Upcoming changes: GST/HST proposals for cross-border digital products and services and fulfilment warehouses

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Upcoming changes: GST/HST proposals for cross-border digital products and services and fulfilment warehouses

Upcoming changes: GST/HST proposals for cross-border digital products and services and fulfilment warehouses

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January 25, 2021

Non-resident actors of the e-commerce industry may have to register, collect and remit GST/HST on their Canadian sales, and maintain additional records starting on July 1, 2021.

Current situation

Under the current GST/HST rules, non-resident persons that are not carrying on business in Canada are not required to register, collect and remit the GST/HST. Consequently, the current rules often result in the GST/HST not being collected and remitted on online purchases from non-resident vendors or made through digital or distribution platforms.

With the implementation of the new proposed GST/HST rules, non-resident vendors and digital or distribution platforms operators may be required to register, collect and remit the GST/HST on their sales in Canada as of July 1, 2021.

Upcoming changes

The new proposed GST/HST rules, which were announced by the Government of Canada on November 30, 2020,¹ would impose new GST/HST obligations to:

Non-resident suppliers of digital products or services, as well as digital or distribution platform operators that facilitate the sales of digital products or services (distribution platform) that are not otherwise considered as carrying on business in Canada.
Non-resident suppliers of goods and operators of fulfilment warehouses.

It should be noted that new rules have also been proposed with respect to short-term accommodations provided through a platform, which are discussed in Upcoming changes: GST/HST proposals regarding platform-based short-term accommodation.

Cross-border digital products and cross-border services

Non-resident vendors and non-resident distribution platform operators that are required to register and collect the GST/HST

Pursuant to the proposed changes, non-resident vendors that supply digital products or services of any kind to consumers in Canada whom sales made to consumers in Canada of taxable supplies (excluding the sales made through a registered distribution platform) exceed, or are expected to exceed CA$30,000 over a 12-month period, would generally be required to register under a simplified GST/HST registration system and collect and remit the GST/HST on those supplies. Also, non-resident operators of a distribution platform whom sales or facilitated sales of taxable supplies of digital products and or services (including the sales made to consumers by a non-resident vendor through their platforms) made to consumers in Canada exceed, or are expected to exceed CA$30,000 over a 12-month period, would also generally be required to register under a simplified GST/HST registration system and collect and remit the GST/HST on those supplies. For the purposes of the proposed changes, a consumer would be any entity or person not registered for GST/HST purposes (consumer or consumers). It should be noted that the government would impose penalties on persons that provide a GST/HST registration number in order to evade, or attempt to evade, tax on a supply acquired for personal consumption.

Simplified online registration and remittance system

For non-resident vendors and non-resident distribution platform operators that are not carrying business in Canada, the government would put in place a simplified online GST/HST registration and remittance system that would, however, not allow the registrants to claim input tax credits (ITCs) for the tax paid on the inputs they acquired and used in their commercial activities. However, the current rules would continue to apply, meaning that non-resident vendors and non-resident distribution platform operators would have the option to register under the normal GST/HST rules in order to claim ITCs.

Collection and remittance of the GST/HST

The non-resident vendors and non-resident distribution platform operators using the simplified registration system would be required to collect GST/HST, but only on digital products or services sold to consumers. With certain exceptions, the new rules would apply when the consumer’s usual place of residence is in Canada. Generally the consumer’s usual place of residence would be determined based on indicators, such as the home address, billing address, internet protocol address of the device used, bank or payment information and subscriber identification module (SIM) card, and would be considered in Canada where two or more of such indicators identify Canada (and if so, where in Canada) as the consumer’s usual place of residence. Registrants would be required to apply the rate applicable in the province or territory of the consumer’s usual place of residence.

What else?

Some of the proposed GST/HST amendments echo measures already implemented by the Government of Québec for Québec Sales Tax (QST) purposes. On December 21, 2020,² the Québec Ministry of Finance announced that it would analyze the new GST/HST proposals and harmonization decisions would be announced at a later date.

Goods supplied through fulfillment warehouses

Non-resident vendor of goods located in Canada at the time of sale

Pursuant to the proposed changes, non-resident vendors that sell goods located in Canada at the time of the sale (i.e. that are located in fulfillment warehouses in Canada or shipped from a place in Canada to a purchaser (whether a consumer or not) (purchaser) in Canada (qualifying supply) may be required to register under the normal GST/HST registration system and collect and remit the GST/HST on such supply, if the qualifying supply is not made through a distribution platform.

Distribution platform operator deemed to be the supplier of sales made by non-registered vendors

In addition, distribution platform operators (whether resident of Canada or not) that facilitate a qualifying supply made by non-registered vendors (whether resident of Canada or not) through their distribution platform to a purchaser in Canada would be deemed to be the supplier of the qualifying supply they facilitate (deemed supply), and therefore may be required to collect and remit the GST/HST on such supply. If not already registered for GST/HST purposes, a distribution platform operator may be required to register under the normal GST/HST registration rules.

Definition of a distribution platform operator

A distribution platform operator would be a person that controls or sets the essential elements of the transaction between a third-party vendor and a purchaser, for example, by providing listing services for the sale of goods and setting payment terms and delivery conditions. If no such person exists, the operator would be a person that is involved, directly or through arrangements with third parties, in collecting, receiving or charging payment, and transmitting it to the vendor. However, a distribution platform operator would not include a person that operates a website that simply allows vendors to list their goods for sale, such as a classified or advertising website, or is solely a payment processor.

Non-resident vendors that are required to register and collect the GST/HST

Non-resident vendors whom sales of a qualifying supply made to consumers in Canada without the use of a distribution platform exceed, or are expected to exceed CA$30,000 over a 12-month period would be required to register under the normal GST/HST rules. Once registered, non-resident vendors would be required to collect and remit the GST/HST on all their supplies made to purchasers in Canada and should be able to claim ITCs for the tax paid on the inputs they acquired and used in their commercial activities, including the GST levied at the border on importation of the goods for storage.

Distribution platform operators that are required to register and collect the GST/HST

Distribution platform operators would be required to register under the normal GST/HST rules if the total of the qualifying supply made to consumers in Canada, including those made through their platform by non-registered third-party vendors, exceed or are expected to exceed $30,000 over a 12-month period. Once registered, distribution platform operators would be required to collect and remit the GST/HST on the qualifying supply (including the deemed supply) made to purchasers in Canada and should be able to claim ITCs for the tax paid on the inputs they acquired and used in their commercial activities, including the GST levied at the border on importation of the goods for storage.

Services provided by distribution platform operators

Distribution platform operators would be deemed to not have made a supply of a service to a non-registered third-party vendor relating to the deemed supply. Therefore, no GST/HST would be collectible on such service.

Distribution platform operator information reporting obligations

Distribution platform operators would be required to report information to the Canada Revenue Agency (CRA) on the third-party vendors using their platforms.

Fulfillment business reporting and record keeping obligations

Persons that provide services of storing goods in Canada (other than services that are incidental to a freight transportation service) that are offered for sale by non-resident persons would be required to notify the CRA that they are carrying on a fulfillment business and maintain records on their non-resident clients.

What else?

On December 21, 2020,³ the Government of Québec announced that changes would be made to the QST system in order to incorporate the new proposed GST/HST measures in it with all necessary adaptations.

What’s next?

The new rules outlined above would generally apply to supplies made on or after July 1, 2021, and supplies made before July 1, 2021 if all the consideration is payable on or after July 1, 2021. Therefore, businesses should begin to review their activities in Canada to determine if they would be required to register and/or to collect and remit the GST/HST on sales of digital products, services or goods in Canada. They should also review their taxable expenses incurred or expected to be incurred in Canada to determine whether or not they should register under the simplified or the normal GST/HST registration systems.

Our Sales Tax Team will be more than happy to help you review the impact of the new rules on your business and comply, as the case may be, with your new obligations, including by registering your business to the GST/HST registry under the simplified or the normal GST/HST registration systems.