The federal government of Canada is introducing new tax rules for ecommerce, which are proposed to come into effect as of 1 July 2021. These will aim to create a fair environment for taxation where all online businesses can compete on equal footing.
Currently, foreign ecommerce traders generally don’t have to collect GST/HST on the supplies they make to Canadian consumers. Inevitably, this has created an unfair competitive advantage for non-resident companies. The global pandemic has accentuated the recent boom in ecommerce and the need for new taxation rules designed for the digital economy.
As such, the new proposed rules will ensure that both resident and foreign ecommerce sellers charge and collect GST/HST from consumers on all ecommerce supplies they make.
Outline of the new upcoming changes
The proposed legislative changes include:
- The requirement for non-resident online businesses supplying digital products or B2C services to Canadian consumers to register for the GST/HST and start collecting and remitting the due indirect tax on their sales.
- Distribution platform operators and marketplaces would also be liable for registering for the GST/HST on the Canadian B2C sales they facilitate.
- The supplies of short-term accommodation in Canada to be subject to the GST/HST.
To help companies remit the due tax on the above-mentioned supplies, the government of Canada is launching a simplified registration scheme on 1 July 2021.
- Distribution platform operators would have to register under the normal GST/HST regime to remit the indirect tax they would collect on the sales of goods dispatched from a fulfilment centre or any warehouse in Canada, when they facilitate those supplies for a business that is not registered for the GST/HST in Canada.
- Non-resident sellers making sales from their own website would also need to register through the normal GST/HST process to charge, collect and remit the indirect tax due on goods dispatched within Canada.
Who is impacted by the new measures?
Non-resident businesses making the following supplies to Canadian consumers are likely to be affected by the new regulations:
- Supply of digital goods and services to consumers located in Canada;
- B2C supplies of goods within Canada or facilitating those supplies;
- Supplies of short-term accommodation in Canada, when the sale if facilitated through an online platform. Then operator of the online platform would likely be liable for the tax.
A new simplified registration scheme for the digital economy
The simplified registration for GST/HST will be made available to online businesses making the following supplies to Canadian customers:
- Cross-border sales of online products and services.
- Short-term accommodation provided through an online platform.
Sales of goods supplied within Canada are not eligible for this simplified scheme and will need to be reported through the normal GST/HST registration.
Registrations to this new simplified scheme are due to open from 25 June 2021.
An exemption threshold applying to small businesses
To mitigate the impact of these measures on smaller businesses, the government of Canada is introducing an annual turnover threshold of $30,000 CAD. This will apply to non-resident businesses supplying taxable goods, digital products or services to consumers in Canada.
As a non-resident business, you would be liable to register for the GST/HST in Canada once your turnover on eligible taxable goods exceeds $30,000 CAD over any 12-month period starting 1 July 2021. Distribution platform operators facilitating those supplies can also benefit from the exemption threshold.
How can you prepare for these changes?
If you are not registered for GST/HST in Canada, you may become liable to register under the new rules.
If you are making supplies of goods and/or digital products and services to consumers in Canada, the platform you sell on might be eligible to register for GST/HST and collect indirect tax on your behalf.
These upcoming changes are in line with the OECD’s recommendation to make online marketplaces liable for collecting the GST or VAT from consumers on behalf of sellers and modernise tax rules for the digital economy. We have seen other countries, and the EU, gradually implementing similar tax reforms with the aim to boost tax collection and close any loopholes that online businesses have been able to benefit from until recently.
In addition to the federal GST/HST reforms, Canadian provinces are also introducing new rules to tax the digital economy one by one.
If you are concerned about how these new rules might affect you and unsure whether you should register for the GST/HST in Canada, contact us and we would be happy to help you identify your tax obligations.