Canada’s Indirect Taxes: A Guide for Digital Service Providers
The last couple of years has seen strong growth in the digital media sectors, which include digital video content, downloaded or streamed digital music, digital games and electronically published content. As digital products can now easily be delivered to any place in the world, many European companies are growing their customer base on other continents. The Canadian digital media market, which is the second largest in North America, offers a promising revenue opportunity as it is projected to reach $6.48 billion in 2022.
EU businesses that provide digital services to Canadian customers may find themselves confronted with multiple tax registration and collection obligations in Canada. The Canadian tax system is much more complex than the one in the EU as it consists of a combination of federal and provincial taxes.
The goods and services tax (GST) applies nationally. Five provinces—New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario, and Prince Edward Island—have coordinated their provincial sales taxes with the GST to implement the harmonized sales tax (HST), which operates in the same way as the GST. Separate provincial sales taxes are collected in British Columbia, Manitoba, Québec and Saskatchewan. Four provinces—Alberta, Northwest Territories, Nunavut, and Yukon—do not apply any provincial sales tax (PST).
The federal government and all the provinces that levy a separate PST have enacted special rules imposing tax collection obligations on foreign providers of digital services. The scope of these laws varies significantly.
From July 1, 2021, nonresident sellers supplying services and intangibles to Canadian consumers must register for GST/HST if their sales to unregistered Canadian purchasers over a 12-month period, excluding sales made through an online marketplace, exceed or are expected to exceed 30,000 Canadian dollars ($23,287). Foreign sellers are not required to charge GST/HST on sales to Canadian customers who are registered under the normal GST/HST regime and have provided their registration number.
The scope of the federal legislation is broad and includes all taxable supplies of intangible personal property or services. Examples of goods and services covered by the nexus legislation include video or music streaming, mobile apps, e-books, online video gaming, and traditional services such as legal and accounting.
The tax rate to be charged depends on the location of the customer:
- 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 Revenue Agency provides detailed guidance on how to determine the location of the customer, taking into account various indicators.
There are also special rules for distribution platform operators and digital accommodation platforms.
The definition of “distribution platform operator” is broad and covers any person (other than the supplier) who controls or sets the essential elements of the transaction between the supplier and the recipient, or is involved in collecting, receiving or charging the consideration for the supply and transmitting all or part of the consideration to the supplier (payment processors are explicitly excluded). If a transaction is facilitated by an online distribution platform, the seller does not have any GST/HST obligations.
In September 2015, British Columbia introduced a requirement for non-Canadian sellers of goods to register and collect 7% PST if they accepted orders from persons in British Columbia and had inventory in British Columbia at the time of the sale.
In April 2021, these registration and collection requirements were expanded to cover foreign providers of software and telecommunication services whose gross revenue from all taxable and exempt sales of software and telecommunication services to British Columbia customers was more than 10,000 Canadian dollars in the previous 12 months or is expected to exceed that amount in the next 12 months.
Additionally, for software to be subject to PST, it must be purchased for use on or with an electronic device that is ordinarily situated in British Columbia, as determined by the billing or IP address. If a nonresident seller does not charge PST because the customer’s electronic device is not ordinarily situated in British Columbia, they must keep evidence to show why they did not collect PST.
Given the broad definitions of software or telecommunication services, the tax collection requirement applies to a wide variety of digital goods and services.
Telecommunication services include the right to access, view and download movies, music or audiobooks. If a service provider charges subscribers for access to a website, the application of PST depends on the content of the website. If the website content consists of nontaxable items, such as electronic books and text-only articles, no PST is charged. If a customer purchases access to a website that provides them with the ability to employ some degree of functionality beyond merely viewing website content, such as the capability to manipulate files or create new files, the customer is not purchasing a telecommunication service but a right to access software. The “software” category includes subscriptions to online video games, access to online photo or video editing tools and most cloud computing services.
Services to software—testing, installation, repair—are generally exempt from PST. If the customer is obliged to buy a software maintenance agreement as part of a purchase of taxable software, they must pay PST on the maintenance services as the maintenance agreement forms part of the purchase price of the taxable software.
There are also several other exemptions that may apply to sales of software and telecommunication services.
For example, such services are exempt from PST if they are provided to a purchaser as part of the purchaser’s participation in an educational program provided by a qualifying school or other educational institution. And, as in other provinces, if a customer provides the seller with their PST number or a certificate of exemption to indicate that they are purchasing goods or services for resale, the seller does not have to charge PST.
Effective July 1, 2022, marketplace facilitators must charge and collect PST on:
- taxable sales of goods that are located within Canada at the time of the sale and are sold to a person in British Columbia;
- software for use on or with an electronic device ordinarily situated in British Columbia;
- provision of accommodation in British Columbia; and
- any other taxable services that they facilitate through their online marketplace if the gross value of retail sales that they made or facilitated in the preceding 12 months was higher than 10,000 Canadian dollars or is expected to exceed this amount in the next 12 months.
The new rules relieve marketplace sellers of the requirement to register and to collect tax where the marketplace facilitator is obliged to do so. However, marketplace sellers remain jointly and severally liable for any PST not collected and remitted by the marketplace facilitator.
The new rules also deem as taxable many of the services provided by marketplace facilitators to their sellers, such as customer support, advertising, storage, listing of products. The application of PST to these services contrasts with the online marketplace rules in Saskatchewan and Manitoba where these types of services are generally not considered taxable under their respective PST rules.
Since 2002, businesses located outside of Manitoba that do not conduct business in the province must register and collect retail sales tax (RST) of 7% if they:
- cause tangible personal property to be delivered in Manitoba;
- solicit orders for goods in Manitoba; and
- accept orders that originate in Manitoba.
Manitoba applies a broad definition of tangible personal property that includes software delivered by electronic means.
Effective Dec. 1, 2021, Manitoba expanded its taxing authority in respect of sales of digital services made by out-of-province sellers. Anyone who operates an online accommodation platform, online sales platform, or provides streaming services must be registered to collect RST.
A streaming service is defined as a telecommunication service that includes the right—whether exercised or not—to download, view, or access by means of an electronic device audio and video content, excluding audiobooks. As the guidance provided by the tax administration does not indicate any economic nexus thresholds for out-of-province sellers, they must be registered as from the first sale.
The scope of the RST collection obligation is narrower than that under GST/HST laws. Many digital goods and services that are taxable under GST/HST—cloud-computing services that require no downloading of any software, audiobooks, e-books, custom software, web-based training—are not subject to RST.
The guidance provided by the tax administration clarifies that if a person in Manitoba merely accesses software installed on a server located outside Manitoba, the applicable charges to the person in Manitoba are not subject to RST. However, if the software is downloaded to a Manitoba computer for the person’s use, the charges for use of the software are subject to RST.
If the RST has been collected and remitted by the platform operator, the seller has no RST-related obligation in respect of that sale. Similarly, if a customer provides the seller with their RST number or a certificate of exemption indicating that he is purchasing goods or services for resale, the seller does not have to charge RST.
In May 2018, Saskatchewan finalized changes to its PST legislation to clarify that businesses that do not carry on business in Saskatchewan, but make retail sales of tangible personal property and taxable services in the province, must register and collect the PST if the goods or services are acquired for use or consumption in Saskatchewan. This requirement applies to a variety of digital products, such as digital audio and video downloads, software, software services and cloud-based services. Products that are exempt in Saskatchewan—e-books, audiobooks and web-based training—do not attract PST when they are provided by nonresidents.
There is no economic nexus threshold for nonresidents in Saskatchewan, meaning that PST of 6% needs to be collected as from the first transaction.
In July 2021, Saskatchewan enacted a new law extending the registration and tax collection requirements to out-of-province electronic distribution platforms, online accommodation platforms and marketplace facilitators. The new rules applied with retroactive effect to Jan. 1, 2020.
An electronic distribution platform includes websites, internet portals and applications that allow consumers or users to purchase tangible personal property and services that are delivered through an electronic format.
A marketplace facilitator is a person who makes or facilitates a marketplace for retail sales by marketplace sellers, directly or indirectly collects payment from a consumer or user, and remits payment to a marketplace seller. If a nonresident seller uses an online platform to sell to Saskatchewan residents, they are not required to register if the marketplace operator collects PST on sales that it facilitates.
Québec extended the application of its sales tax (QST) to foreign providers of digital services in January 2019. Its economic nexus laws have a very broad scope and impose a tax collection obligation in respect of all supplies of intangible personal property and services made by nonresident sellers to Québec customers.
Before the legislation took effect, Québec consumers had to self-assess QST in respect of the acquisition of services and incorporeal movable property supplied outside of Canada. However, there was a low level of compliance with this requirement.
The obligation for foreign sellers to register and charge 9.975% QST is triggered on the first day of the calendar month during which the threshold of 30,000 Canadian dollars has been exceeded. This threshold includes the value of all taxable supplies of services and intangible personal property made in Québec to a recipient who reasonably can be considered a consumer in a 12-month period.
A person cannot be considered a Québec consumer if the supply is made purely for business purposes, such as the purchase of enterprise software, or to a person who is QST registered. One piece of evidence, such as a billing address, IP address, or payment-related bank information, is sufficient to conclude that the customer is located in Québec. However, once they register and start collecting QST, they must collect two pieces of noncontradictory evidence to confirm their customers’ location.
If the seller uses an online platform to sell intangible property and services to Québec consumers, the platform is subject to the QST registration, and collection requirements in the place of the nonresident supplier. The seller will have no QST-related obligations in respect of sales facilitated by the platform.
EU businesses selling digital services to Canadian customers may end up having five different tax registrations if they exceed the relevant federal and provincial economic nexus thresholds. As the threshold calculation in Canada is based on a seller’s gross revenue from a consecutive 12-month period and not from the previous calendar year, a seller not meeting the revenue threshold requirement must check monthly whether an obligation to register for federal GST/HST, QST or British Columbia PST arises.
Nonresidents selling into Canada need to determine where their Canadian customers are located as both the taxability of products and the tax rates may vary by province.
The federal GST/HST and QST have the broadest scope and apply to all digital goods and services.
Provincial sales taxes are much narrower in scope. Examples of digital products that are subject to different taxability rules include audiobooks (taxable everywhere except Manitoba RST and Saskatchewan PST), downloadable custom software (taxable everywhere except Manitoba RST and British Columbia PST) and web-based training (taxable everywhere except the provincial sales taxes of Manitoba, Saskatchewan, and British Columbia).
All Canadian jurisdictions now have marketplace facilitator rules in place. This is a great simplification for foreign sellers, as such rules mean that they have no tax collection and registration obligations in respect of sales facilitated by online marketplaces.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
The opinions expressed in this article are those of the author and do not necessarily reflect the views of any organizations with which the author is affiliated.
Aleksandra Bal is indirect tax technology & operation lead at Stripe.