companies providing digital products and services were subject to the GST/HST anyway. Their products and services were expensive as compared to the Non-Resident digital services/products providers in Canada. The new proposed regulation will level the playing field for both resident and non-resident companies.
New digital tax will apply to all platforms providing accommodation services inside Canada, for example, Airbnb. The rule will also apply to all non-resident vendors providing digital services such as online streaming, gaming, subscriptions, etc.
Non-resident companies providing fulfillment services to online marketplaces would need to register under the normal GST/HST rules. Non-resident companies will have to pay the digital tax if they use fulfillment warehouses located inside Canada. Resident platform operators using the same platforms are already subject to the GST/HST, which makes their final pricing costly. The platform operator in Canada would be responsible for collecting the GST/HST for the non-resident company.
Multiple Tax Registration for Foreign Companies
In Canada, the tax collection system is handled by Provinces that make it difficult for large companies to cope with. A new digital tax proposition would also pose such challenges to non-resident companies. Non-resident digital service providers may have to register for different tax regimes such as for Canada GST/HST, for Quebec Sales Tax (QBS), for Provincial Sales Tax (PST) in British Columbia.
The Threshold for Digital Tax Registration
For non-resident companies selling digital products and services, the challenge will be to determine if their buyer is located inside Canada. They’ll also need to identify the correct tax regime for each transaction for provincial tax obligations.
The threshold digital sales amount for GST/HST registration is currently set at CAD 30,000 within 12 months. If your business meets the threshold limit, you’ll be responsible for the collection and remittance of GST/HST to the relevant Canadian tax authorities (provincial or federal).
The invoicing for the digital taxes will depend on the recipient of the tax, Provincial or federal tax authority. Normally, vendors will need to include the following:
- Full business name and address
- The amount to be paid or becomes payable
- The total amount of GST/HST Charged
- Business identification number
- Separate amounts for GST and HST wherever applicable.
- Buyer’s complete information such as name, address, or trade name.
- Description of goods/services sold.