Brian Morcombe:
Hi everyone, my name is Brian Morcombe and I lead BDO Canada's national Indirect Tax team. And welcome to season two, episode three, of BDO Canada's Cross-Border Podcast Series: Managing Goods and Services. Joining me today we have Melanie Camire, Indirect Tax Senior Manager in BDO Canada's Montreal office, and Bruce Goudy, Indirect Tax Director in BDO Canada’s, Toronto office. Melanie and Bruce, thanks for joining the podcast.
For many years, some multinational enterprises, or MNEs, have exploited gaps between different countries and tax systems, leading to domestic tax base, erosion, and profit shifting, what we call BEPS. BEPS has cost certain countries as much as $240 billion in lost revenue, and it's not limited to income tax. It impacts sales tax as well. Arguably, the sales taxes cannot exceed the income tax exposures.
In Canada, it was a regular occurrence that resident vendors of digital goods, services and intangibles were required to collect sales tax on supplies. Whereas, many non-residents created an advantage in the form of lower net sales prices by not having to be registered to collect sales tax. The result: 5% to 15% lower net price to consumers if they buy from non-resident vendors.
International VAT GST guidelines were introduced by the OECD and in conjunction with the G-7 back in 2016. Among the goals of these guidelines was to achieve neutrality of VAT GST in international trade by preventing taxing business to business, ensuring foreign businesses are not advantaged or disadvantaged, and demanding easy administration of the taxes.
Another guideline included determining the appropriate place of taxation, known in tax circles as a destination principle, by taxing based on the jurisdiction of consumption through customer identification and usual residence rules. Melanie is going to elaborate on Canada's alignment with this concept in a moment.
Change has been afoot for several years to address the guidelines in Canada. Quebec led the way by taxing foreign businesses beginning in 2019, and the Canada Revenue Agency started taxing e-commerce transactions on July 1st, 2021. The provinces of British Columbia, Saskatchewan, and Manitoba have followed with their own rules.
So, with that in mind, let's hear from Melanie. Melanie, what are the new e-commerce sales tax rules in Canada?
E-commerce Sales Tax Rules
Mélanie Camiré:
Thank you, Brian. Thanks for the introduction. So, as you mentioned, Quebec was the leader in the e-commerce rules when it adopted the rules in 2019. It's only in 2021 that the Government of Canada adopted new rules regarding e-commerce.
I would like to begin with explaining the rules for services and digital products. Since July 1st, 2021, Canada introduced what we call the simplified GST HST registration regime. This regime applies to non-residents providing digital products or services to Canadian customers not registered for GST and having their usual place of residence in Canada.
So, what do we mean by non-registered? We mean any individual, but it also could be a financial institution or a residential landlord. Examples of digital products and services are, for example, nonresidents selling online subscriptions for music and movies. It could also be a non-resident supplying professional service to Canadian individuals. For example, we have an architect from New York who is hired by a Canadian individual. There might be a registration requirement.
What will be important in this regime is for the non-resident to confirm the registration status of its customers. So if all the customers are GST registrant, there's no need to register. If all the customers are non-registrant, this is where there might be an obligation to register. Most importantly, if the non-resident is both registrant and non-registrant the non-resident would only charge GST to those who are not registered. So that's a big difference compared to the normal GST HST regime, where normally the non-resident registrant would charge tax to all of its customers.
Also, under this simplified regime, there's no input tax credit that can be claimed and the non-resident will only remit the tax on a quarterly basis. As we mentioned earlier, QST already had rules in place, but it totally harmonized with the GST as of July 2021. So if the non-resident has customers in Quebec, then the non-resident will likely have to register for both the GST with the Government of Canada and for QST with Quebec.
Brian Morcombe:
Thanks, Melanie. It's quite a complicated set of rules here. What about tangible goods?
Melanie Camire:
Okay. Thank you, Brian. Now we're going to move to the sale of goods. It's about the same conditions that I just mentioned. If a non-resident is selling goods to a non-registrant, there would be a registration requirement. Under the regime, and this would be the normal regime, a non-resident would have to register if it sells goods with legal delivery in Canada, including any goods coming from a warehouse in Canada.
A platform operator who would distribute goods in Canada would also need to register. Regarding the platform operator, the platform operator will register and remit the GST if the seller is not registered. However, where the seller is registered, the platform will collect the GST QST and then forward the tax to the supplier, and the supplier will remit the tax to the government.
Brian, please note that under these new rules, there's no registration required if the non-resident sends the goods by mail or courier from a place outside of Canada.
Brian Morcombe:
Yeah. There's a whole lot of issues here. What's funny is we haven't even touched on the import models that non-residents could be using and residents to get their goods into Canada. They could be using the casual method. They could be using the commercial method.
What's most concerning is this need to be set up on CARM as well, the new Customs Assessment Revenue Management system, or technically the CBSA Assessment Revenue Management system. All importers are going to need to be on this by January 2023. You take that into account in conjunction with these new TPP rules, tangible personal property rules, for sales tax purposes. It's really something, but I do digress here. Melanie, can you talk to us a little bit about the PST implications?
Melanie Camire:
So, PST applies in three provinces: British Columbia, Manitoba, and Saskatchewan. So these provinces also have the GST, but they have their own regime, which is very similar to the sales and US tax in the US.
Let me explain the rules, and I will go in the same order as I did for GST. We will start with digital products and services. For the province of BC, if a non-resident sells or provides taxable software for use on an electronic device in BC, there is a registration requirement.
As of July 2022, online platform’s selling software will also need to register for BC PST. In Saskatchewan, a non-resident providing computer services, such as license or access fee to end-user on consumers in Saskatchewan, would have to register. In the province of Manitoba, registration is required if a non-resident vendor directly solicits software sales in Manitoba. There is also a registration requirement if a non-resident provides streaming services and telecommunication services.
Now let's move to the goods that are delivered in those provinces. Let's start with the goods sold through a platform. There is a consensus among the three provinces. It is a platform that must register and charge PST whether or not the vendor is a PST registrant. The only difference is that for BC, this rule is coming into effect in July 2022.
Now, regarding other sales made outside a platform, a registration would be required if delivery occurs in the province and the non-resident accepts a purchase order from that province. For Saskatchewan, there is no other conditions. This means that if a non-resident sells goods in Saskatchewan, that are taxable, there is a registration requirement.
In BC and Manitoba, there's more criteria. If the non-resident has a warehouse or inventory in BC or Manitoba or solicited sales, then there is a registration requirement.
So, Brian, as you can see, there are many new rules and some variations from one jurisdiction to the other, hence non-residents selling into Canada should really review their situation to ensure they are compliant.
Brian Morcombe:
Thanks, Melanie. Definitely a complicated set of rules for businesses to get right. You think about the need for all these businesses to try and capture this information even from their customers. If they don't get it right, all the things that can go wrong, that impact the customer, that impact the vendor for the collection of taxes, it's very complicated.
So, I think what I'd like to do now is take a deeper look at the services side of all of these rules. We've got Bruce here. Bruce, as the digital market evolves, I know you've been working with many online gaming platforms to address how they comply with sales tax under Ontario's new regulatory framework, and specifically when it comes to games of chance. Can you give the listeners some background and also some insights on what you're seeing?
Gaming (Betting Platforms)
Bruce Goudy:
Yeah, that's right, Brian. Starting April 1st, 2022, there's one more layer of complexity here because Ontario became the first province in Canada to regulate the online gaming.
In general, gaming is allowed in Canada only when it's managed or licensed via provincial government. To achieve this, Ontario established a crown corporation called iGaming Ontario, known as iGO for short.
iGO is responsible for conducting and managing online gaming in the province. It'll do this through private operators that register with the province instead of those gaming platforms conducting and managing their own online gaming activities.
The gaming platforms can be residents in Ontario, Canada or outside Canada offshore, and any gaming platform that's contemplating making its platform available for use in Ontario must apply to the province to do so.
So as part of that planning, gaming platform operators need to clearly consider what model suits their particular rollout to the regulated Ontario market and what are the tax implications of each structure? Not just sales tax, but also transfer pricing as well as withholding tax obligations.
For example, can the platform achieve its purpose by operating as an entity that's well, not resident in Canada, or should it incorporate as a Canadian entity to deal with iGO, and should it even have servers in Canada? Each arrangement has a different sales tax registration obligation and reporting requirement, as well as possibly posting of security with the federal government.
Brian Morcombe:
I know GST HST has specific rules for gaming activities that treat bets and payouts as tax included. Is that what's happening with Ontario?
Bruce Goudy:
Interestingly, those rules would apply more so in an unregulated environment. So as you mentioned, the HST rules in Canada, for games of chance, in an unregulated environment are designed such that one would expect that a bet placed with an online gaming platform would be considered to be HST included.
Similarly, one would also expect that an online platform operator would be able to claim input tax credits to recover the HST embedded in its payouts and then remit the net amount to the tax authority. Before Ontario clarified its approach last summer, the HST rules initially created a significant amount of concern for non-resident online gaming platforms who thought they might have to register under the new simplified regime that Melanie was talking about that took effect in July of 2021.
Under those simplified rules, non-resident platform operators would've been at a huge disadvantage relative to their Canadian-based competitors because non-residents registering under that simplified system would not have been eligible to claim any input tax credits on their payouts. Whereas Canadian resident platforms would've been able to do so.
Under Ontario's rules for online gaming, the platform operator is providing those behind-the-scenes platform and software to iGO. That helps to support the appearance that iGO, rather than the gaming platform, is conducting or managing the gaming activities.
Special rules apply to online gaming platform services to iGO. So these gaming platforms are considered to be distributors for HST purposes. That means that these distributors or these online gaming platforms don't have to collect HST on their fees that they earn from iGO, but even despite being able to be entitled to claim full input tax credits on their inputs.
Brian Morcombe:
Wow Bruce. If the gaming platforms don't collect HST on their services, how is this activity being taxed for sales tax purposes?
Bruce Goudy:
Yeah, great question. Rest assured Brian that online gaming activity in Canada is being taxed for HST purposes. It's just done in a unique way that, of course, us tax geeks take an interest in. Even though the online gaming platforms themselves will not charge HST on their fees to iGO, iGO instead is required to self-assess and remit 13% HST on its purchases from those platform operators.
Essentially, it's the amount that the platform operator retains from its net gaming revenue. In addition to having to pay 13%, self-assessment, at the 13% on the fees that it pays to the platform operators, it also has to pay an additional 13% on all its other purchases that had already paid 13% to its vendors.
So iGO Ontario has an effective tax rate of double that, 26% unrecoverable tax costs on many of its inputs. I mentioned earlier, too, that online gaming operators that are eligible to register for HST may be entitled to claim input tax credits to recover HST paid on their own inputs. Their activities would be fully commercial for HST purposes, even though they aren't required to collect tax on their revenues.
That issue, however, is whether entities that are not residents in Canada would even be eligible to register voluntarily so that they could claim input tax credits to recover HST on their inputs. Suffice to say that online gaming operators, whether residents in Canada or based offshore, need to explore the options available to them and the corresponding obligations and reporting for sales tax purposes, as well as transfer pricing and withholding taxes as they begin their gaming operations under Ontario's regulated framework.
Brian Morcombe:
Wow. So Bruce, what happens with the other provinces then?
Bruce Goudy:
I think it's fair to say that the other provinces within Canada are closely watching how Ontario's regulated framework is progressing, and many are contemplating how they can implement similar models in their own jurisdictions. For now, it's wait and see.
Brian Morcombe:
Thanks, Bruce and Melanie for your insights. I've jotted down a few takeaways from this episode.
If you sell property, services, and or intangibles in Canada, it's very likely that registration is required or possibly desirable. Also, understand what your tax question requirements are, how this is impacted by your import model of choice, and make sure, as we said earlier in the episode, get set up on this new CARM portal if you're bringing goods into Canada. Don't be blindsided. That comes in January 1st, 2023. In the world of games of chance, it's becoming increasingly complex and you can lose when it comes to Canadian sales tax. That's my bad pun there, Bruce. Forgive me.
In case you missed our last episode everyone, we had an engaging discussion on the key aspects of foreign corporations and their need to consider when financing business operations in jurisdictions outside of their own.
In our next podcast episode, we look at how companies should prepare to buy a company when coming into Canada. If you haven't already done so, subscribe and tune in to the full Cross-Border Podcast suite. Thanks for listening, and we'll see you next time.