On July 1, 2021, significant changes to the Goods and Services Tax and Harmonized Sales Tax (GST/HST) will take effect in Canada, which will impose new GST/HST compliance obligations on nonresident, US-based businesses that supply consumers in Canada as well as digital platforms that facilitate these supplies.
These rules follow similar changes targeting nonresidents direct-to-consumer (D2C) businesses in both the United States—under the South Dakota v. Wayfair, Inc. decision—and non-US jurisdictions.
Here are the main provisions and updates to know.
Implications for Nonresident Cross-Border E-Commerce Vendors and Distribution Platforms
There are several considerations for nonresident e-commerce businesses that supply to Canadian consumers.
- Is the Business Required to Register for the GST/HST?
- Nonresident e-commerce businesses and distribution platforms of digital services and products that don’t conduct business in Canada—but make taxable supplies to consumers in Canada—will need to register for the GST/HST. The registration is mandatory when total taxable supplies to consumers in the country exceed or are expected to exceed $30,000 CDN over a 12-month period.What Should a Business Consider Before Registering?
Nonresident businesses that are required to register can choose between a normal GST/HST registration or a simplified method.
The simplified registration and remittances are expected to be accessible through an online portal starting in late June of 2021.
While the simplified registration will be easier to access and simplify compliance, businesses with simplified GST/HST registration will be required to collect and remit the tax on the supply of digital products and services made to Canadian consumers only.
This means that nonresident businesses that choose the simplified method over the normal registration and have digital sales to consumers and businesses in Canada must find a way to differentiate between the two types of supplies. Canadian customers with no GST/HST registration will be treated as consumers and will be subject to the tax, while those with a GST/HST registration won’t. As a result, businesses may need to update their systems so they can correctly identify when to charge the tax.
Further, under the simplified registration, no input tax credits to recover any GST/HST paid on business inputs will be allowed. Therefore, nonresident businesses that make cross-border digital supplies of products and services should review the impact of each type of registration with respect to their operations and choose the right type for their situation before applying to register.
1. How Do I Determine the Right Amount of Tax to Charge?
Nonresident vendors and nonresident distribution platforms that make cross-border supplies of digital products and services to Canadian consumers and are required to register for the GST/HST will need to determine which of their consumers have a usual place of residence in Canada.
They’ll generally be able to determine this information using factors related to the customer, such as:
- Home address
- Billing address
- Internet Protocol (IP) address
- Bank or payment information
- Subscriber identification module (SIM) card
If two of the above factors are in Canada and the consumer’s usual place of residence is in Canada, the GST/HST will apply at the following rates for these locations:
- Ontario: 13%
- Nova Scotia, New Brunswick, Newfoundland and Labrador, and Prince Edward Island: 15%
- Other locations: 5%
Implications for Nonresident Vendors and Distribution Platforms Supplying Goods
In light of the updates, nonresident vendors and distribution platforms will be impacted by the following changes.
All distribution platforms that facilitate sales of goods to Canadians from nonregistered vendors that are shipped from Canada will be deemed the suppliers of these goods. These distribution platforms will be required to register for the GST if their qualifying sales exceed or are expected to exceed $30,000 over a 12-month period.
Tax Remittance on Sales
Distribution platforms will be required to collect and remit the tax to the CRA on all sales regardless of the recipient’s registration status. A distribution platform won’t be a supplier on sales of a registered third-party vendor for circumstances in which the vendor remains liable for the tax.
In addition, distribution platforms will be eligible to claim input tax credits in respect of Division III tax paid at the Canadian border by nonregistered third-party vendors that import their goods into Canada and sell their goods through distribution platforms. Similarly, registered third-party vendors will be eligible, as under the existing GST/HST rules, to claim input tax credits in respect of the tax paid at the border.
Further, distribution platforms won’t be deemed to have made a supply to the nonregistered third-party vendor of services relating to the sale of the goods made through the platform. As a result, there won’t be leakage of unrecoverable GST/HST. Distribution platforms will also be required to report information on the third-party vendors to the Canada Revenue Agency (CRA) using their platforms.
Nonresident vendors that make sales of goods from Canada without using a distribution platform will be required to register under the normal GST/HST rules if their total sales to consumers in Canada exceed or are expected to exceed $30,000 over a 12-month period.
Nonresident vendors will be required to collect and remit the GST/HST on all of their supplies made in Canada, regardless of whether the supply is made to a consumer or purchaser that is registered. Nonresident vendors will also be eligible, under the existing GST/HST rules, to claim input tax credits in respect of the tax paid on inputs used in their commercial activities, including tax paid at the border.
Fulfillment warehouses in Canada will be required to notify the CRA that they’re carrying on a fulfillment business and maintain certain records on their nonresident clients.
Implications of GST/HST Changes for Nonresident US Businesses
US nonresident businesses with a requirement to register for purposes of the GST/HST should consider the impact of the tax on its Canada operations and review its:
- Physical supply chain to see if it’s beneficial to change the ship from location from Canada to the United States to remain out of scope of the tax
- Pricing model to make sure that effects from the tax are addressed and adjust financial models where necessary
- Contracts with digital platforms to see if the current arrangement would require the digital platform to account for the tax and avoid registration
- Accounting practices to verify that recoverable GST/HST paid on business-related inputs is not erroneously treated as expenses instead
- Technology to verify that the systems are capable of holding new information, able to connect with third-party solutions, and can issue tax-compliant billing invoices
- Staff training practices to confirm the impact of the tax is considered in relation to future pricing models, new client contracts, accounting practices, and financial and operational decisions
We’re Here to Help
If you have questions about how these changes might impact your business, please contact your Moss Adams professional.