By the end of November, the Department of Finance Canada posted a news release under the name of Supporting Canadians and Fighting COVID-19: Fall Economic Statement 2020. Besides discussing the impact of the virus on health and jobs, it also goes through the economic and tax implications, specifically the Tax System for the Digital Economy.
Under existing regulations, foreign digital businesses do not need to charge GST/HST to their sale of goods or services to local Canadians. According to the government, this creates a big disadvantage to local businesses and undercuts competition, and at the same time puts the burden on Canadian customers to remit sales tax. In addition, the tax authorities could also use this tax money for different purposes.
To level the field, the Canadian government proposes a number of changes to current rules:
– All foreign digital service or products providers (like mobile apps, online video gaming and video and music streaming) will be required to register for, collect and remit GST/HST on their taxable sales to Canadians. The effective date of this measure will be July 1, 2021. It is estimated that this measure will increase federal revenues by $1.2 billion over 5 years, starting in 2021-22.
– GST/HST will be applied to all sales to Canadians of goods that are located in Canadian fulfillment warehouses, effective July 1, 2021. Under this proposal, the GST/HST will be required to be collected and remitted by either the foreign-based vendor or the digital platform that facilitates the sale and it is expected to generate federal resources around $1.6 billion over 5 years.
– All platform-based short-term rental accommodation supplied in Canada will also have to apply GST/HST as of July 1, 2021.
Before the proposal of these new measures, there was no federal GST/HST to tax foreign suppliers of Digital Services.
As it stands today, 3 provinces are taxing non-resident suppliers of Digital Services:
Introduced on July 1st, 2020, all B2C non resident suppliers of digital services are required to be registered for Provincial Sales Tax (PST) on eServices. The registration threshold is CA$ 10,000 and the applicable tax rate is 7%.
Since January 1st, 2019, all foreign suppliers of digital services to final consumers in Canada (B2C) need to register for Québec Sales Tax (QST) on eServices. When supplies exceed the registration threshold of CA$ 30,000, such supplies are taxable at a rate of 9.975%.
Also introduced on January 1st, 2019, all digital supplies by non-residents companies are subject to Provincial Sales Tax (PST) on eServices of 6%. There is no threshold for the registration, therefore since the first supply the obligation to register arises.