Making sales in Canada from abroad: a new indirect tax world

Fri 02 Dec 2022

Prior to July 2021, if you were not carrying on a business in Canada you did not have to worry about Canadian sales taxes. Those sales were said to be out of jurisdiction for Canada and therefore by virtue of the applicable sales tax laws not subject to Canadian sales taxes. Well, those days are over.

A bit of history

Canada’s federal value-added tax system is called the Goods and Services Tax (GST). Several Canadian provinces (such as Ontario, Nova Scotia, New Brunswick, Prince-Edward Island and Newfoundland) have gradually abandoned their traditional retail sales tax systems, in favour of harmonising their rules with the federal GST, and charging a Harmonized Sales Tax (HST) in their particular provinces, over and above the federal rate. The province of Quebec, for its part, applies its own value added tax, the Quebec sales tax (QST). The provinces of British Columbia, Saskatchewan and Manitoba levy provincial sales taxes (PST), also known as retail sales taxes (RST), in their respective jurisdictions. As a result, there are five possible registrations for sales tax purposes in Canada.

Non-resident companies selling goods to Canadian customers in a B2B context already know that they will have to clear the goods at the border and pay applicable Canadian sales taxes if they deliver the goods to Canadian territory. This has not changed for B2B, but it did change for B2C non-commercial sales made through distribution platforms or fulfillment warehouses.

With respect to digital products and services, Canadian consumers have up to July 2021 always received them free of sales tax. This has changed.

What has changed

The moment you have clients in Canada, the federal or provincial measures may affect you.

Cross-border digital products or services

At the federal level, as of July 1, 2021, you must register if you provide digital products or services, such as online music streaming or traditional services, if the annual total of such sales to clients that are not registered for GST/HST exceeds $30,000 over a 12-month period. For the purposes of this determination, you must obtain the federal sales tax number of your Canadian customers that are registered for GST/HST, and register if total sales to non-registered customers exceed the threshold.

At the provincial level, the province of Quebec has an autonomous sales tax system that is fully harmonised with the federal system. For sales of digital goods or services to customers located in Quebec, you must obtain a Quebec sales tax number and register under this provincial sales tax if your total sales to non-registered customers exceed the same threshold.

Goods supplied through fulfillment warehouses

Previously, although applicable taxes were levied at the border on the value of the goods upon import, GST/HST wasn’t consistently charged on the final price paid for goods subsequently sold to Canadians through Canadian-based distribution platforms or fulfillment warehouses. By contrast, Canadian-based online vendors selling goods on the same digital platforms, and using the same fulfillment warehouses, were required to charge GST/HST on the final price paid.

To address this issue, the new rules require that GST/HST be charged on all sales to Canadians facilitated by non-resident vendors or digital platform operators of goods located in Canadian fulfillment warehouses. These rules require such vendors and digital platform operators (with sales over $30,000 over a 12-month period) to register for GST/HST and collect and remit GST/HST on sales to Canadians of goods located in Canadian fulfillment warehouses.

The province of Quebec has fully harmonised its QST with the GST/HST and the rules are similar with the necessary territorial adaptations.

Sales made to clients in British Columbia, Saskatchewan or Manitoba

Following the federal and Quebec governments, these three provinces have introduced new registration obligations for sellers from abroad.

There was already a registration requirement for non-resident vendors who in a very summary way made sales and delivered goods in these provinces (province-specific requirements exist).

In Saskatchewan, since January 1, 2020, online marketplace facilitators are required to register and collect PST on electronic distribution services that are delivered, streamed, or accessed through an electronic distribution platform.

Beginning December 1, 2021, Manitoba expanded its PST registration, collection and remittance requirements for businesses providing audio and video streaming service providers. Online marketplaces that facilitate the sale of taxable goods by third parties are also required to register to collect and remit taxes on those sales.

Recent changes were introduced by British Columbia to take effect on July 1, 2022, requiring marketplace facilitators to collect and remit PST on sales of taxable items made through their online platform on behalf of online sellers.

Making sense of Canadian sales tax patchwork

The wonderful world of indirect taxes in Canada has long been in calm waters. But that world has changed. Businesses with clients in Canada face a variety of rates and rules based on jurisdiction. This tax patchwork makes it even more important to remain up to date on sales tax changes.

If you have any questions about Canadian sales tax and your business, contact Pierre Nadeau.