Industries: International Business
By: Jennifer Dowdy
Recent sales tax legislation in Canada set to take effect on July 1, 2021, makes changes to its Goods and Services Tax (GST/HST) that will have consequences for many non-resident companies selling goods and services to customers in Canada. The legislation was intended to address economic changes that occurred in the digital era and to capture e-commerce (digital and online) sales and services made through digital or distribution platforms from non-resident companies. These sales weren’t being taxed by non-resident sellers under Canada’s existing rules. The new rules broaden the scope of non-resident companies who are required to register and collect sales tax in Canada; and importantly, the new legislation does not just impact e-commerce companies. It also imposes registration requirements on some non-resident companies selling tangible property in Canada that weren’t previously required to register.
Under Canada’s existing rules, companies are required to register and collect sales tax from customers if they sell taxable supplies in the course of carrying on business in Canada. Canada applies a facts-and-circumstances test to determine whether a company is carrying on business in Canada, and under those rules, many non-resident companies were not considered to be carrying on business in Canada and, therefore, are not required to register for and collect GST/HST. The new rules apply a bright-line dollar value threshold test and look to whether the customer is registered to determine whether non-resident companies need to register.
Under the new rules, non-resident sellers of intangible and tangible goods and services will be required to register and collect sales tax if their customers are not registered for GST/HST, and the non-resident company makes CAD 30,000 in sales in any 12-month period starting July 1, 2021. Specifically, non-resident companies will need to register if they 1) sell digital products, services, or intangibles to Canadian customers who are not registered for GST/HST, 2) sell tangible personal property where the contractual delivery point is in Canada to residents of Canada or non-resident individuals who are not registered, 3) are distribution platform operators who facilitate transactions for customers not registered, and 4) are accommodation platform operators who facilitate supplies of short-term accommodation in Canada to persons not registered for GST/HST. The new rules put a significant burden on non-resident companies by requiring them to know whether their customers are registered for GST/HST and to collect their registration information.
A simplified online system is available for non-resident companies that are not carrying on business in Canada to register and remit the GST/HST. This system, however, does not allow companies to claim any input tax credits that may be available to them or to their customers. Companies can instead choose to register under the regular GST/HST registration system, which would then enable them to claim input tax credits.
If you have sales of digital products or services to customers in Canada, your GST/HST collection requirements are likely changing, and you should consult your tax advisor about how these new rules apply to your business.