GST / HST and the digital economy

On July 1, 2021, new Goods and Services Tax (GST) and Harmonized Sales Tax (HST) measures relating to the digital economy came into effect. As a result of these measures, many non-resident businesses and platform operators (both Canadian resident and non-resident) are having to revisit their GST / HST obligations, as well as the processes required to meet these obligations.

Background

At a high level, the new measures were introduced to target supplies made by non-residents of Canada to Canadian consumers which were not already covered by the historic GST / HST regime (i.e., the “standard” regime). The historical “carrying on business test” that would trigger GST / HST registration obligations for non-residents of Canada had not been effective for some time. This is because it focused primarily on outdated indicators of presence in Canada, such as having a bank account in Canada or whether a non-resident's name and business was listed in a directory in Canada.

As a result, non-resident businesses were in a situation where they could operate without charging sales taxes to Canadian consumers, while their Canadian competitors had the obligation to charge and collect sales taxes on similar supplies. This created an unequal playing field.

The new measures (i.e., “new regime”) target supplies made by non-residents of Canada to Canadian consumers that were not already covered by the standard GST / HST framework. Generally, the changes relate to:

• Cross-border digital products and services;
• Goods supplied through fulfillment warehouses in Canada; and
• Short-term accommodation in Canada facilitated through a digital platform.

The new measures include GST / HST registration, collection, remittance, and reporting obligations that apply not only to non-resident vendors, but also distribution platform operators. The definition of “distribution platform operator” in the new rules is broad; many platform operators (generally, parties facilitating sales transactions between vendors and purchasers) may fall into this definition and be subject to the new rules.

Within certain sales thresholds, non-resident vendors and distribution platform operators are required to register under a simplified GST / HST framework with simplified compliance processes — though no input tax credits (ITCs) would be available under this framework. Such vendors and distribution platform operators can opt to register under the standard GST / HST program if they wish to be eligible for ITCs, in which case they will be subject to the standard GST / HST rules.

With the new measures in place for several months now, we are seeing some challenges in their application.

1. Tax collection obligations

   Determining who is required to collect GST / HST is a complex process that now requires a review of both the standard and the new GST / HST regimes. While the Canada Revenue Agency (CRA) has provided guidance on collection obligations, non-resident vendors and distribution platform operators will likely still have questions as to what their respective collection obligations are.

   For example, a distribution platform operator registered for the GST / HST (under either the simplified or standard GST / HST regimes) is required to charge and collect GST / HST on supplies of digital products or services made through its platform to certain Canadian customers — except in situations where the digital products or services are provided by a non-resident vendor registered under the standard GST / HST regime. In this case, it is the non-resident vendor (and not the platform operator) who has the obligation to collect and remit the GST / HST.

   In practice, distribution platform operators may not always be provided with the correct information from the vendors to make the appropriate determination. As platform operators often apply the same conditions to all the vendors they deal with — and will, in practice, often charge and collect taxes on their behalf regardless of the registration status of the vendors— this can result in GST / HST being remitted by the wrong party or remitted twice (by both the non-resident vendor and the platform distribution operator).

   The CRA has published a decision tree to help assess collection obligations, but a high level of complexity and uncertainty remains.

2. Taxes charged in error

   Under the new regime, GST / HST is not payable on a supply made by a vendor (the supplier) to a customer (the recipient) who is registered under the standard regime.

   In practice, the billing systems of certain non-resident vendors are likely not set up to assess the registration status of their Canadian customers. Similarly, the customer may not know whether the vendor is registered under the new or standard regime, making it difficult for the customer to determine if it has the obligation to pay GST / HST charged by the vendor, considering their own registration status.

   Where taxes are charged in error by the vendor to the customer, the customer can only recover the amount by seeking a credit from the vendor, as the new regime does not allow for rebates from the CRA in this situation. Where the vendor’s systems are not set up to credit taxes charged in error, it could take longer for the customer to recover such amounts as the process may require additional investigation.

3. ITCs claimed in error

   While it is the customer’s responsibility (as the recipient of goods or services) to disclose its own GST / HST registration status, it may not always know when it needs to do so. It may assume in certain cases taxes are paid under the standard regime and that it will be entitled to ITCs in respect of amounts paid, even when such amounts were in error as discussed above. This creates further complications in the customer’s GST / HST reporting process.

4. Guidance for additional reporting requirements

   Distribution platform operators and platform operators that facilitate short-term rental accommodation will be required to file an annual information return with the CRA for the calendar year, due six months after the end of the calendar year. The CRA has announced the deferral of the first calendar year information return to help affected businesses and platform operators adjust to the new reporting requirements. While information returns are not required for the 2021 calendar year, the reporting requirement will be in effect for 2022 and later calendar years.

   July 2022 Update: The federal government recently proposed implementing the Model Rules that the Organization for Economic Co-operation and Development developed for reporting by digital platform operators on platform sellers. Until further notice, the CRA has indicated it does not require platform operators to file such information returns.

   Fulfillment warehouses must notify the CRA that they are carrying on a fulfillment business. They must also maintain records on their non-resident clients and the goods stored on these clients’ behalf.

   We will be looking to CRA for additional guidance on the reporting and notification requirements, which will hopefully be published in due course to allow registrants sufficient time to gather any required information.

What does this mean for you and your business?

While the new GST / HST regime addresses some major concerns identified through the continuing growth of the digital economy, it is challenging to navigate. Where applicable, the new rules increase the complexity of GST / HST tax compliance for businesses operating in Canada. Businesses need to be aware of and carefully review the new rules to ensure they meet their GST / HST obligations. Your MNP indirect tax advisor can help you and your business navigate the new rules and manage the compliance process.

Contact

For more information on indirect taxes and their impact on your business, contact Heather Weber, CPA, CA, Indirect Tax Services Leader, at 250.979.2575 or [email protected], or Nicolas Désy, LL.M, Partner, at 514.228.7897 or [email protected]