What The New Canada Digital Tax Means For Businesses
November 5, 2021 Andrew AdolphDST,GST HST Registration
The new Canada digital tax affects a wide variety of businesses. Read on to learn how you can prepare before January 1, 2022.
The New Canada Digital Tax, Explained
According to Canada’s Office Of The Auditor General 2019 report, Canada lost approximately CAD 169 million in indirect taxes on ‘foreign digital products and services sold’ in 2017.
In addition, the report proved Canada’s sales tax system susceptible to unfair competition between local businesses in Canada and their foreign counterparts, which called for critical changes.
In response, Canada’s deputy prime minister and finance minister proposed a 3% digital services tax (DST) in April 2021. Experts expect this provision will generate an estimated CAD 2.72 billion in revenue over the next five years.
What You Should Know About The New Canada Digital Tax Law
- It’s effective as of July 1, 2021.
- Non-resident vendors of digital products and services (and specific online platforms) that sell to Canadian consumers must register with the Canada Revenue Agency (CRA).
- These cross-border vendors are required to charge and remit GST/HST if their total taxable supplies amount to CAD 30,000 or more (throughout twelve months). Therefore, smaller-scale suppliers need not register and remit.
- The CRA will launch a new online portal to simplify the registration and remittance processes. This portal will accept foreign currency remittances.
How Are Canada’s GST/HST Rates Determined?
Canada’s GST/HST rates are based on the consumer’s place of residence. Below are the GST/HST rates consumers must pay in various regions:
- 5% GST: Alberta, British Columbia, Manitoba, Quebec, Saskatchewan, the Northwest Territories, Nunavut or Yukon
- 13% HST: Ontario
- 15% HST: New Brunswick, Newfoundland and Labrador, Nova Scotia or Prince Edward Island
However, according to the current excise tax provisions, non-resident businesses are not obliged to register for GST/HST unless they carry on business in Canada and are not considered a small supplier.
Therefore, companies must perform a “carry on business” analysis to discover if GST/HST registration is necessary. This time-consuming process entails numerous factors, which makes it highly tedious. Consequently, many foreign digital products or services vendors in Canada fail to register for GST/HST.
The four non-participating provinces in Canada that don’t align with the federal excise tax regime include:
- British Columbia
Moreover, three provinces have created their own provincial sales taxes (PSTs), which involve some semblance of digital taxation.
As of April 2021, the implications of Canada’s DST on provincial taxes have yet to be determined. However, the federal government will discuss its significance with provincial and territorial governments.
What Businesses Will The New Canada Digital Tax Impact?
Aside from the type of business you operate, you could also be affected by more than one of the measures. It will help to consider their impact on your business as a whole.
Even though you are not obliged to register, collect, and charge GST/HST, your consumers might have to start paying GST/HST to a digital platform operator on your products or services if you promoted them through a digital platform.
If you operate one of the following businesses, one or more parts of the new Canada digital tax may affect you.
1. Cross-Border Digital Products And Services
Non-resident vendors or non-resident distribution platform operator vendors who sell taxable digital products or services make up this category.
These products and services include online music streaming or traditional services sold to Canadian consumers and entities not registered under the regular GST/HST regime.
This rule may also include distribution platform operators who promote their supplies or products through their platform.
With this measure, a streamlined GST/HST registration and a reporting and remittance system are accessible to non-resident vendors, non-resident distribution platform operators, and distribution platform operators.
2. Supply Of Qualifying Goods In Canada
This category includes non-resident vendors or non-resident distribution platform operator vendors who produce the supply of qualifying goods.
These goods include those delivered or made available in Canada, such as products shipped to a purchaser in Canada or goods based in a fulfillment warehouse.
Likewise, distribution platform operators who promote qualifying goods through their platform also make up this category.
3. Platform-Based Short-Term Accommodation
These are vendors of taxable supplies of short-term accommodation in Canada or accommodation platform operators that promote these supplies through their accommodation platforms.
Under this measure, streamlined GST/HST registration and reporting and remittance systems are available to accommodation platform operators.
What’s Next For Businesses?
It wouldn’t be surprising if Canada’s new DST ignited cross-border political debate and controversy due to its perceived ramifications on US tech giants.
The new GST/HST regulations will affect more businesses because of the lowered qualification criteria. Therefore, foreign companies must align their accounting systems in compliance with the new GST/HST. Doing so will allow them to meet invoicing requirements needed efficiently.
For foreign companies that conduct digital B2B sales in Canada, the CRA may still require GST/HST registration. Moreover, they remain subject to the burdensome common law test, too.
In addition, companies with operations in British Columbia, Manitoba, Quebec, and Saskatchewan may need five separate assessments by expert tax advisors to ensure they meet the requirements.
For exceptional cases, multiple indirect tax registrations in Canada may be necessary.
Is Your Business Ready For The New Digital Tax Changes?
- Canada Revenue Agency. “GST/HST for Digital Economy Businesses: Overview.” Government Of Canada, July 29 2021, https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/gst-hst-businesses/digital-economy.html.
- Lickess, Tom. “Canada’s New Digital Tax: What Multinational Businesses Need to Know.” Vistra, April 28. 2021, https://www.vistra.com/insights/canadas-new-digital-services-tax-what-multinational-businesses-need-know.
Andrew Adolph is a CPA and former CRA auditor with 25 Years of experience. He helps businesses to not par any more in sales taxs than the law says they must and acts as an advocate for you if you are being audited, so you can fous on your business.