Canada’s Indirect Taxes: A Guide for Digital Service Providers

The final couple of years has seen robust development within the digital media sectors, which embrace digital video content material, downloaded or streamed digital music, digital video games and electronically revealed content material. As digital merchandise can now simply be delivered to anyplace on this planet, many European firms are rising their buyer base on different continents. The Canadian digital media market, which is the second largest in North America, provides a promising income alternative as it’s projected to succeed in $6.48 billion in 2022.

EU companies that present digital providers to Canadian clients might discover themselves confronted with a number of tax registration and assortment obligations in Canada. The Canadian tax system is far more complicated than the one within the EU because it consists of a mix of federal and provincial taxes.

The products and providers tax (GST) applies nationally. 5 provinces—New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario, and Prince Edward Island—have coordinated their provincial gross sales taxes with the GST to implement the harmonized gross sales tax (HST), which operates in the identical approach because the GST. Separate provincial gross sales taxes are collected in British Columbia, Manitoba, Québec and Saskatchewan. 4 provinces—Alberta, Northwest Territories, Nunavut, and Yukon—don’t apply any provincial gross sales tax (PST).

The federal authorities and all of the provinces that levy a separate PST have enacted particular guidelines imposing tax assortment obligations on overseas suppliers of digital providers. The scope of those legal guidelines varies considerably.

Federal

From July 1, 2021, nonresident sellers supplying providers and intangibles to Canadian shoppers should register for GST/HST if their gross sales to unregistered Canadian purchasers over a 12-month interval, excluding gross sales made by a web based market, exceed or are anticipated to exceed 30,000 Canadian {dollars} ($23,287). Overseas sellers are usually not required to cost GST/HST on gross sales to Canadian clients who’re registered underneath the conventional GST/HST regime and have offered their registration quantity.

The scope of the federal laws is broad and contains all taxable provides of intangible private property or providers. Examples of products and providers lined by the nexus laws embrace video or music streaming, cellular apps, e-books, on-line video gaming, and conventional providers corresponding to authorized and accounting.

The tax charge to be charged will depend on the placement of the shopper:

• 5% (GST) in Alberta, British Columbia, Manitoba, Northwest Territories, Nunavut, Québec, Saskatchewan, and Yukon;
• 13% (HST) in Ontario; and
• 15% (HST) in New Brunswick, Newfoundland and Labrador, Nova Scotia, and Prince Edward Island.

The Canada Income Company offers detailed guidance on tips on how to decide the placement of the shopper, making an allowance for varied indicators.

There are additionally particular guidelines for distribution platform operators and digital lodging platforms.

The definition of “distribution platform operator” is broad and covers any individual (aside from the provider) who controls or units the important parts of the transaction between the provider and the recipient, or is concerned in amassing, receiving or charging the consideration for the provision and transmitting all or a part of the consideration to the provider (fee processors are explicitly excluded). If a transaction is facilitated by a web based distribution platform, the vendor doesn’t have any GST/HST obligations.

British Columbia

In September 2015, British Columbia launched a requirement for non-Canadian sellers of products to register and gather 7% PST in the event that they accepted orders from individuals in British Columbia and had stock in British Columbia on the time of the sale.

In April 2021, these registration and assortment necessities had been expanded to cowl overseas suppliers of software program and telecommunication providers whose gross income from all taxable and exempt gross sales of software program and telecommunication providers to British Columbia clients was greater than 10,000 Canadian {dollars} within the earlier 12 months or is anticipated to exceed that quantity within the subsequent 12 months.

Moreover, for software program to be topic to PST, it have to be bought to be used on or with an digital machine that’s ordinarily located in British Columbia, as decided by the billing or IP tackle. If a nonresident vendor doesn’t cost PST as a result of the shopper’s digital machine isn’t ordinarily located in British Columbia, they have to hold proof to point out why they didn’t gather PST.

Given the broad definitions of software program or telecommunication providers, the tax assortment requirement applies to all kinds of digital items and providers.

Telecommunication providers include the best to entry, view and obtain motion pictures, music or audiobooks. If a service supplier costs subscribers for entry to an internet site, the appliance of PST will depend on the content material of the web site. If the web site content material consists of nontaxable gadgets, corresponding to digital books and text-only articles, no PST is charged. If a buyer purchases entry to an internet site that gives them with the power to make use of a point of performance past merely viewing web site content material, corresponding to the potential to govern recordsdata or create new recordsdata, the shopper isn’t buying a telecommunication service however a proper to entry software program. The “software program” class includes subscriptions to on-line video video games, entry to on-line photograph or video modifying instruments and most cloud computing providers.

Companies to software program—testing, set up, restore—are typically exempt from PST. If the shopper is obliged to purchase a software program upkeep settlement as a part of a purchase order of taxable software program, they have to pay PST on the upkeep providers as the upkeep settlement varieties a part of the acquisition value of the taxable software program.

There are additionally a number of different exemptions that will apply to gross sales of software program and telecommunication providers.

For instance, such providers are exempt from PST if they’re offered to a purchaser as a part of the purchaser’s participation in an academic program offered by a qualifying faculty or different academic establishment. And, as in different provinces, if a buyer offers the vendor with their PST quantity or a certificates of exemption to point that they’re buying items or providers for resale, the vendor doesn’t must cost PST.

Efficient July 1, 2022, marketplace facilitators should cost and gather PST on:

• taxable gross sales of products which can be positioned inside Canada on the time of the sale and are bought to an individual in British Columbia;
• software program to be used on or with an digital machine ordinarily located in British Columbia;
• provision of lodging in British Columbia; and
• another taxable providers that they facilitate by their on-line market if the gross worth of retail gross sales that they made or facilitated within the previous 12 months was greater than 10,000 Canadian {dollars} or is anticipated to exceed this quantity within the subsequent 12 months.

The brand new guidelines relieve market sellers of the requirement to register and to gather tax the place {the marketplace} facilitator is obliged to take action. Nonetheless, market sellers stay collectively and severally accountable for any PST not collected and remitted by {the marketplace} facilitator.

The brand new guidelines additionally deem as taxable most of the providers offered by market facilitators to their sellers, corresponding to buyer assist, promoting, storage, itemizing of merchandise. The applying of PST to those providers contrasts with the web market guidelines in Saskatchewan and Manitoba the place these kind of providers are typically not thought of taxable underneath their respective PST guidelines.

Manitoba

Since 2002, companies positioned exterior of Manitoba that don’t conduct enterprise within the province should register and gather retail gross sales tax (RST) of seven% in the event that they:

• trigger tangible private property to be delivered in Manitoba;
• solicit orders for items in Manitoba; and
• settle for orders that originate in Manitoba.

Manitoba applies a broad definition of tangible private property that features software program delivered by digital means.

Efficient Dec. 1, 2021, Manitoba expanded its taxing authority in respect of gross sales of digital providers made by out-of-province sellers. Anybody who operates a web based lodging platform, on-line gross sales platform, or offers streaming providers have to be registered to gather RST.

A streaming service is outlined as a telecommunication service that features the best—whether or not exercised or not—to obtain, view, or entry by the use of an digital machine audio and video content material, excluding audiobooks. Because the guidance offered by the tax administration doesn’t point out any financial nexus thresholds for out-of-province sellers, they have to be registered as from the primary sale.

The scope of the RST assortment obligation is narrower than that underneath GST/HST legal guidelines. Many digital items and providers which can be taxable underneath GST/HST—cloud-computing providers that require no downloading of any software program, audiobooks, e-books, customized software program, web-based coaching—are usually not topic to RST.

The guidance offered by the tax administration clarifies that if an individual in Manitoba merely accesses software program put in on a server positioned exterior Manitoba, the relevant costs to the individual in Manitoba are usually not topic to RST. Nonetheless, if the software program is downloaded to a Manitoba pc for the individual’s use, the fees to be used of the software program are topic to RST.

If the RST has been collected and remitted by the platform operator, the vendor has no RST-related obligation in respect of that sale. Equally, if a buyer offers the vendor with their RST quantity or a certificates of exemption indicating that he’s buying items or providers for resale, the vendor doesn’t must cost RST.

Saskatchewan

In Could 2018, Saskatchewan finalized modifications to its PST laws to make clear that companies that don’t stick with it enterprise in Saskatchewan, however make retail gross sales of tangible private property and taxable providers within the province, must register and gather the PST if the products or providers are acquired to be used or consumption in Saskatchewan. This requirement applies to quite a lot of digital merchandise, corresponding to digital audio and video downloads, software program, software program providers and cloud-based providers. Merchandise which can be exempt in Saskatchewan—e-books, audiobooks and web-based coaching—don’t entice PST when they’re offered by nonresidents.

There isn’t any financial nexus threshold for nonresidents in Saskatchewan, that means that PST of 6% must be collected as from the primary transaction.

In July 2021, Saskatchewan enacted a new law extending the registration and tax assortment necessities to out-of-province digital distribution platforms, on-line lodging platforms and market facilitators. The brand new guidelines utilized with retroactive impact to Jan. 1, 2020.

An digital distribution platform contains web sites, web portals and functions that permit shoppers or customers to buy tangible private property and providers which can be delivered by an digital format.

A market facilitator is an individual who makes or facilitates a market for retail gross sales by market sellers, straight or not directly collects fee from a shopper or person, and remits fee to a market vendor. If a nonresident vendor makes use of a web based platform to promote to Saskatchewan residents, they don’t seem to be required to register if {the marketplace} operator collects PST on gross sales that it facilitates.

Québec

Québec prolonged the appliance of its gross sales tax (QST) to overseas suppliers of digital providers in January 2019. Its economic nexus laws have a really broad scope and impose a tax assortment obligation in respect of all provides of intangible private property and providers made by nonresident sellers to Québec clients.

Earlier than the laws took impact, Québec shoppers needed to self-assess QST in respect of the acquisition of providers and incorporeal movable property equipped exterior of Canada. Nonetheless, there was a low degree of compliance with this requirement.

The duty for overseas sellers to register and cost 9.975% QST is triggered on the primary day of the calendar month throughout which the edge of 30,000 Canadian {dollars} has been exceeded. This threshold contains the worth of all taxable provides of providers and intangible private property made in Québec to a recipient who fairly might be thought of a shopper in a 12-month interval.

An individual can’t be thought of a Québec shopper if the provision is made purely for enterprise functions, corresponding to the acquisition of enterprise software program, or to an individual who’s QST registered. One piece of proof, corresponding to a billing tackle, IP tackle, or payment-related financial institution info, is adequate to conclude that the shopper is positioned in Québec. Nonetheless, as soon as they register and begin amassing QST, they have to gather two items of noncontradictory proof to substantiate their clients’ location.

If the vendor makes use of a web based platform to promote intangible property and providers to Québec shoppers, the platform is topic to the QST registration, and assortment necessities within the place of the nonresident provider. The vendor may have no QST-related obligations in respect of gross sales facilitated by the platform.

Sensible Concerns

EU companies promoting digital providers to Canadian clients might find yourself having 5 totally different tax registrations in the event that they exceed the related federal and provincial financial nexus thresholds. As the edge calculation in Canada relies on a vendor’s gross income from a consecutive 12-month interval and never from the earlier calendar 12 months, a vendor not assembly the income threshold requirement should verify month-to-month whether or not an obligation to register for federal GST/HST, QST or British Columbia PST arises.

Nonresidents promoting into Canada want to find out the place their Canadian clients are positioned as each the taxability of merchandise and the tax charges might differ by province.

The federal GST/HST and QST have the broadest scope and apply to all digital items and providers.

Provincial gross sales taxes are a lot narrower in scope. Examples of digital merchandise which can be topic to totally different taxability guidelines embrace audiobooks (taxable in all places besides Manitoba RST and Saskatchewan PST), downloadable customized software program (taxable in all places besides Manitoba RST and British Columbia PST) and web-based coaching (taxable in all places besides the provincial gross sales taxes of Manitoba, Saskatchewan, and British Columbia).

All Canadian jurisdictions now have market facilitator guidelines in place. It is a nice simplification for overseas sellers, as such guidelines imply that they haven’t any tax assortment and registration obligations in respect of gross sales facilitated by on-line marketplaces.

This text doesn’t essentially replicate the opinion of The Bureau of Nationwide Affairs, Inc., the writer of Bloomberg Legislation and Bloomberg Tax, or its homeowners. 

The opinions expressed on this article are these of the writer and don’t essentially replicate the views of any organizations with which the writer is affiliated.

Writer Info

Aleksandra Bal is oblique tax know-how & operation lead at Stripe.