Jan 7, 2022

Canada Digital Services Tax: A Sales Tax Rule for the Digital Economy

If you run a business selling digital goods and services to consumers or entities in Canada, then it may be difficult to wrap your head around all of the new Canadian sales tax rules that came into force on July 1, 2021.

Thankfully, you’re not alone – it’s complicated stuff, even for tax experts. (To be honest, Canadian tax legislation is a black hole that can suck up all of your time, if you let it. The struggle is real!)

That’s why we’re here to break down all of the technical information and give you a clear answer about how to handle Canada sales taxes in the digital economy!

Place of Supply Rules

First of all, if you want to understand the Canada Digital Services Tax, we need to define an important term: place of supply.

We define “place of supply” as the location where a supplier delivers a good or service, or the location of the purchaser. Keep in mind that there are different place of supply rules for both goods and services, which we’ll cover shortly.

What Are Taxable Supplies?

There are two key terms within “place of supply” to understand. First, let’s talk about supply.

In accounting parlance, “taxable supplies” are supplies of goods or services made in the course of commercial activity.

We care about these because they are subject to sales tax (ie the GST/HST). Even zero-rated supplies that are taxable at the rate of 0% should be counted.

Is the Taxable Supply Made Inside Canada?

The other key aspect of the “place of supply” concept is the place. As we’ll cover in a bit, it’s pretty straightforward to understand where a taxable supply should be taxed as a physical good, because it’s simply wherever the physical good is delivered.

But digital goods and services supplied inside Canada can be a little more complex to understand. We follow “place of supply” rules to help figure out the sales tax requirements for each customer.

The 4 Place of Supply Rules

Your challenge in navigating “place of supply” is the fact that every province is different. Some collect GST, others collect HST, and still others collect a provincial sales tax (such as Quebec’s QST).

You may be tempted to collect just one type of sales tax for all of your customers, but this isn’t how the law is written – and the CRA isn’t going to like it! Instead, you must collect the sales tax that’s appropriate in each province where your customers are buying.

Fortunately, there are four place of supply rules to help you parse out what kind of sales tax to collect and remit for buyers:

Rule 1: Subject to more specific rules, the supply of a service is made in a province if in the normal course of business the supplier obtains an address in the province that is:

  • The recipient’s home or business address in Canada; or
  • If more than one such address obtained, the one most closely connected with the supply; 

OR if no such address obtained, where a recipient address that is most closely connected with the supply is in a province, then the supply is made in that province.

In other words, if the customer has an address within a province, then that’s the province that counts as the place of supply. This first rule covers 80-90% of the issues that we see, but in cases where there are multiple addresses associated with a customer, you would need to move on to Rule 2.

Rule 2: Where the Canadian element of the service is performed primarily (>50%) in the HST provinces, the supply is made in the participating province in which the greatest proportion is performed.

There are times where you may have multiple addresses from a single customer. In this case, you would choose the province where you’ve done the most work or delivered more value.

Rule 3: (Tie-breaker) If the service is supplied equally across multiple provinces, then you should adopt the HST province with the highest rate; or if equal, charge that rate.

In the event you’ve supplied a product or service equally across two or more HST provinces, you’ll charge tax on whichever HST rate is highest. (And if the rate is the same across the board, then charge that.)

Rule 4: Where the Canadian element of the service is performed otherwise than primarily in the HST provinces, the supply is deemed to be made in a GST province.

Lastly, if your customer is mostly based in a non-HST province, then you would opt to charge their GST rate for the sales tax.

Quick note: Before you apply these place of supply rules, you need to:

  1. Make sure the supply is taxable.
  2. Make sure the taxable supply is made inside Canada.
  3. Make sure there is no relief from taxation.

There are also many exceptions to the general place of supply rules as well, such as personal services, services in relation to tangible personal property, cleaning and maintenance services, and more.

If you’re wanting help understanding the place of supply rules and GST/HST, please contact us at Envolta for personalized guidance.

Types of Digital Businesses to Comply with the New Tax Rules

The other major factor to consider is the type of business that’s supplying these digital goods and services.

Are you unsure if your business is subject to these new tax rules? Below are the three types of businesses that the new Canada digital tax applies to.

1. Cross-border digital products and services

This is the biggest change. Any non-resident vendor selling taxable digital products or services to Canadian consumers or entities will need to register for and collect GST/HST.

As an example, Netflix is a streaming platform not based in Canada, so prior to July 2021, it didn’t have any sales tax requirements. But under these new “place of supply” rules, Netflix must register to collect tax from any Canadian customers who aren’t registered for GST/HST themselves.

As a result, international companies across industries – from streaming providers to accountants – no longer have a pricing advantage over Canadian resident service vendors. Instead, everyone who sells to customers in Canada must collect sales tax from them.

More specifically, the requirements apply to any non-resident vendors or platform operators whose revenue from taxable supplies exceed C$30,000 over a 12-month period.

2. Supply of qualifying goods in Canada

The next major business affected by these new rules is any non-resident vendor of physical goods located in fulfillment warehouses within Canada. Any distribution platform operator or warehouse that facilitates the sale of these goods to Canadian consumers will need to register and collect GST/HST.

Again, this applies to non-resident vendors or platform operators whose revenue from taxable supplies exceed C$30,000 over a 12-month period.

3. Short-Term Accommodations

There are also new rules for short-term accommodations (defined as a residential unit supplied for less than 30 days at a time).

Either the property owner or the operator of the accommodation platform (such as Airbnb) would need to collect and remit the GST/HST on these.

GST/HST Simplified Registration Regime

It’s worth noting that if you sell to consumers or entities in Canada, but you’re a non-resident business or platform operator, there’s a simplified GST/HST simplified registration regime made especially for you.

Learn more about registering for the GST/HST.

Conclusion

There are obviously a lot of different approaches to sales tax across Canada and within each of the provinces.

So, if you provide any digital goods or services, it’s absolutely essential that you become familiar with the requirements in every jurisdiction where you’re delivering value.

Here are three steps we recommend for evaluating your sales tax situation:

  1. Think about your current sales and future plans. Are you going to be expanding to provide your services across additional provinces throughout Canada?
  2. Assess whether you’re hitting thresholds or place of supply rules that would require you to register under GST/HST.
  3. Make any changes necessary to get to a compliant standard.

If that sounds daunting, it doesn’t have to be! Our team here at Envolta team is well-equipped to help out with any questions you might have about place of supply rules, the GST/HST, and getting into compliance.
Contact us at Envolta today to find out more!

Last but not least…

Do you have questions about how to move forward with your accounting? Contact us at Envolta to get started!
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