New GST/HST rules for non-resident online sales to Canadians

On November 30, 2020 the federal government released its Fall Economic Statement (FES) amidst the COVID-19 pandemic. In addition to a number of programs designed to stimulate the economy and support Canadians through the pandemic, the government announced significant changes to how GST/HST applies to sales made over the internet by non-residents. While the changes are primarily directed at non-residents, there are also important changes and considerations for Canadian resident businesses and consumer purchasers.

GST/HST on services and digital goods

Advances in technology have led to a steady increase of non-resident vendors branching out and selling goods to Canadians through online platforms, also known as online marketplaces. When Canadians purchase goods from non-residents online, at the very least, GST (and in some cases PST or HST) is levied when those goods cross the border. However, similar taxes do not apply when Canadians purchase digital goods and services online, as there is no physical way to track when an app is downloaded or a service provided. As the non-resident vendor is generally not considered to be carrying on business in Canada, they are not required to register for GST/HST purposes and, as a result would not be required or permitted to charge GST/HST on the supply of digital goods and services to Canadian customers.  

Beyond resulting in less GST/HST revenue being collected by vendors on behalf of the Canada Revenue Agency (CRA), current registration rules also effectively disadvantage GST/HST registered vendors, including those who sell through distribution platforms and fulfillment warehouses in Canada. Generally, vendors located in Canada are required to collect and remit GST/HST on the final selling price when digital goods are supplied to customers in Canada. This means the Canadian vendors’ total tax included price to consumers could be higher than the unregistered non-resident vendors’ price for the same digital goods and services.

Under the proposed new provisions, however, non-resident vendors that supply digital goods and services over the internet, that are not considered to be carrying on business in Canada, would be required to register, charge and collect GST/HST through a simplified registration system. Unlike GST/HST charged by a regular GST/HST registered supplier, GST/HST charged through this simplified registration system is not eligible for an input tax credit (ITC) or rebate and the vendor is unable to claim any ITCs for any GST/HST incurred on their activities in Canada.

The non-resident would charge tax based on the rate in effect in the consumers’ usual place of residence. However, there are exceptions to this rule—in particular, where the product or service supplied is connected to a specific location. However, no GST/HST would apply if a service is purchased by a Canadian resident consumer but the service relates to

• real property outside Canada,
• services or rights to services performed at an identifiable location outside Canada, and
• services in connection with litigation taking place outside Canada.

Non-resident vendors are only required to charge the specified GST/HST on supplies to consumers (or unregistered organizations). In cases of supplies made to a GST/HST-registered business/organization, that business must provide their GST/HST number to the non-resident vendor to permit the non-resident not to charge them the specified tax. If GST/HST is charged in error to a registered person, the person must obtain a refund of the tax from the non-resident and not from CRA.

The proposed new rules are currently expected to apply to supplies made on or after July 1, 2021. They will also apply to supplies made prior to July 1, 2021 if they are not paid for until July 1, 2021 or afterwards.

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