Some examples of new legislation include Mexico’s value-added tax on digital services and France's digital services tax. Canada is the newest addition to this growing list, having introduced a digital tax at both the excise and corporate tax levels.
In May 2019, Canada’s Office of the Auditor General published a report that estimated the country lost CAD 169 million in indirect taxes on “foreign digital products and services sold in Canada in 2017.” The report also found that Canada’s sales tax system led to unfair competition between businesses based in Canada and their foreign counterparts, and therefore warranted a significant change.
As part of its 2020 Fall Economic Statement, Canada’s government announced a new series of tax measures that will make cross-border digital services and products subject to goods and services tax (GST) and harmonized sales sax (HST).
As a next step, on 19 April 2021, Canada’s deputy prime minister and minister of finance proposed a 3 percent digital services tax (DST). Approximately CAD 2.72 billion of revenue will be raised over the course of five years by introducing this provision.
The remainder of this article will provide a high-level summary of Canada’s new GST/HST and DST provisions, including the benefits of the new regimes, pitfalls to avoid and next steps for in-scope digital businesses.
New excise tax measures explained
Canada’s new GST/HST regime will take effect on 1 July 2021. Non-resident vendors of cross-border digital services and products, as well as certain online platforms, that sell to Canadian consumers must register with the Canada Revenue Agency (CRA) and subsequently charge and remit GST/HST if their total taxable supplies are CAD 30,000 or more over a twelve-month period (so, small suppliers are not required to register and remit). The CRA will introduce an online portal that provides a simplified registration and remittance process. The portal will accept remittances in foreign currency.
The primary difference between Canada’s legislation and those of other jurisdictions (such as Mexico) is that the new GST/HST is levied on both digital services and products provided by foreign companies. Also, only business-to-consumer (B2C) sales are subject to the tax. Other nations typically tax both B2C and business-to-business (B2B) sales.
Generally, Canada’s GST/HST rates are determined by the consumer’s residence. A person is considered a Canada resident for tax purposes in this case if two or more of the following are used at the time of the relevant transaction:
- Canadian home or billing address
- Canadian internet protocol
- Canadian bank or payment
- Canadian subscriber identification module card
Depending on the location, the following GST/HST rates will apply:
- 5 percent GST in Alberta, British Columbia, Manitoba, Quebec, Saskatchewan, the Northwest Territories, Nunavut or Yukon
- 13 percent HST in Ontario
- 15 percent HST in New Brunswick, Newfoundland and Labrador, Nova Scotia or Prince Edward Island
New excise tax measures significantly simplify the process for non-residents. Under the current excise tax provisions, non-resident businesses are not required to register for GST/HST, unless they carry on business in Canada and are not a small supplier. To make this determination, a “carry on business” analysis must be conducted. This is a complex common law test where several factors are considered and weighted to determine whether a GST/HST registration is required. Due in part to the complexity of this process, many foreign companies that sell digital products or services in Canada have failed to register for GST/HST.
New corporate tax measures explained
Canada’s DST draft legislation, known as Annex 7, proposes that the tax is effective 1 January 2022. For the most part, the proposal is consistent with the OECD’s guidelines on digital taxation. Canada’s DST will apply to both foreign and domestic companies, unlike Canada’s new excise tax provision. The DST will be levied on revenue from online business models in which user participation is a key value driver. Specifically, the DST will apply to revenue from online marketplaces, social media platforms, online advertising and user data.
Multinational companies meeting both of the following thresholds will be subject to a flat 3 percent DST in Canada:
- global turnover from all sources of EUR 750 million or more in the preceding year, and
- revenue from provision of digital services to Canadian online users in excess of CAD 20 million in the calendar year.
Given these high thresholds, the DST clearly targets large web companies — including Amazon, Facebook and Netflix — that can take advantage of tax systems generally designed for brick-and-mortar economies.
Canada’s 3 percent DST is an interim measure, as Canada has a strong preference for a multilateral approach.
There are four so-called non-participating provinces in Canada that are not aligned with the federal excise tax regime: British Columbia, Manitoba, Quebec and Saskatchewan. Three of these provinces have developed their own provincial sales taxes, or PSTs, which include some form of digital taxation:
- Quebec has been taxing out-of-province providers (excluding small suppliers) of digital services at a rate of 9.975 percent since September 2019.
- Saskatchewan calls for a 6 percent PST on B2C sales of tangible personal property or services. Unlike Quebec, Saskatchewan sets no threshold of taxable supplies made in the province, so any out-of-province supplier selling to Saskatchewan consumers is required to register, collect and remit PST.
- As of 1 April 2021, British Columbia’s PST of 7 percent applies if annual sales of goods, software and telecommunications services exceed CAD 10,000. British Columbia’s PST differs from those of Quebec and Saskatchewan (as well as the federal tax) in that it applies to both B2B and B2C sales.
- Manitoba does not impose a digital tax.
At the time of this writing, the implications of Canada’s DST on provincial taxes are unknown. The federal government is set to engage with the provincial and territorial governments to discuss these implications.
Canada’s new DST may spark cross-border political debate over perceived targeting of US-based tech giants. The US government may even introduce retaliatory tariffs.
The new GST/HST rules will affect a greater number of companies due to the new taxes’ lower qualification criteria. In-scope foreign companies should start preparing their accounting systems to comply with the new GST/HST to ensure that invoicing requirements are met. Foreign companies with digital B2B sales in Canada remain subject to the existing, complex and burdensome common law test, and a GST/HST registration may still be required.
Depending on how the provinces react to the two federal initiatives, companies doing business in British Columbia, Manitoba, Quebec and Saskatchewan may require five separate evaluations by experienced tax advisors to ensure compliance. In certain cases, multiple indirect tax registrations in Canada may be needed.
Canada is not the first and won’t be the last country to introduce some form of digital tax, especially in the absence of an integrated OECD approach. With countries struggling to compensate for COVID-19 relief measures, and widespread public outcry for more equitable taxation, taxing web businesses has become a high priority for legislators around the world.
Hanna Mialik, Tax Manager, Global International Tax Advisory, contributed to this article.
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