On November 30, 2020, as part of the Fall Economic Statement 2020, Supporting Canadians and Fighting COVID-19 (“FES2 2020”), the Canadian federal government proposed sweeping changes to the taxation of the digital economy.
In particular, the government released draft legislative proposals to amend the federal goods and services tax/harmonized sales tax (“GST/HST”) (i.e., VAT) effective July 1, 2021. The stated intention of these amendments is to eliminate the current “competitive inequity” between resident and non-resident vendors of certain goods and services.
Signalling a rather bold shift in policy that is sure to draw the attention (and perhaps the ire) of the international community, the government also announced its intention to implement a new income tax on corporations providing digital services, effective January 1, 2022.
GST/HST (VAT) changes - effective July 1, 2021
- Non-resident registration required for digital products and services provided to Canadian consumers
Registration will become mandatory for non-resident vendors that supply digital products or services to customers in Canada. These non-resident vendors will be able to register for and remit GST/HST under a simplified online registration / remittance system.
Registration will also be mandatory for non-resident operators of digital platforms, such as online stores and marketplaces, that facilitate the sale of goods and services to Canadian customers by non-registered third-party vendors. The same simplified online registration / remittance system will be available to these operators, unless they also facilitate the sale of goods that are stored in Canada. (More on those operators below.)
The obligation to charge GST/HST is limited to business-to-consumer supplies and does not extend to business-to-business supplies. Therefore, if the non-resident vendor or operator can confirm that the customer is a GST/HST registrant, it will not be obliged to charge GST/HST.
- GST/HST on goods sold by non-residents shipped from within Canada
Non-resident digital platform operators that facilitate the sale by non-registered third-party vendors of goods that are shipped from a location in Canada to a Canadian customer (e.g., from a Canadian fulfilment warehouse) will now join resident digital platform operators in being required to register for and charge GST/HST on those sales.
In addition, non-resident vendors who sell directly (i.e., not through a third-party digital platform) to Canadian customers goods that are shipped from a location in Canada (e.g., a fulfillment warehouse) will be required to register for and charge GST/HST.
In both cases, the simplified online registration process will not be available and registration must be done under the usual process. In addition, the obligation to charge GST/HST will apply regardless of whether it is a business-to-consumer or business-to-business supply.
- GST/HST on all short-term accommodation sold through a digital platform
Non-resident digital platform operators that facilitate the supply of short-term accommodation in Canada will now join resident digital platform operators in being required to register for and charge GST/HST on those accommodations if the property owner is not a GST/HST registrant. If the property owner is a registrant, the responsibility to charge GST/HST remains with the owner. The simplified online registration / remittance process will be available to non-residents, and GST/HST need only be collected in business-to-consumer suppliers (where the person renting the accommodation is not a GST/HST registrant).
In all cases, the requirement to register is triggered when a supplier’s taxable supplies exceed CDN$30,000 over a 12-month period.
New digital services tax - effective January 1, 2022
For years, Canada has been working with its international partners in a process led by the Organization for Economic Cooperation and Development (“OECD”) to develop a multilateral consensus-based solution to address the tax challenges arising from the digitalization of the economy. The OECD previously sought to deliver a solution by the end of 2020, but due to delays caused by the COVID-19 outbreak is now aiming for mid-2021.
The Canadian government, apparently tired of waiting, announced in FES 2020 that while it “remains committed to a multilateral solution… [it] is concerned about the delay in arriving at consensus” and so is moving forward unilaterally with a tax on corporations providing digital services, which will apply beginning on January 1, 2022 until “an acceptable common approach comes into effect.”
It is possible that the new digital services tax will resemble one proposed by the Liberal party in its 2019 campaign platform: a “value-added” 3% tax on revenue generated in Canada by large technology companies (i.e., corporations with global revenue of at least CDN$1 billion and Canadian revenue of more than CDN$40 million), according to the party’s cost estimate at the time. That earlier proposal, modelled on the digital services tax recently introduced in France, would have applied to “targeted advertising and digital intermediation services.”
Details on this new proposed digital services tax were absent from FES 2020 but are expected to be announced when the government releases its 2021 federal budget.
Please contact any member of our National Tax Group if you have any questions about these proposals.
This article provides only general information about legal issues and developments, and is not intended to provide specific legal advice. Please see our disclaimer for more details.