Defining a Digital Good for Canadian Tax Purposes
Defining a Digital Good
The digital economy is expanding in Canada and globally every year. E-commerce has changed the way Canadians shop, and how businesses sell goods and services. According to Statistics Canada, an estimated 82% of Canadians shopped online in 2020, spending a total of $84.4 billion on digital and physical goods and services. If you are a business owner selling digital goods and services to Canadian customers, you might need help with defining a digital good for Canadian tax purposes. Traditionally, governments applied sales tax only to tangible goods. However, with the ever-growing popularity of ecommerce, countries across the globe, including Canada, have imposed taxes on digital goods and services. If you need help understanding the tax implications of selling digital goods in Canada, contact Jeremy Scott, the founding lawyer at Jeremy Scott Law to get practical tax advice. Call 902-403-7201 for a case evaluation.
How Are Digital Goods Defined in Canada?
A digital good is anything that is sold, delivered, and transferred to customers in digital form. After buying the digital product via the Internet, the customer can download, use, watch, listen to, or otherwise access the product online. However, if a customer purchases a product online and the product is delivered to the customer in physical form, it is not a digital good.
In Canada, digital goods are often referred to as digital products and intangible personal property. When defining a digital good for Canadian tax purposes, digital goods can be broken down into four categories:
- Digital audio goods, which include music, audiobooks, and podcasts (iTunes, YouTube Music, Spotify, etc.);
- Digital video goods, which include movies and TV shows (Hulu, Netflix, Amazon Prime, etc.);
- Digital games and apps, which include videogames, mobile games, and apps (App Store, Play Market, etc.); and
- Digital books, which include books delivered electronically (Amazon Kindle).
Common examples of digital goods and services that may have tax implications in Canada include movies, software, mobile apps, downloads/streaming of music and other media, eBooks, newspaper subscriptions, and many more.
In Canada, live streaming of events as well as the sale of tickets for such events are considered digital services. It means that the digital platform that sells the tickets or live streams the event is liable to collect the Goods and Services Tax (GST). GST is Canada’s value-added tax (VAT).
What Are the Taxes for Goods and Services in Canada?
Now that we have defined digital goods for tax purposes, it is important to understand the different taxes for goods and services in Canada. The GST is a federal sales tax applied to all taxable goods, including digital goods and services, throughout all of Canada. The federal GST is charged at 5% in Canada.
Some provinces across Canada also impose a Provincial Sales Tax (PST), which ranges from 6 to 10%. Not all provinces have a separate provincial sales tax. Some provinces have chosen to merge their sales tax with the federal goods and services tax to create the Harmonized Sales Tax (HST). Quebec is the only province in Canada to create its own VAT, known as the Québec Sales Tax (QST).
What Are the Tax Laws for Digital Goods in Canada?
As outlined on the official website of the Government of Canada, the country started applying its tax laws to digital goods and services sold by non-resident vendors on July 1, 2021. Sales of digital goods and services by non-resident vendors in Canada are now called “cross-border digital products and services.”
Under the new rules, businesses whose gross revenue from the sale of digital goods and services exceeds $30,000 CAD during a 12-month period are required to collect and remit the GST/HST. In other words, GST/HST is a tax that the business owner or service provider must charge when their revenue meets the threshold.
If you need help understanding whether or not you need to pay or charge any taxes for selling digital goods in Canada, consider speaking with a Canadian tax lawyer at Jeremy Scott Law. As an experienced lawyer with decades of experience under my belt, I assist clients with tax planning and advice as well as help with tax compliance.
Which Goods and Services Are Exempted from Canada’s Tax Laws?
While many goods and services, including digital ones, are subject to the Canadian GST and HST, some are tax-exempt. In addition in some instances some items have the tax rate reduced to a GST/HST tax rate of 0% (effectively making the tax free).
Examples of such goods in Canada include books (but not audiobooks), basic groceries (e.g., milk and bread), agricultural products, and prescription drugs, among others. See the full list of exempt and ‘zero-rated’ goods and services on the Government of Canada’s website.
How to Comply with Canadian Tax Laws for Digital Goods and Services?
If, after defining a digital good for Canadian tax purposes, you realized that your business must register for GST/HST because the sale of digital goods and services surpasses the threshold, you need to understand what you can do to comply with Canadian tax laws.
- Register for GST/HST. If the gross revenue of your business surpasses the above-mentioned threshold, you should register for and begin charging GST/HST. If your gross revenue is less than $30,000 CAD within a 12-month period, you do not need to register for GST/HST.
- Verify the customer’s location. In Canada, business must use at least two pieces of evidence to verify the customer’s location before charging the applicable taxes. Such evidence could include the customer’s billing address, home or business address, their IP address, and others.
- File tax returns on time. Filing tax returns on time is essential to avoid penalties and other negative consequences. When filing taxes, pay attention to the filing requirements for GST, HST, and PST as they may differ depending on the Canadian province where your business is registered.
- Consult with a tax lawyer. Consider speaking with a knowledgeable tax lawyer to help you understand the steps you should take to comply with Canadian tax laws for digital goods and services.
Speak with a Tax Lawyer at Jeremy Scott Law
Schedule a consultation with an experienced tax lawyer at Jeremy Scott Law to help you with defining a digital good for Canadian tax purposes and understanding whether or not you need to register for and charge GST/HST if you sell digital goods or services to Canadian customers. Call 902-403-7201 today.
If you found this information valuable, I encourage you to check out my other blog posts.
The Disclaimer:
Please note the content above and throughout this website is provided for general information purposes only and does not constitute legal or other professional advice or an opinion of any kind. I urge you to seek specific legal advice by contacting me (or your current legal counsel) regarding any legal issues you may face. I do not warrant or guarantee the quality, accuracy or completeness of any information found on this website and will not be held liable for anything contained in this document or any use you make of it. Finally, accessing the information on my website does not create a lawyer-client relationship.
Top 7 GST/HST Tips for Sales of Real Property
GST/HST and Sales of Real Property
I am often asked: “Is there GST on the sale of Real Property?”. The answer of course is, it depends. The application of the Goods and Services Tax / Harmonized Sales Tax (‘GST/HST’) to real estate transactions is particularly risky for a number of reasons. First, real estate transactions often involve big dollar amounts (in particular given the hot real estate market in Canada). Second, real estate transactions tend to happen relatively infrequently. Finally, and perhaps most importantly, there are unique GST/HST rules that apply to real estate transactions. Below is my list of the top 7 GST/HST Tips for Sales of Real property:
Normally, GST/HST only applies to the sale of a good or service if the vendor is registered for GST/HST purposes. This however is not the case for sales of real property. The tax status of the sale of real property is generally NOT impacted by the GST/HST registration status of the vendor. The applicability of tax to a particular real estate sale will be based on a number of other factors, regardless of the registration status of the vendor.
2. GST/HST Registered purchasers don’t pay the applicable tax to the vendor, instead they report it directly to the CRA.
Most GST/HST registered purchasers will report the applicable tax directly to the CRA (except for individuals purchasing new residential complexes). This rule is intended to provide cashflow relief for purchasers of commercial use real property. Please note however this reporting method is mandatory – not optional! Failing to apply the rule appropriately not only has negative cashflow consequences, but can lead to reassessments for failing to properly report GST/HST.
3. There are unique rules for real property sales by individuals.
In general, real property sales by an individual will be exempt from the GST/HST. There are however exceptions to this general rule, including exceptions for property used in a business, sold in the course of a business, that was previously subdivided or is a new ‘residential complex’. In other words, while most real property sold by individuals is likely to be exempt from the GST/HST, that will not always be the case.
4. Purchasers can protect themselves by having a vendor certify a property transaction is tax exempt.
The responsibility to determine if a transaction is subject to GST/HST rests with the vendor. Vendors who determine after the fact that they should have collected tax, have a right to collect the additional tax from their customer. When it comes to sales of real property – often the tax status of a transaction will turn on facts that practically speaking, will be solely within the knowledge of the vendor. Where a purchaser reasonably relies on a vendor’s written certification that a transaction is GST/HST exempt, the vendor is precluded from collecting any applicable taxes after the fact. It is crucial that the certification be in writing. If its not in writing the purchaser remains at risk.
5. The construction of a new residential rental property will trigger HST on the FMV of the property, not the cost of construction.
Apartment buildings, condominiums, houses and other similar facilities that are intended to be used for long term residential rental purposes are subject to GST/HST at the time of first use as a rental property. Unlike other assets, the applicable tax is not based on the cost of construction, but is instead based on the fair market value of the property at the time the tax becomes due. Care must be taken when constructing new rental properties to understand not only the fair market value of the property, but also the timing rules which trigger when the tax becomes due.
6. The Airbnb craze has a whole host of HST implications that no one seems to be considering.
Electronic platforms such as ‘Airbnb’ are making it easier for people to purchase properties for use as short-term rental properties. Generally, short term rentals are subject to GST/HST and depending upon the extent of use of the properties in these short-term rentals, the subsequent sale of the property will likely attract HST, even if the initial purchase of the property was GST/HST exempt. Remember point #1 earlier. It won’t necessarily matter if the vendor is a GST/HST registrant at the time the property is sold.
7. If you sell taxable real property – there might be a rebate available to obtain previously unrecovered GST:
Commercial properties will often be subject to GST/HST when sold. In some instances, the owners did not use the property in a commercial activity (Ie doctors and dentists) and were therefore unable to recover any of the tax incurred with respect to the property. Where this is the case, the vendor may be able to claim a rebate to recover a portion of the GST/HST previously paid with respect to the purchase of (and improvements to) the property.
In conclusion, there are many nuances in the GST/HST legislation that are unique to real property transactions. I have touched on a number of them and hope that you find this information useful. I am happy to assist you in determining how GST/HST applies to a particular real property transaction should you require assistance. Alternatively, you may find the CRA’s administrative guide GST/HST memorandum 19.1 regarding the applicability of GST/HST to real property useful as well.
The Disclaimer:
Please note the content above and throughout this website is provided for general information purposes only and does not constitute legal or other professional advice or an opinion of any kind. I urge you to seek specific legal advice by contacting me (or your current legal counsel) regarding any legal issues you may face. I do not warrant or guarantee the quality, accuracy or completeness of any information found on this website and will not be held liable for anything contained in this document or any use you make of it. Finally, accessing the information on my website does not create a lawyer-client relationship.
Regards,
Jeremy
© Jeremy Scott 2021. All rights reserved.