Canada imposes corporate and personal income tax on its residents (including Canadian subsidiaries of foreign entities) in respect of income and capital gains earned anywhere in the world.  Federal income tax is imposed under the Income Tax Act (ITA).  Non-residents who carry on business in Canada, are employed in Canada or sell certain types of properties are also subject to Canadian income tax.

All of the provinces of Canada impose provincial income taxes on corporations and individuals residing or carrying on business within the province.  Generally, taxable income for provincial income tax purposes is computed in the same manner as under the ITA.  However, each of the provinces provides for certain modifications in the calculation of tax liability, including the provision of specified tax incentives.

The ITA also imposes a 25% withholding tax on non-residents who receive dividends, certain interest payments, rents, royalties, certain trust distributions or management fees from Canada.  The Canadian payer of any such amounts is liable for withholding and remitting this tax on behalf of the non-resident recipient.  Canada has an extensive double-tax treaty network that may reduce or eliminate the 25% withholding tax rate on such types of income.  For example, the Canada-United States Tax Convention (1980) eliminates withholding tax on most cross-border interest payments and reduces the rate on dividends to 15% or 5% depending on the circumstances.

Canada is a signatory to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) and has adopted the minimum standards (principal purpose test and dispute resolution) as well as certain optional provisions.  

In addition to income tax, a sales tax is levied at each of the federal and provincial levels, except in Alberta where no sales tax is imposed by the province.  Moreover, the governments of the Canadian territories (Northwest Territories, Nunavut and Yukon) do not levy a sales tax.  Some provinces have combined their respective provincial sales taxes with the federal tax to create a harmonized sales tax that is administered centrally by the government of Canada.  In addition, various specific indirect taxes including the luxury tax and the underused housing tax have recently been implemented by the federal government.

In this chapter

• Legal systems
• Taxation authorities
• Business vehicles
• Financing a corporate subsidiary
• Corporate income tax
• Cross-border payments
• Payroll taxes
• Indirect taxes

Legal systems

Canada and its provinces and territories (other than the province of Québec) operate under a common law legal system. Québec utilizes a civil law system for private law that is based on the Civil Code of Québec. While the ability to make certain laws are in the exclusive domain of the federal government, others are within the scope of provincial authority. In some cases, the federal and provincial governments exercise concurrent jurisdiction. For example, while the federal government has the authority to regulate trade and commerce, the provinces have the right to regulate (i) the incorporation of companies with provincial objects and (ii) property and civil rights in the province.

Taxation authorities

The federal tax system in Canada is administered by the Canada Revenue Agency (CRA). The CRA also administers provincial income tax and/or sales tax for a number of provinces. For example, in Ontario, the CRA collects both provincial income tax and sales tax, while in British Columbia only income tax is administered by the CRA on behalf of the provincial government. In Québec, Revenu Québec is responsible for collecting provincial income tax as well as both the federal and Québec sales tax.

Business vehicles

A non-resident may either establish a Canadian business vehicle to carry on business in Canada or operate directly through a foreign entity (with or without a Canadian permanent establishment). Canadian business vehicles are corporations (limited liability or unlimited liability) and partnerships (general or limited). While it is also possible to use a trust to carry on business in Canada, due to a number of complexities, a trust is rarely utilized for these purposes. However, it is common for trusts (including family trusts and mutual fund trusts) to hold investments, such as shares of corporations.

Partnerships

A partnership (whether general or limited) is generally treated as fiscally transparent for Canadian income tax purposes. While certain partnerships are required to file annual information returns, it is the partners of the partnership, rather than the partnership itself, that are subject to income tax under the ITA. However, the ability of a limited partner to deduct losses incurred by a limited partnership may be restricted to the extent the losses exceed the limited partner’s “at-risk” amount. A partnership will be considered to be a non-resident of Canada for withholding purposes unless it qualifies as a “Canadian partnership” under the ITA. To be a Canadian partnership, all of the partners of the partnership must be Canadian residents. There is no requirement for the partnership to be formed under Canadian law in order for it to qualify as a Canadian partnership. Conversely, a partnership formed under Canadian law that has one or more non-resident partners (directly or indirectly through other partnerships) will not qualify as a Canadian partnership.

Corporations

Corporations where shareholders are not liable for the corporation’s liabilities can be incorporated quickly (often same day) either federally or in any of the provinces or territories.  The jurisdiction of incorporation does not impact on the corporation’s income tax liability.  Often the choice of jurisdiction is based on the residence requirements for corporate directors.  For example, corporations incorporated under federal law require that at least 25% of the directors of the corporation be Canadian residents, while no such requirement exists for British Columbia, Ontario, Québec, New Brunswick or Nova Scotia.

The establishment of a corporation does not require any capital to have been received by the corporation.  However, in order to issue shares, a nominal amount of capital must be received by the corporation.  Most provinces do not allow a person to issue a promissory note as payment for shares of a company.

Unlimited Liability Company

The provinces of Nova Scotia, Alberta and British Columbia permit the incorporation of an unlimited liability company (ULC). As with other corporations, a ULC can be incorporated quickly. However, unlike a regular corporation, a ULC does not provide shareholder protection from the liabilities of the company in the event that the company is insolvent or wound up. Therefore, the direct shareholder of a ULC is generally a liability-blocking entity (such as a holding company with no assets other than the shares of the ULC).

While a ULC does not provide any Canadian tax advantages, it does qualify to be treated as fiscally transparent for United States tax purposes, thereby providing certain tax advantages to US shareholders. Use of a ULC does create certain complexities under the Canada-United States Tax Convention (1980).

Foreign Corporations (with or without a Canadian branch)

A foreign corporation that carries on business in Canada is subject to tax under the ITA in respect of such income. The determination of whether a corporation is carrying on business in Canada is generally made in accordance with common law principles. In addition, the ITA deems certain activities conducted by a non-resident to constitute carrying on business in Canada. Where the foreign corporation is resident in a country with which Canada has a double-tax treaty and is eligible to claim the benefits thereunder, it will generally be exempt from Canadian taxation on its business profits except to the extent that the profits were earned through a permanent establishment of the corporation that was situated in Canada.

A corporation that operates through a Canadian permanent establishment (such as a branch) will be subject to Canadian income tax as well as branch tax (see details below).

The ITA imposes a withholding tax of 15% on all payments made to non-residents in respect of services rendered in Canada. For services rendered in Québec, an additional 9% provincial withholding tax applies. These withholding taxes also apply to payments made to a Canadian branch of a foreign corporation. While the amounts withheld may be refunded in whole, or in part, upon the filing of a non-resident income tax return, the withholding obligation imposes a cash flow burden on the non-resident and an administrative burden on its customers. Accordingly, it is generally impractical for a foreign corporation to operate a Canadian services business either directly or through a Canadian branch. Non-residents planning to operate a services business in Canada will generally incorporate a Canadian subsidiary.

Financing a corporate subsidiary

Equity financing

Contributions for shares

Where an equity investment is made into a Canadian corporation in exchange for shares, the amount of the investment is added to the corporation’s “stated capital” account. Subject to certain adjustments, a corporation’s stated capital is generally the same as its paid-up capital for tax purposes.

Contributions without taking additional shares

Where an equity contribution is made by a shareholder to a federally incorporated corporation and to most provincially incorporated corporations without the issuance of additional shares, the amount is added to the “contributed surplus” account of the corporation and not stated capital. However, in certain circumstances, the contributed surplus can be transferred to stated capital without incurring negative tax consequences.

Distributions of paid-up capital

A corporation (other than a public corporation) is permitted to make distributions of its paid-up capital to a non-resident shareholder without incurring Canadian withholding tax. In contrast, the ITA does not permit the tax-free distribution of contributed surplus that has not been converted into stated capital. While ordinary course reductions of capital made by a public corporation are deemed to be dividends, a public corporation may return capital on a redemption, acquisition or cancellation of any of its shares or in the course of a winding-up, discontinuance or reorganization of its business.

Debt financing

General

Interest on debt obligations is generally considered to be a capital expenditure and therefore only deductible where specifically permitted under the ITA. In this regard, the ITA generally permits a deduction for a reasonable amount of interest that is paid or payable pursuant to a legal obligation to pay interest on (i) borrowed money used for the purpose of earning income from a business or property or (ii) an amount payable for property acquired for the purpose of gaining or producing income from the property or for the purpose of gaining or producing income from a business.

Withholding tax implications

Interest (other than participating debt interest) that is paid or credited by a Canadian resident to a non-resident with which it deals at arm’s length is generally exempt from withholding tax. However, the ITA imposes a withholding tax of 25% on interest payments made to non—arm’s length parties. As previously mentioned, the withholding tax rate can be reduced or eliminated under an applicable double-tax treaty. For example, the Canada-United States Tax Convention (1980) generally eliminates withholding tax on cross-border, non—arm’s length interest payments (other than participating debt interest).

Thin capitalization

If a Canadian corporation is to be financed with debt, it may be subject to the thin capitalization rules contained in the ITA. These rules restrict the deductibility of interest paid or payable by a corporation resident in Canada to certain non-resident shareholders (or parties that do not deal at arm’s length with such shareholders) where the ratio of interest-bearing debt to equity exceeds 1.5 to 1. To the extent that debt exceeds this ratio, there will be a proportionate denial of the interest deduction and any payment of interest that is subject to restriction under these rules is deemed to be a payment of a dividend for the purpose of withholding tax obligations.

Excessive interest and financing expenses limitation

Canada recently enacted new interest deductibility limitation rules. The Excessive Interest and Financing Expense Limitation (EIFEL) rules apply to taxation years that begin on or after October 1, 2023.  

These interest deductibility limits restrict the amount of net interest and financing expenses (IFEs) (being interest and financing expenses net of interest and financing revenues) that may be deducted by a taxpayer (or by a group) to 30% of “adjusted taxable income” – which is calculated on a basis similar to earnings before interest, taxes, depreciation and amortization, also known as “EBITDA”. The definition of “taxpayer” in the EIFEL rules excludes natural persons and partnerships thereby limiting the scope of these deductibility limits to corporations and trusts.  However, these deductibility limits apply to corporations or trusts that hold an interest in a partnership to the extent of their share of net interest and financing expenses from the partnership. IFEs that are denied under these rules can be carried forward indefinitely and deducted in a future taxation year where there is additional capacity.. Generally, the EIFEL rules do not apply to a Canadian resident corporation in a taxation year if its total net IFEs is less than CA$1 million in the particular year.

Hybrid mismatch

Canada recently enacted certain hybrid mismatch rules which apply retroactively to payments arising on or after July 1, 2022. 

These rules are intended to implement the recommendations in, and be generally consistent with, the report under Action 2 of the Group of 20 and Organisation for Economic Co-operation and Development's Base Erosion and Profit Shifting Project (the "BEPS Action 2 Report"), titled Final Report on Neutralising the Effects of Hybrid Mismatch Arrangements.

“Hybrid mismatch arrangements” are cross-border arrangements that exploit differences in the income tax treatment of business entities or financial instruments under the laws of two or more countries to produce mismatches in tax results (referred to as "hybrid mismatches").

Consistent with the recommendations in the BEPS Action 2 Report, the Canadian hybrid mismatch rules eliminate hybrid mismatches and align the tax results in Canada and the other relevant country in respect of a mismatch, by restricting the amount deductible by a taxpayer in respect of a payment under a hybrid mismatch arrangement, or including an amount in the income of a taxpayer who receives such a payment, as applicable.

The new legislation addresses deduction/non-inclusion mismatches that arise from payments where the mismatch is attributable to the terms of a particular financial instrument.

Stamp tax

Canada does not impose a stamp tax in respect of debt or equity financing.

Corporate income tax

Income tax rate

For 2024, the combined federal and provincial corporate tax rate on general active business income ranges between 23% and 31%, depending on the province or territory.

A corporation that qualifies as a “Canadian-controlled private corporation” is entitled to certain tax incentives and is also subject to additional refundable taxes on investment income.

Capital gains

As of June 25, 2024, Canadian resident corporation, including a Canadian subsidiary of a foreign corporation must include 66.67% of all capital gains (referred to as “taxable capital gains”) in its taxable income.  Taxable capital gains are taxed in the same manner as ordinary income; 66.67% of capital losses (referred to as “allowable capital losses”) can be used to offset taxable capital gains in the year.  To the extent that allowable capital losses exceed taxable capital gains in a year, the excess may generally be carried back three years or forward indefinitely to be applied against taxable capital gains in those other years.  The ITA contains restrictions on the use of losses by a corporation following an acquisition of control of the corporation.

A non-resident is only taxable on gains arising from the disposition of “taxable Canadian property,” other than gains exempted under an applicable double-tax treaty.  Taxable Canadian property includes all of the following:

1. Real or immovable property situated in Canada
2. Property (including goodwill) used or held by a taxpayer in a business carried on in Canada
3. Inventory forming part of a business carried on in Canada
4. Shares of a corporation (other than shares listed on a designated stock exchange), partnership units or interests in a trust (other than a mutual fund trust) if, at any time during the 60-month period preceding the disposition, the shares, units, or interests, as applicable, derived more than 50% of their fair market value from Canadian real property, Canadian resource property or timber resource property (including options, interests or rights therein).

For shares listed on a designated stock exchange and mutual fund trusts to be taxable Canadian property, in addition to the foregoing test, the non-resident (together with certain non–arm’s length parties) must own 25% or more of the issued shares of any class of the corporation or units of the mutual fund trust, as the case may be.  Other rules apply to non-resident insurance companies.

Branch tax

The ITA imposes a tax equal to 25% of Canadian after-tax profits earned by a branch of a non-resident corporation that are not reinvested in Canada. The branch tax is roughly equivalent to the withholding tax that would apply on dividends paid by a Canadian subsidiary to a foreign parent. The branch tax may be reduced or eliminated under an applicable double-tax treaty. For example, under the Canada-United States Tax Convention (1980), the first CA$500,000 of after-tax profits not reinvested in Canada is exempt from branch tax and the tax rate on any excess is reduced to 5%.

Computation of taxable income

Taxable base

A taxpayer is subject to tax on its profits from carrying on its business. Profit is generally considered to be its revenues less its deductible expenditures.

Deductions

A taxpayer is generally permitted to deduct its current expenses in computing business income. As a general rule, capital expenses are not deductible. However, the ITA provides for specific exceptions to that rule. This includes interest incurred for the purpose of earning income from a business or property (subject to the thin capitalization, excessive interest and financing expenses limitation and hybrid mismatch rules discussed above) and depreciation expense (referred to as capital cost allowance).

Income tax reporting

Canadian resident corporations and non-resident corporations that carry on business in Canada or that dispose of taxable Canadian property are required to file an annual corporate income tax return. Corporate tax returns must be filed within six months of the fiscal year-end of the corporation in order to avoid late filing penalties. Installment payments are required in respect of current-year taxes, and interest on any unpaid tax balance will start accruing two months after the year-end of the corporation.

A provincial tax return must also be filed for each province in which the corporation has a permanent establishment. In all provinces other than Alberta and Québec, the provincial tax return forms part of the federal return.

General anti-avoidance rule

The general anti-avoidance rule (GAAR) can be used by the CRA to deny a tax benefit where an avoidance transaction (or series of transactions) that otherwise complies with the rules of the ITA results in the misuse or abuse of the object, spirit, or purpose of the ITA.  Canada recently enacted legislation that significantly expands and strengthens the GAAR which retroactively applies from January 1, 2024. Under the expanded GAAR, the threshold test for an avoidance transaction is reduced, an economic substance rule has been introduced, a 25% penalty may be imposed and an extension of the normal reassessment period in certain circumstances may apply in certain circumstances 

Cross-border payments

Transfer pricing

Canada’s transfer pricing regime generally conforms to the arm’s length principle of the Organisation for Economic Co-operation and Development (OECD). The ITA permits the CRA to impose a transfer pricing adjustment in respect of a transaction that is not made on arm’s length terms or conditions. A transfer pricing adjustment can also be made in respect of a transaction that would not have been entered into at all by arm’s length parties if it can reasonably be considered that the transaction was not entered into primarily for non-tax purposes. Canadian taxpayers are also required to maintain contemporaneous documentation in respect of transactions subject to the transfer pricing rules.

Withholding tax on passive income

Payments made by a resident of Canada to a non-resident (including a partnership that does not qualify as a “Canadian partnership”) in respect of certain types of interest payments, rents, royalties, dividends, management or administration fees and trust income distributions are subject to tax under Part XIII of the ITA at the rate of 25%. However, the rate may be reduced under an applicable double-tax treaty (subject to the application of the MLI, described below).

Withholding tax on services fees

Where any person makes a payment to a non-resident of Canada in respect of services performed in Canada, the payer must deduct and withhold 15% of the gross payment on account of federal income tax. Where the services are performed in Québec, the payer must deduct an additional 9% on account of provincial income tax. The payment is considered to be made on account of income taxes owing by the recipient of the payment and may be recovered in whole or in part upon the filing of an income tax return. In particular, a non-resident may be able to claim an exemption from Canadian income tax on such business profits if the non-resident is a resident of a country with which Canada has entered into a double-tax treaty and does not maintain a permanent establishment in Canada.

Multilateral Instrument

Canada ratified the MLI on June 21, 2019 and deposited its instruments of ratification on August 29, 2019. On December 1, 2019, the MLI entered into force and began to apply to some of Canada’s tax treaties as early as January 1, 2020. Canada has listed 84 treaties to be covered by the MLI. Notable exclusions are Canada’s treaties with the United States (which has not adopted the MLI), Germany and Switzerland. Canada is currently in updated treaty negotiations with Germany and Switzerland and intends to incorporate elements of the MLI in the new treaties with those countries.

Canada has adopted the minimum provisions of the MLI as well as Article 4 (dual resident entities), Article 8 (dividend transfer transactions), Article 9 (capital gains) and Articles 18-26 (arbitration). Canada has also adopted Article 5 with respect to its treaties with Gabon, Ivory Coast, Morocco and Poland.

International tax reform

On October 8, 2021, Canada, along with 135 other countries, committed to a two-pillar plan for international corporate tax reform that supports the OECD Inclusive Framework’s “Tax Challenges Arising from Digitalisation” project.

In April 2024, Canada reaffirmed its commitment to work with its global partners toward completing multilateral negotiations so that the convention to implement Pillar One can be brought into effect as soon as a critical mass of countries is willing. At the same time Canada also indicated that, due to the consecutive delays internationally in implementing the multilateral treaty, it would be moving ahead with its plan to enact a Digital Services Tax (DST) notwithstanding the ongoing Pillar One negotiations. Canada released its latest draft legislative proposals for a DST on August 4, 2023, which now forms part of a bill tabled before Parliament.  The DST will be imposed no earlier than January 1, 2024 and the first year of the DST’s application would cover taxable revenues earned since January 1, 2022

In March 2023, Canada also confirmed its intention to introduce legislation implementing the Income Inclusion Rules (IIR) and a domestic minimum top-up tax applicable to Canadian entities of multinational enterprises (MNEs) in furtherance of Pillar Two, with effect for fiscal years of MNEs that begin on or after December 31, 2023.  Canada also intends to implement the Undertaxed Payments Rule (UTPR) with effect for fiscal years of MNEs that begin on or after December 31, 2024.  The government released draft legislative proposals for the IIR and domestic minimum top-up tax for public consultation on August 4, 2023, which consultation period closed on September 29, 2023. Draft legislative proposals for the UTPR are expected to follow at a later time.

Payroll taxes

Canada pension plan

Employers paying remuneration to employees are liable to make contributions under the Canada Pension Plan (CPP). The employer’s contribution on account of CPP premiums is capped at a maximum of CA$3,867.50 per employee for 2024.  Employees are also liable to make matching CPP contributions. The employer is responsible for withholding the employees’ CPP contributions at source and remitting this amount to the CRA.

Employment insurance

Employers are also required to pay premiums under the federal Employment Insurance Act.  The employer’s contribution on account of employment insurance is capped at a maximum of CA$1,468.77  per employee for 2023. Employees are also liable to make employment insurance contributions to a maximum of CA$1,049.12 in 2024. The employer is responsible for withholding the employees’ employment insurance contributions at source and remitting this amount to the CRA.

Provincial payroll taxes

Some provinces also impose various payroll taxes.  For example, Québec requires contributions be made for the Québec Pension Plan and for Québec employment insurance. Ontario imposes an employer health tax on total remuneration paid by an employer in a year exceeding CA$1 million. British Columbia imposes an employer health tax on total remuneration paid by an employer in a year exceeding CA$1 million.

Indirect taxes

Goods and services tax

The federal goods and services tax (GST) is a value-added tax imposed on the final domestic consumption of most goods and services supplied in Canada. Specific rules with respect to the place of supply exist to determine whether a supply is deemed to be made in Canada and subject to the GST rules.

There are three categories of GST supplies: a) the taxable (other than zero-rated) supplies at the current GST rate of 5%; b) the zero-rated supplies (e.g., exported goods and services, prescription drugs, medical devices and basic groceries) taxable at 0%; and c) the exempt supplies (e.g., health care services, educational services and most financial services) which are not subject to the GST at all.

Entities and individuals resident in Canada that are involved in making taxable supplies (including zero-rated supplies) in Canada in the course of a commercial activity are required to register under the general GST regime and charge, collect and remit GST on such supplies, provided they don’t qualify as a “small supplier”. Entities and individuals that are non-residents of Canada might be required to register if they are considered to have a permanent establishment or to carry on a business in Canada. It should be noted that special rules apply with respect to entities and individuals that make sales through a digital platform (referred to as a “distribution platform”) and to an operator of such a distribution platform, which are further discussed below.

As the GST is intended to be a consumption tax, which is ultimately borne by the final consumer, entities and individuals that are registered under the general GST regime and who make taxable supplies (including zero-rated supplies) are generally required to pay the GST on their inputs but are entitled to recover such GST by means of the input tax credit (ITC) mechanism. It should be noted that the GST is a final cost to a supplier that only makes exempt supplies as it generally cannot recover the GST payable in its inputs.

Harmonized sales tax

The harmonized sales tax (HST) combines the 5% GST with a provincial sales tax component of 8% or 10% depending on the participating provinces to the HST regime (referred to as “participating provinces”). The current list of participating provinces and HST rates are the following: Ontario (13%) , Nova Scotia (15%), Newfoundland and Labrador (15%), New Brunswick (15%) and Prince Edward Island (15%). The HST is federally administered and applies in the HST provinces with the same basic operating rules as the GST, with certain exceptions. Each of the participating provinces has the ability to decrease or increase the provincial component of the provincial part of the HST.

Québec sales tax

Québec sales tax (QST), like the GST/HST, is a value-added tax. Most of the concepts existing under the GST/HST legislation have been adopted by the government of Québec with respect to the QST. The QST rate is currently 9.975% on both taxable goods and services supplied in Québec. Revenu Québec is responsible for administering both the GST/HST and QST in the province of Québec with respect to the GST/HST and QST registrant that resides in Québec or have a permanent establishment in Québec.

Provincial sales tax

Provincial sales tax (PST), which is a single-incidence sales tax imposed on end users or consumers of tangible personal property as well as certain services in the province, is imposed in Saskatchewan (6%), Manitoba (7%) and British Columbia (7%). Relief from these taxes is available in certain circumstances.

Land transfer tax

A transfer tax is payable in most provinces on any acquisition of real property.  In certain provinces, such as Ontario, the transfer tax is payable regardless of whether the acquisition is in respect of a legal or a beneficial interest in real property, subject to specified exceptions.  The cities of Toronto and Montreal also imposes a land transfer tax.  While there is no such tax in Alberta, Saskatchewan, Newfoundland and Labrador, or any of the territories, each of these jurisdictions does levy some form of registration fee on the transfer of real property.

Transfer tax and registration fee rates vary from 0.04% to 5% depending on the province or territory.  An additional land transfer tax may be payable in Ontario (25%), and British Columbia (20%), if the purchaser is a non-resident of Canada and certain other criteria are met.  An additional land transfer tax of 5% may be payable in Nova Scotia if the purchaser is a non-resident of Nova Scotia and certain other criteria are met.

Underused Housing Tax

On January 1, 2022, the Underused Housing Tax (UHT) came into force, requiring certain non-Canadian owners (and certain Canadian owners) of residential property in Canada to file an annual return to report their ownership, and subject to certain exemptions, pay a 1% tax on the property’s value.  The deadline for filing a UHT return and paying the UHT is April 30th of the year following the relevant tax year. Residential property owners affected by UHT had until April 30, 2024 to file UHT returns and pay the UHT for the 2022 calendar year without paying penalties or interest.

Certain provinces and municipalities are considering imposing similar taxes on vacant homes.  A vacant home tax has already been introduced by the Province of British Columbia and by the municipalities of Vancouver, Toronto, Hamilton, Peel and Ottawa.

E-Commerce GST/HST, QST and PST rules

Special e-commerce rules apply at the federal level (GST/HST) and provincial level (QST and PST).

More particularly, at the federal level, non-resident vendors and/or non-resident distribution platform operators might be required to register for, collect and remit the GST/HST under the specified e-commerce registration regime, if they make taxable cross-border sales of digital products or services to an entity or person not registered for GST/HST in Canada.  As a GST/HST registrant under the specified e-commerce regime, non-resident vendors and/or non-resident distribution platform operators do not have the right to claim any ITCs with respect to any taxable expenses they might incur.

However, non-resident vendors and distribution platform operators might be required to register under the general GST/HST regime and to collect and remit the GST/HST on the sale of goods when such are located in Canada at the time of the sale and shipped from a place in Canada to a purchaser in Canada.  As a GST/HST registrant under the general GST/HST regime, they should have the right to claim the GST/HST paid by means of an ITC with respect to any taxable expenses they might incur.

The QST rules are similar to the GST/HST rules, subject to the necessary adaptations as the QST applies only in Québec.

The PST regimes have their own particular set of e-commerce rules.  Generally, non-resident vendors of taxable goods and/or services and/or non-resident distribution platform operators that facilitate the sale of taxable goods are required to register for PST purposes and to collect and remit the applicable PST on the sale.

Luxury Tax

On September 1, 2022, the luxury tax came into force. The luxury tax applies to supplies made in Canada, as well as the importation into Canada, of new vehicles, vessels and aircraft priced over certain thresholds (referred to as a ”subject good”). Specifically, for vehicles and aircraft priced over CA$100,000, the luxury tax is calculated as the lesser of 10% of the taxable amount and 20% of the taxable amount over CA$100,000. For vessels over CA$250,000, the luxury tax is calculated as the lesser of 10% of the taxable amount and 20% of the taxable amount over CA$250,000. A person that makes a qualifying sale or a qualifying importation in the course of a business (generally manufacturers, wholesalers and retailers) of a subject good is generally required to register and might be required to pay the luxury tax on the sale or lease of the subject good. The luxury tax should generally be included in the sale price.

It should be noted that certain provinces also impose a kind of luxury tax, such as Québec and British Columbia with respect to certain types of vehicles.