Internet sales have increased significantly over the past several years, largely because many businesses operate online stores and can deliver goods directly to the door of their customers. While some retailers sell goods both online and in-store, others operate solely online. No matter what type of retail business you operate, you need to understand your Canadian sales tax obligations.
What is the GST/HST?
The federal Goods and Services Tax/Harmonized Sales Tax (GST/HST) applies to most goods and services supplied in Canada. GST and HST are the same value-added tax, with GST referring to tax at a 5% rate in non-harmonized jurisdictions, and HST referring to tax at higher harmonized tax rates that include a provincial component. HST rates are currently 13% for sales to Ontario and 15% for sales to Nova Scotia, New Brunswick, Prince Edward Island, and Newfoundland and Labrador.
Businesses resident in Canada with annual sales, including those of associates, of $30,000 or less are generally not required to register for GST/HST. Canadian-based retailers with sales of more than $30,000 on an associated basis are required to register under the general GST/HST framework and charge the GST/HST where applicable.
Historically, businesses not resident in Canada were not required to register for GST/HST under the general framework if they were not carrying on business in Canada. However, if a non-resident of Canada making taxable supplies to customers in Canada determines that it is carrying on business in Canada, it would be required to register and collect applicable GST/HST on its sales. The facts of each situation must be considered on their own merits when determining whether a business not resident in Canada is carrying on business in Canada for purposes of GST/HST.
New digital economy businesses rules
Services and intangible property
On July 1, 2021, the Government of Canada expanded GST/HST registration requirements with a “simplified framework” to address the digital economy. In a nutshell, these new registration, collection and remittance rules apply to non-resident businesses that are not registered for GST/HST under the general framework and sell more than $30,000 of services and intangible personal property in a 12-month period to residents of Canada that are not registered for GST/HST.
Also, digital platform operators are required to register under the simplified framework to collect and remit GST/HST on sales of services and intangible property by non-residents of Canada that are not registered for GST/HST under the general framework to residents of Canada that are not registered for GST/HST.
Unlike those registered under the general framework, persons registered under the simplified GST/HST framework are not entitled to claim input tax credits to recover GST/HST paid on their inputs.
Registrants under the simplified framework are required to file returns quarterly, with the return and payment due within one month after the end of each calendar quarter. Remittances can be made using qualifying foreign currencies (currently USD and EUR).
These simplified framework rules apply, for example, to non-resident vendors selling online subscriptions for music or movies directly to Canadian customers and also capture non-resident vendors providing taxable professional services directly to Canadian customers. It is imperative that non-residents selling services and intangible personal property to residents of Canada have a process to obtain and retain the GST/HST registration number of their customers as support for not exceeding the $30,000 registration threshold if not registered, or for non-collection of the tax from particular customers if already registered.
Tangible personal property
Changes also took effect on July 1, 2021 that require non-residents of Canada that make supplies of more than $30,000 of tangible personal property delivered in Canada in a 12-month period to customers that are not registered for GST/HST to register for GST/HST under the general framework if the order is fulfilled from inventory in Canada, or the goods are drop-shipped from a Canadian supplier to the non-resident's customer. These expanded rules are intended to ensure that that non-resident vendors collect GST/HST on their sale price to customers not registered for GST/HST.
Digital platform operators are required to register under the general GST/HST framework if they facilitate more than $30,000 of such sales of tangible personal property in a 12-month period.
Selling online between provinces
A GST/HST-registered online retailer who has a physical presence in one province and sells taxable goods to consumers in other provinces is required to charge the GST/HST at a rate based on where the goods are delivered. For example, a company based in Ontario selling taxable clothing online to a consumer in Nova Scotia is required to collect HST at 15%.
Online service providers generally collect GST/HST at rates based on their customer's address. For example, even if a business that provides services via the internet maintains a physical location in a particular province, it is generally required to charge the rate that applies in the province in which the purchaser is located. This means that a service provider located in Ontario providing services to a consumer in Newfoundland and Labrador is generally required to collect HST at the Newfoundland and Labrador rate of 15%.
Making sense of our sales tax patchwork
GST/HST was intended to be a national sales tax system that applies uniformly across the country. That is clearly not the case today. Despite the government's best intentions, businesses with customers in Canada face a variety of rates and rules based on jurisdiction. For online retailers who easily sell across provincial borders, this tax patchwork makes it even more important to remain up-to-date on sales tax changes across the country.
Brian Morcombe, Partner, Indirect Tax National Service Line Leader