The new GST/HST rules surrounding Canadian sales tax present unique challenges for foreign businesses. While the new rules are designed to level the playing field for Canada-based businesses, those without a physical presence in Canada will need to adapt to continue selling goods and services to Canadian residents. If you own a foreign business that is not a current Canadian Revenue Agency registrant, consider speaking with a knowledgeable tax lawyer at Jeremy Scott Law at (902) 403-7201 to learn how we may be able to help you apply the new GST/HST rules to your business.
What Are The Canadian GST/HST?
Many foreign business owners are working to understand the new GST/HST rules, but are unsure of what the Canadian GST and HST are. Simply put, GST and HST are VAT-style sales taxes imposed by federal and, in some cases, provincial governments in Canada.
GST (Goods and Service Tax)
Canada’s Federal Goods and Services Tax (GST) is a five percent sales tax on goods and services sold throughout Canada. Depending on the province in which the Canadian consumer lives, the GST may be shown as a separate tax on a transaction or part of the HST total.
HST (Harmonized Sales Tax)
The Harmonized Sales Tax (HST) combines Canada’s GST with the provincial sales tax in participating provinces. The following provinces use an HST model for sales tax:
- New Brunswick
- Newfoundland and Labrador
- Nova Scotia
- Prince Edward Island
Each province has its own sales tax, so the HST rate varies between provinces and is based on the Canadian consumer’s province of residence. The provinces of British Columbia, Manitoba, Quebec, and Saskatchewan do not use an HST model and instead charge their sales tax separately from the GST.
The Reason Behind Canada’s New GST/HST Rules
According to the Tax Foundation, North America accounted for only eleven percent of internet users in the world in 2015 but generated thirty-seven percent of digital value creation. As cross-border sales of digital goods and services have increased, countries have increasingly turned to VAT-style taxes to remedy tax leaks caused by these types of transactions, and Canada’s new GST/HST rules are no exception.
Previous GST/HST Rules
Canada’s GST law went into effect in 1991. At that time, the vast majority of transactions for goods and services in Canada took place in traditional brick-and-mortar businesses, and Canadian businesses were individually responsible for collecting GST/HST on each transaction.
The Canadian government did not impose liability for collecting and paying GST/HST on foreign businesses without a physical presence in Canada. Instead, the government relied on Canadian residents to self-report transactions with such businesses and pay the GST due on a transaction directly to the Canada Revenue Agency (CRA).
The Digital Economy Influences The New GST/HST Rules
As the world entered the digital age, Canadians increasingly purchased digital goods and services online from foreign companies. These foreign companies often did not have a physical presence in Canada, and therefore were not subject to collection and remittance of the GST/HST under the old rules. This placed Canadian businesses at a disadvantage, causing their goods and services to be more expensive for Canadian consumers and rendering them less competitive in the digital economy.
Ultimately, the new GST/HST rules aim to level the playing field for Canadian and foreign businesses who are competing for sales from Canadian residents by requiring all businesses to collect the same taxes on digital goods and services sold to Canadian residents. The knowledgeable tax lawyers at Jeremy Scott Law understand the impact of these Canadian tax laws on foreign businesses and will work to ensure that their clients are tax-compliant.
How The New GST/HST Rules Work
The new GST/HST rules are effective beginning July 1, 2021. They apply to foreign businesses who make sales to Canadian consumers on:
- Cross-border digital products and services
- Goods supplied through fulfillment warehouses located in Canada
- Short-term lodging/accommodation transacted through digital platforms
Under the new GST/HST rules, foreign businesses will be required to collect and remit GST/HST to the CRA if they:
- Have no physical presence in Canada, and
- Have total taxable goods or services whose value exceeds, or is expected to exceed, CAD $30,000 over twelve months
Challenges For Foreign Businesses Under The New GST/HST Rules
While the new GST/HST rules increase fairness among foreign and Canadian businesses competing for sales in Canada, they pose new challenges for foreign businesses in the area of tax compliance.
First, foreign businesses must identify whether they are required to register with CRA to collect and remit sales taxes under the new GST/HST rules. This could prove to be a difficult determination for small and middle-market businesses whose sales in Canada approach the CAD $30,000 threshold.
Second, foreign businesses that are required to register with the CRA to collect and remit taxes under the new GST/HST rules must implement methods to identify Canadian consumers and their province of residence to ensure they are collecting the correct GST/HST as required by CAR and provincial governments. Foreign businesses may face challenges in updating their payment processing systems to identify and charge the correct GST/HST based on the Canadian consumer’s province of residence.
How An Experienced Canadian Tax Lawyer Can Help
Canada’s new GST/HST rules may be unfamiliar and confusing for foreign business owners. As more countries around the world impose taxes on cross-border sales of digital goods, services, and warehoused products, business owners are left to understand and implement each country’s or region’s tax policy individually. The good news is that foreign business owners do not have to navigate Canada’s new GST/HST rules alone. A Canada-based tax lawyer can help business owners:
- Determine whether they are required to register with CRA and collect GST/HST
- Register the business for GST/HST with the CRA
- Complete sales tax returns
- Identify revenue streams that may or may not be subject to GST/HST taxation
- Review accounting systems to ensure they properly record GST/HST taxes payable and receivable
If you are a foreign business owner grappling with the new GST/HST rules, consider speaking with a knowledgeable tax lawyer at Jeremy Scott Law at (902) 403-7201 to understand how we may be able to help with your GST/HST compliance needs.
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