Canada to tax non-resident sales of digital products and more

Canada’s current tax system generally doesn’t require non-resident vendors to register then collect and remit Goods and Services Tax (GST) or Harmonized Sales Tax (HST). A proposal introduced in the government’s 2020 Fall Economic Statement would change that starting July 1, 2021.

The GST/HST is a broad-based consumption tax intended to apply to most goods and services consumed in Canada, but it hasn’t kept up with the times. Although Canadian vendors must register then collect and remit GST/HST, non-resident vendors can’t be compelled to do the same unless they carry on business in Canada (i.e., conduct the business activity in question regularly or continually).

Of course, the internet now enables non-resident vendors to easily solicit sales from Canadian consumers without “carrying on business” in Canada. This, according to the government, is challenging “the effectiveness and fairness of the GST/HST system”

To make the system more equitable, the government proposes the following:

Tax cross-border sales of digital products and cross-border services
Tax goods supplied through fulfillment warehouses located in Canada
Tax short-term accommodation sold through online platforms

The proposed changes would apply only to non-resident vendors and marketplace facilitators whose sales to consumers in Canada exceed, or are expected to exceed, $30,000 over a 12-month period.

Tax non-resident sales of digital products and services

Quebec and Saskatchewan currently require certain non-resident vendors to register then collect and remit their local sales tax on certain digital services sold to consumers in those provinces. Starting April 1, 2021, some foreign providers of software and telecommunications services will be subject to British Columbia’s Provincial Sales Tax. However, GST/HST doesn’t apply to these sales today.

Under the Canadian government’s proposed amendments, non-resident vendors whose sales of digital products and services to consumers in Canada exceed the $30,000 threshold would need to register then collect and remit applicable GST/HST to the Canada Revenue Agency (CRA). Sales made through a registered distribution platform operation would count toward a non-resident vendor’s $30,000 threshold.

For sales made through a digital distribution platform, the responsibility to register, collect, and remit the GST/HST would fall on the digital platform operator, so long as its sales to Canadian consumers exceed the $30,000 threshold.

Non-resident vendors whose sales exceed the threshold would be required to collect and remit GST/HST on business-to-consumer (B2C) sales only, not business-to-business (B2B) sales.

The government intends to implement a simplified process for online registration and remittance. Additional details can be found here.

Tax goods supplied through fulfillment warehouses located in Canada

Canada’s also looking to make marketplace facilitators (aka, distribution platform operators) collect and remit GST/HST due on third-party sales fulfilled from warehouses in Canada.

The government explains, “While applicable duties and taxes are levied at the border on the value of the goods at the time of importation, the GST/HST is not consistently charged on the final price paid for the goods when they are subsequently sold to Canadians through distribution platforms and fulfillment warehouses located in Canada. This means that the difference between the value at the time of importation and the final price paid escapes the GST/HST.”

Although such goods are in Canada at the time of sale, neither the non-resident vendor nor distribution platform operator is required to collect or remit GST/HST under current law: The non-resident third-party vendor generally isn’t “carrying on business” in Canada, and the distribution platform operator isn’t considered to be “the supplier of the goods.” This puts resident vendors at a competitive disadvantage.

To level the playing field, both resident and non-resident distribution platform operators whose qualifying sales into Canada exceed or are expected to exceed $30,000 over a 12-month period would be liable for GST/HST on sales of goods facilitated on behalf of a non-registered vendor to consumers in Canada, whether shipped from a fulfillment warehouse or otherwise. The tax would be due on the final sale price, excluding service fees.

Among other requirements, fulfillment businesses would need to confirm the registration status of all vendors, as well as maintain records of non-resident clients and goods stored on behalf of non-resident clients.

Canada’s also looking to require non-resident vendors with goods in Canada (in fulfillment houses or elsewhere) to register and collect and remit GST/HST on direct sales to Canadian consumers. This would apply to non-resident vendors whose total qualifying sales to purchasers in the country exceed or are expected to exceed the $30,000 threshold.

Under the proposed changes, GST/HST would apply to most taxable sales occurring through distribution platforms — those by resident and non-resident vendors. Additional details about the proposed changes can be found here.

Tax short-term accommodation sold through online platforms

Canada’s also seeking to apply GST/HST to marketplace sales of short-term accommodations in Canada (i.e., sales facilitated through a digital accommodation platform).

GST/HST generally applies to short term accommodations in Canada, but under existing law, the platform isn’t required to collect and remit it. Property owners (or responsible persons) must register for GST/HST only if they make more than $30,000 in taxable sales (including but not limited to sales of short-term accommodation made through an online platform) in Canada. As a result, the tax on these transactions often isn’t collected.

Under the proposed system, property owners (or responsible persons) that are registered for GST/HST would be liable for the GST/HST due on the short-term rentals. If the property owner or responsible party isn’t registered for GST/HST, the accommodation platform operation would be deemed the supplier liable for the GST/HST.

As above, the tax obligation would apply to property owners, responsible parties, or accommodation platform operations that make or facilitate (or expect) $30,000 in taxable supplies of short-term accommodation in Canada over a 12-month period. Additional details are available here.

Lessons from South Dakota v. Wayfair, Inc.

All this should be familiar to U.S. readers.

Until the Supreme Court of the United States issued the groundbreaking decision in South Dakota v. Wayfair, Inc. (June 2018), states couldn’t impose a sales tax collection obligation on businesses with no physical presence the state — the equivalent of a non-resident vendor in Canada.

After the Wayfair decision, states quickly adopted economic nexus laws requiring out-of-state sellers with a certain amount of sales activity in the state to collect and remit sales tax. Florida and Missouri are the only two states with a general sales tax that don’t tax remote sales today.

Likewise, most states now require marketplace facilitators to collect and remit the tax due on third-party sales, whether the individual seller has a physical presence in the state or not.

Many Canadian businesses have been impacted by economic nexus and marketplace facilitator laws in the U.S. Come July 1, 2021, U.S. businesses that sell to consumers in Canada will likely face new registration, collection, and remittance requirements themselves. Companies selling affected digital products or services into British Columbia, Quebec, and Saskatchewan could be required to register and remit to four different tax authorities.

Avalara helps businesses of all size comply with international tax obligations. Learn more.

Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.