Tax compliance is essential to the integrity of Canada’s numerous tax structures. Consequently, the Canada Revenue Agency (CRA) takes enforcement extremely seriously, and ensuring tax compliance is an important part of operations for any Canadian business. Today, technology is taking a larger role in the assessment, remittance, and review of taxes, both for businesses and for the CRA. To learn more, schedule a consultation with Jeremy Scott Law by calling (902) 403-7201.
What Are the Factors Influencing Taxpayers’ Compliance?
For both businesses and individuals, tax compliance consists of fulfilling all their obligations to pay taxes. Tax compliance is therefore a lynchpin in Canada’s national revenue system, ensuring that the country has monies to fund infrastructure and public services. However, recognizing that tax compliance is important does not necessarily help residents and business owners to understand their obligations and the steps they must take to fulfill them completely and in a timely manner. Here are a few of the factors that often influence tax compliance:
Better Understanding of the System
Often, tax laws and regulations are complicated. Unfortunately, the Canadian tax system is known for its various tax authorities, rigid regulations, and multiple deductions. Additionally, some of Canada’s carefully calibrated tax rates can be confusing for the average taxpayer. This complexity can make it hard for the average person or business owner to understand whether they have remitted all taxes required of them, as well as what forms of documentation they may need to retain in order to prove their compliance in the event of an audit from the CRA. Many taxpayers may therefore struggle to fulfill their tax obligations, simply through misunderstanding what they are supposed to do. They may believe that they are paying the correct rate, but in actuality, they are not in compliance.
However, the Canada Revenue Agency (CRA) is using technology to assist taxpayers in gaining a better understanding of the nation’s tax system. Anyone can visit the agency’s website, download forms, apply for an appeal, and submit their information at the click of a button. The CRA provides both businesses and individuals with a variety of resources to assist in tax compliance. No matter where in Canada the taxpayer is located, they will be able to fulfill their tax obligations.
Effective enforcement and detection to determine fraud are essential to ensuring tax compliance. Along with helping educate taxpayers, the CRA does play a major role in tax enforcement. Enforcement of tax regulations on the part of the CRA runs parallel to taxpayers’ good faith efforts to achieve, and remain in, compliance with the tax laws that apply to their sources of income and their business ventures.
Availability of Tax Incentives and Credits
Tax incentives and credits offer substantial leverage to either incentivize or dissuade compliance. When taxpayers clearly understand the advantages of the tax incentives available to them, their motivation to comply increases.
Canada offers a number of tax credits and incentives to benefit businesses and individuals, with small businesses and those that provide services in the public interest often receiving explicit consideration. The various credits, rebates, and other incentives are enumerated on the CRA’s website; however, owing to the complexities of Canadian tax law and the high stakes of even a minor error, it may advisable for businesses seeking to identify which incentives best apply to their situation to consult with an experienced Canadian tax attorney.
What Is the Tax on Digital Services in Canada?
As the digital economy continues to expand, there is a growing call for the taxation of digital services. A proposed Digital Services Tax (DST) is under consideration. This tax would apply to both domestic and foreign businesses based on certain factors:
- Total Revenue Threshold: A taxpayer or their consolidated group would need to achieve a total revenue of $750,000,000 or more from all sources in a fiscal year to qualify for this threshold in the subsequent calendar year.
- Canadian In-Scope Revenue Threshold. The taxpayer would reach this requirement if they (or their consolidated group) earn more than $20,000,000 of Canadian in-scope revenue in the calendar year.
The DST rate would be set at 3% of certain revenue. This measure would be imposed on January 1, 2024, but those taxes would be payable retroactively to January 1, 2022. These taxes are geared towards larger businesses. As a result, nonprofits, small organizations, and individuals would not be subjected to the tax.
Canada has instituted a policy to tax digital goods and services supplied by non-resident vendors nationwide. Non-resident vendors expecting to generate $30,000 in business-to-consumer (B2C) sales within a year are obligated to follow the procedures for registration, tax collection, and remittance of GST/HST. The specific tax rate is contingent on the locations of both the business and the customer. Typically, GST is applicable to companies with a physical presence within Canada. Currently, Quebec and Saskatchewan are the two provinces that have implemented taxation on digital services.
Is Software As A Service (SaaS) Taxable in Canada?
Specific guidelines govern the regulation of Software as a Service (SaaS) in Canada. In cases where the Harmonized Sales Tax (HST) is not in use, the Goods and Services Tax (GST) is applied to transactions involving SaaS. However, GST nor HST may not be levied on SaaS when the services are sold beyond Canada’s borders.
How Are Taxes Regulated in Canada?
Canada’s tax system clearly separates tax authority between the federal and provincial governments. This division was established by the Constitution Act of 1867. The regulatory framework delineates the responsibilities of each level of government in overseeing various forms of taxation within the country. Some of the important tax regulations include:
The federal government imposes several nationwide taxes. These include:
- The Goods and Services Tax (GST)
- The federal portion of the Harmonized Sales Tax (HST) in provinces that consolidate the federal GST with their own sales tax structure
- The Income Tax
The Federal Income Tax Act governs federal income tax. Additionally, the administration and enforcement of federal tax laws fall under the review of the Canada Revenue Agency.
Provincial governments have the authority to levy their own distinct taxes. These encompass:
- Provincial sales taxes (PST)
- The provincial portion of the HST, in provinces which consolidate their sales taxes
- Corporate income taxes
- Personal income taxes
Each province formulates its own tax laws and designates specific agencies responsible for administering and enforcing these taxes. In certain provinces, federal and provincial sales taxes are amalgamated into a single unified tax, the HST.
Similar to their provincial counterparts, territorial governments in Canada, comprising regions like Yukon, Northwest Territories, and Nunavut, have the authority to impose taxes specific to their jurisdictions. These levies may include the Territorial Sales Tax and various forms of income taxes.
Canada maintains an extensive network of tax treaties with foreign countries. These treaties are designed to address double taxation issues and promote international trade. Many agreements govern the taxation of income, dividends, interest, and royalties earned by residents of one country who originate from another, or who conduct business internationally. To learn more about how tax treaties impact business tax compliance in Canada, reach out to Jeremy Scott Law.
Reach Out to a Canadian Tax Lawyer
Numerous factors influence tax compliance, and the oversight of taxation is a collaborative effort among federal, provincial, and territorial authorities in the country. Individuals and businesses need to remain vigilant regarding potential changes in tax regulations in order to ensure full compliance. Small businesses in particular may benefit from consulting with experienced professionals who may be able to offer strategic guidance on available incentives to legally limit their total tax liability. For assistance in navigating tax obligations, incentives, and filing requirements, schedule an appointment with Jeremy Scott Law today by calling (902) 403-7201.