The Government is proposing significant changes to how GST / HST applies to digital supplies. Where digital supplies are being made in Canada by a company or entity that is registered for GST / HST, these supplies are already taxable. The changes announced on November 30, 2020 target non-resident businesses that would not already be registered for the GST.
The implementation of these measures has been escalated given the current economic situation and the rapid increase of supplies being acquired online. These supplies include not only goods (i.e. a new pair of shoes), but also services such as legal services, accounting services, decorating services, etc.
Due to the pandemic, every type of business has had to adapt and, where possible, determine how their services can be acquired online. The Governments current view is that when goods and services are acquired online, there are no physical boundaries.
The current rules often result in GST / HST not being charged on sales made by non-residents. Presently, where a non-resident business does not have a physical footprint in Canada (only a digital one), it is generally not required to register for GST / HST. However, a non-resident entity is required to register for GST / HST if it is determined to be carrying on business in Canada. This is a subjective test that reviews a number of different factors, primarily looking at the physical touch points that a business has within Canada, such as:
- * Does the business have employees in Canada?
- * Are contracts concluded in Canada?
- * Is inventory stored in Canada?
These factors, if answered affirmatively, are indicators that the entity may be carrying on business in Canada.
Where a non-physical item is being sold into Canada, such as a song, an app, a download of information, or a subscription to a software license, and the company selling these items does not otherwise meet the subjective test for carrying on business in Canada, that entity would not be required to register for GST / HST – regardless of the dollar value of sales into the Canadian market.
The provisions announced on November 30 will require non-residents, selling goods or services exceeding $30,000 into Canada to Consumers (individuals or other entities not registered), to register under a simplified system.
Highlights of this new registration system are as follows:
- * A simplified registration form that can be completed online;
- * An online portal to file returns and make remittances;
- * No ability for the non-resident to claim input tax credits;
- * The tax will apply on business-to-consumer transactions;
- * Where a transaction is a business-to-business transaction, the person acquiring the supply must provide their GST / HST number to be relieved of paying the tax. A new penalty is being introduced for persons that provide false information or incorrectly provide their GST number to avoid paying the tax where they are liable to do so (they are a consumer);
- * If the Canadian business provided its GST / HST number to the non-resident but still paid GST / HST, the tax paid to the non-resident vendor registered under this system will not be eligible as an input tax credit or for claiming a tax paid-in-error rebate: the Canadian business will need to request a refund from the vendor directly.
The place of supply rules will also be simplified so the tax rate is based on where the consumer is located; however, there will be exceptions where this location is not appropriate to the supply. For example, consider a consumer living in Alberta who orders a gift for their son who lives in Ontario: although the invoice is paid by the parent in Alberta, the goods are shipped to the son in Ontario and therefore the applicable tax rate will be 13 percent.
Self assessment of GST will still be required under this new system where a GST-registered business acquires services or supplies from a non-resident and the supply is not for use in their commercial activities. For example, a health care provider selling taxable items will be registered for GST. When acquiring software from a newly registered non-resident provider, they will provide their GST number and not pay the tax at the time of acquisition. However, as the software is for use in their exempt activities, they are required to self assess the applicable GST.
These proposed provisions are similar to measures already introduced in Quebec and Saskatchewan, and other countries such as Japan, Australia and many of the European countries. The intention of these proposals is to level the playing field for Canadian businesses offering the same supplies.