Fall Economic Statement: New GST/HST Registration and Collection Requirements for E-Commerce Businesses

On November 30, 2020, the federal government tabled its fall economic statement Supporting Canadians and Fighting COVID-19 (the “Fall Economic Statement”). As part of the global trend to tax digital economy and with the increasing importance of e-commerce, it is not surprising that the Fall Economic Statement contains a number of significant changes, including the implementation of new goods and services tax / harmonized sales tax (“GST/HST”) registration and collection requirements for non-resident vendors and digital platform operators. While the Fall Economic Statement contains other significant changes from a tax perspective, this article is intended to cover specifically the new proposed GST/HST measures.

Interestingly, the new proposed rules mirror those adopted in Québec almost two years ago for Québec sales tax (“QST”) purposes regarding supplies made to Québec consumers by foreign suppliers and operators of digital accommodation platforms (the “New QST regime”).[1] Such measures are largely in line with the Organisation for Economic Cooperation and Development’s recommendations on the digital economy and the actions taken by many other jurisdictions.

It is also noteworthy that such measures have been released at a time when provincial governments, such as Saskatchewan and British Columbia, have also recently enacted or announced their intention to adopt similar measures for non-resident suppliers and platform operators in their provincial sales tax (“PST”) regime.[2]

Under current GST/HST rules, a non-resident business selling goods and services to Canadian customers (either registered or non-registered) is not required to collect the GST/HST, unless it is considered to be “carrying on business” in Canada. Whether a person is carrying on business in Canada is essentially a question of fact and revolves around certain factors and principles set out by the Canada Revenue Agency in its Policy Statement P-051R2, which is largely outdated as it has not been modified or updated in over a decade. As a result, this has put Canadian businesses at a clear competitive disadvantage with their non-resident competitors since the former have the obligation to charge and collect GST/HST while the latter frequently did not. This became a pressing concern over recent years with the advent of the digital economy, especially with respect to sale of digital products and services such as mobile apps, online video gaming, and video and music streaming. The current public health situation was likely an additional incentive to release such measures given the sharp rise in e-commerce: from February to May 2020, retail e-commerce sales was up 99.3% in Canada.[3]

GST/HST On E-commerce Transactions and Cross-border Digital Products and Services

To level the playing field between Canadian and non-resident vendors and ensure the GST/HST applies to all goods and services consumed in Canada, regardless of how and by who they are supplied, the federal government proposes a new simplified GST/HST registration and remittance regime[4] through an online portal (not yet available) for “specified non-resident suppliers”[5] (hereinafter referred to as “non-resident vendors”) of digital products or services, and for “distribution platform operators”[6] that facilitate such supplies regardless of whether they are carrying on business in Canada or have a permanent establishment here.

Under the new rules, non-resident vendors and distribution platform operators would be required to register, collect, and remit applicable GST/HST on all taxable supplies of digital products and services made or facilitated to Canadian consumers to the extent the total of such taxable supplies exceed, or are expected to exceed, $30,000 over a 12-month period.[7] No collection obligations are imposed on supplies made to GST/HST registered persons.[8]

In line with the approaches taken in other jurisdictions, and particularly Québec, vendors and platform operators would generally be able to determine the usual place of residence in Canada of a customer using specified indicators, such as the home address, billing address, Internet Protocol address of the device used, bank or payment information, etc. Subject to specific exceptions (such as where the digital product or service is linked or restricted to a specific location inside or outside Canada), the consumer’s usual place of residence would be considered to be in Canada, and subsequently in a particular Canadian province, when two or more of these indicators identify Canada as the consumer’s normal location or residence.

Non-resident vendors and distribution platform operators using the simplified registration system would not be entitled to claim input tax credits to recover any GST/HST paid on business expenses (although presumably limited in these circumstances). In such scenarios, non-resident vendors and distribution platform operators should explore the opportunity of registering under the normal GST/HST regime on a voluntary basis.

GST/HST On Fulfillment Warehouses and Marketplace sales

Although applicable duties and taxes are in general terms levied at the Canadian border on the value of the goods at the time of importation, the GST/HST may not consistently be charged or be charged on the final price paid for the goods where they are subsequently sold to Canadian consumers through distribution platforms or online marketplaces and fulfillment warehouses located in Canada.

This may result in GST/HST leakage. To address this issue, the federal government proposes to require distribution platform operators to register under the normal GST/HST rules, and require the collection and remittance of GST/HST in respect of sales of goods that are located in fulfillment warehouses in Canada or shipped from a place in Canada to a purchaser in Canada, when those sales are made by non-registered vendors through distribution platforms. Distribution platform operators would be required to register and to collect and remit the GST/HST if their total qualifying supplies, including those made through their platforms by non-registered third-party vendors, to purchasers in Canada that are not registered for the GST/HST exceed or are expected to exceed $30,000 over a 12-month period.

The federal government also proposes to require non-resident vendors to register under the normal GST/HST rules and to collect and remit the GST/HST in respect of sales of goods that are located in fulfillment warehouses in Canada or shipped from a place in Canada to a purchaser in Canada, when those sales are made by the non-resident vendors on their own. In these circumstances, non-resident vendors would also be required to register under the normal GST/HST rules if their total qualifying supplies to purchasers in Canada that are not registered for the GST/HST exceed or are expected to exceed $30,000 over a 12-month period.

Importantly, the proposed legislation imposes new reporting and record keeping on distribution platform operators in respect of a qualifying tangible personal property supply which would be required to file an information return to the Canada Revenue Agency (“CRA”) about vendors using their platform, as well as on fulfillment businesses in Canada which would be required to notify the CRA on their storing/fulfillment activities and on the non-resident vendors’ stored goods.

GST/HST On Short-Term Accommodation Supplied Through Digital Platforms

The federal government proposes to apply the GST/HST on all taxable supplies of short-term accommodation[9] in Canada facilitated through a digital platform[10]. Under such new measures, the GST/HST would be required to be collected and remitted on taxable short-term accommodations supplied in Canada through an “accommodation platform”[11] by either (i) the property owner to the extent it is registered for GST/HST purposes, or (ii) the “accommodation platform operator”[12] where the property owner is not registered. In this latter case, the accommodation platform operator would be deemed to be the supplier of the short-term accommodation.

Under such rules, any accommodation platform operator who facilitates or expects to facilitate over a 12-month period more than $30,000 in taxable supplies of short-term accommodation in Canada where the underlying third-part suppliers/owners of the accommodation are not registered for the GST/HST would be required to register and collect and remit the applicable GST/HST on such supplies. The registration may be undertaken through the simplified GST/HST registration and remittance regime (assuming the accommodation platform operator is not otherwise required to be registered under the normal GST/HST regime).

Similarly to the New QST regime, accommodation platform operators would be required to collect and remit the GST/HST on supplies of taxable short-term accommodation in Canada made to consumers and not to GST/HST registered persons[13], and would not be entitled to claim any input tax credits to recover potential GST/HST paid on business inputs.

Finally, an accommodation platform operator would also be subject to new disclosure and record keeping obligations in respect of all supplies of short-term accommodation situated in Canada made in a particular year, including the obligation to file with the CRA an annual information return no later than six months after the end of a given calendar year or any later date allowed by the CRA.

A Few Additional Comments

Under the new proposed measures, discretionary authority is granted to the CRA to disclose or otherwise make available to the public, in any manner that the CRA considers appropriate, the name of any person registered under this new simplified GST/HST registration regime, including their effective date of registration. Although similar to the New QST regime, such provision is quite unusual in the context of the GST/HST legislation.

It is estimated by the government that these proposed measures will increase federal revenues by over $2.5 billion over 5 years, starting in 2021- 2022.

All of the proposed measures discussed below are to become effective July 1, 2021. This time frame should afford time for the federal government to consult stakeholders, and for businesses to assess their registration and collection obligations and bring their systems within compliance if need be. The federal government invites interested parties to submit comments and concerns on these new measures by February 1, 2021.

 

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[1] Further details on such rules can be found here.

[2] On July 3, 2020, the Government of Saskatchewan enacted new Saskatchewan PST registration and collection requirements for e-commerce platforms, which apply with a retroactive effect to January 1, 2020. Further details can be found here. The Government of British Columbia also confirmed that effective April 1, 2021, certain sellers, including Canadian and foreign seller of software and telecommunication services may face new BC PST registration and collection obligations.

[3] Statistics Canada, Retail e-commerce and COVID-19: How online shopping opened doors while many were closing, July 24, 2020, https://www150.statcan.gc.ca/n1/pub/45-28-0001/2020001/article/00064-eng.htm

[4] For example, under new Subdivision E of Division II of part IX of the ETA.

[5] Defined as a non-resident person that does not make supplies in the course of a business carried on in Canada and that is not registered under the normal GST/HST rules (i.e. under Subdivision D of Division V of part IX of the ETA).

[6] In respect of a supply of property or a service made through a “specified distribution platform”, a distribution platform operator means a person (other than the supplier or an excluded operator in respect of the supply) that:

  1. controls or sets the essential elements of the transaction between the supplier and the recipient;
  2. if paragraph (a) does not apply to any person, is involved, directly or through arrangements with third parties, in collecting, receiving or charging the consideration for the supply and transmitting all or part of the consideration to the supplier; or
  3. is a prescribed person (not yet defined).

A “specified distribution platform means” a “digital platform” through which a person facilitates the making of “specified supplies” (including a taxable supply of intangible personal property or service) by another person that is a specified non-resident supplier or the making of “qualifying tangible personal property supplies” (see footnote 7) by another person that is not registered under Subdivision D of Division V.

A “digital platform” includes a website, an electronic portal, gateway, store or distribution platform or any other similar electronic interface but does not include (a) an electronic interface that solely processes payments; or (b) a prescribed platform or interface (not yet defined).

[7] It is noteworthy that sales made by a non-resident vendor which are facilitated by a distribution platform operator that is registered for the GST/HST (under either the normal or simplified GST/HST regime) would not, for the purposes of this proposal, be included in computing the non-resident vendor’s threshold as the platform operator would be deemed to have made the supply.

[8] In this latter case, it is strongly recommended that sufficient proof of GST/HST registration be provided by the registrant to the non-resident to support the non-application of the GST/HST on such sales. The GST/HST registrant would rather remain liable to self-assess and remit such tax payable on its purchase of digital products and services from non-resident vendors and distribution platform operators, unless the purchase is for use, consumption or supply exclusively in the course of its commercial activities.

[9] Generally including a rental of a residential complex or a residential unit to a person for a period of less than 1 month where the price is more than $20 per day.

[10] Supra, note 5.

[11] Means a digital platform through which a person facilitates the making of supplies of short term accommodation situated in Canada by another person that is not registered under subdivision D of Division V (i.e. the normal GST/HST regime).

[12] For the purposes of this proposal, an “accommodation platform operator” is essentially defined to be a person that (a) control or sets the essential elements of the transaction between the supplier and the recipient (e.g. by providing listing services in respect of supplies of short-term accommodation in Canada and setting payment terms and conditions), or if such person doesn’t exists, the operator would be the person that is involved directly or through arrangement with third parties, in collecting, receiving or charging the consideration for the supply and transmitting all or part of the consideration to the supplier, or (c) is a prescribed person (not yet defined).

[13] In this case, it would strongly be recommended that sufficient proof of GST/HST registration be provided to the non-resident to support the non-taxable sale.

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