New GST/HST rules for digital economy businesses in Canada

Effective July 1, 2021, non-resident vendors who conduct online sales in Canada will have to adapt to the new rules on the goods and services tax (GST) and harmonized sales tax (HST).

These new rules concerning the digital economy were announced on November 30, 2020, by the Government of Canada. Further details and amendments were added to the Federal Budget 2021 presented last April 19. A Notice of Ways and Means Motion to amend the Excise Tax Act was tabled followed with Explanatory Notes by the Department of Finance Canada. For its part, the Canada Revenue Agency (CRA) released Frequently Asked Questions. More recently, to help affected businesses to prepare and adapt to the change, the CRA created a glossary of definitions for the digital economy and a new webpage called GST/HST for businesses in the digital economy, which includes a questionnaire to  help businesses determine whether they have to register for the new GST/HST simplified regime, as well as instructions and examples.

What you should know

The three proposed measures are pertaining to:

• GST/HST on digital products or services (including traditional services) provided to consumers in Canada by foreign-based digital businesses (which are not required to register under current GST/HST rules);

• GST/HST on goods supplied by fulfillment warehouses in Canada and sold to buyers in Canada, whether the goods are sold by non-resident vendors who sell directly to consumers in Canada for their own account, or whether the goods are sold through online market platforms that facilitate the sale of these goods to consumers in Canada by non-registered vendors; and

• GST/HST on platform-based short-term accommodation.

At the present time, non-resident vendors are generally not required to collect GST/HST if they sell products or services electronically to Canadian consumers, however, they do not have a physical presence, nor do they operate a business in Canada.

In general, the proposed measures would trigger the obligation to collect GST/HST on these types of purchases, which are considered under these proposed measures to be intended for direct consumption in Canada.

Non-resident vendors will be required to register under the simplified GST/HST registration framework if the total of their taxable supplies of digital products or services for consumers in Canada exceeds CA$30,000 over a 12-month period.

The reporting period will correspond to a calendar quarter.

The Federal Budget 2021 amends the proposed measures for electronic commerce supplies initially announced in the November 2020 Economic Statement. Under these changes:

• Suppliers registered under the proposed simplified method will be able to deduct their bad debt accounts and certain provincial refunds, at the HST point-of-sale to purchasers, from the sales tax they are required to pay;

• The CRA will have the authority to register platform operators and operators who would be required to register under the proposed simplified registration rules; and

• The Budget specifies that the CRA may exercise any discretion during the 12-month transition period to GST/HST measures as of July 1, 2021, when affected businesses and platform operators prove that they have taken reasonable steps to comply with the proposed measures, but have not been able to comply with all of them.

Definition of "Specified Canadian Recipient"

A "specified Canadian recipient" is a recipient of a supply who has not provided to the supplier satisfactory evidence of being registered to the GST/HST under Subdivision D of Division V of Part IX of the Excise Tax Act (Act) (i.e., the regular GST/HST registration).

Determining the CA$30,000 Threshold Amount

According to the new legislation, not all sales made in Canada would be included in the calculation of the CA$30,000 threshold, but those made to consumers who are considered specified recipients.

Under the new legislation, a person (except a registrant or a person operating a business in Canada) who is, at some point, a specified non-resident supplier, a distribution platform operator or a housing platform operator is required, at that time, to be registered under the new simplified method if the threshold amount for any 12-month period (except for a period that begins before July 2021) exceeds CA$30,000.

For example, when determining whether a person is required to be registered on July 1, 2021, only the 12-month period that begins on July 1, 2021, and ends on June 30, 2022, should be taken into account. However, when determining whether a person is required to be registered on August 1, 2022, all 12-month periods including that date (such as the 12-month period beginning on that date and the 12-month period ending on that date) should be taken into consideration and the person would be required to be registered on that date if the threshold amount for any period of those 12-month periods exceeds CA$30,000.

Distribution Warehouses

Under the new legislation, distribution platform operators will generally be required to register for GST/HST under the regular regime (not the simplified registration system for digital supplies mentioned above) and collect and pay the tax in cases where they make eligible supplies of tangible goods (including sales of goods by non-registered suppliers through distribution platforms where goods are shipped from a location in Canada to a buyer in Canada).

When a supply of goods is made by a non-resident supplier and the goods are shipped to a buyer in Canada (other than by mail or by courier from outside Canada), but the sale is not made through a distribution platform, it will generally be the non-resident who will need to register.

Key points to remember

• At the time of this publication, the simplified GST/HST online registration system is being developed and is not yet available. This webpage will be updated by the CRA once it becomes available.

• To our knowledge, the government has not yet explained the degree of due diligence to which suppliers will be subject to with respect to the validity of the GST/HST numbers that are provided to them.

• Our understanding is that the new legislation does not apply to the provision of goods sent to Canadian buyer by mail or by courier at an address in Canada from an address abroad, but the supplier will need to have evidence that the good was sent.

• Non-resident vendors should be prepared to:
  • Visit the CRA webpage in order to:
    • Determine whether your business must register for the new GST/HST regime;
    • Know how to register for GST/HST;
    • Know how to charge and collect the tax;
    • Complete and file a return;
    • Pay (remit) the tax that the suppliers collected;
    • Notification and reporting of information to find out if the suppliers have additional reporting obligations; and
    • Contact the CRA about GST/HST by phone or email.
  • Implement processes to obtain and keep the clients' GST/HST registration numbers; and
  • If the client does not provide a GST/HST registration number, put in place processes to obtain the client's place of residence to determine the GST/HST rate to be applied.

Key Contact

For more information, please contact Pierre Nadeau, Adm. A, M. Fisc., Senior Manager of Indirect Taxes or your advisor at Mazars.