Canada’s Multiple, Uncoordinated Netflix Taxes

The 2020 fall economic statement proposed significant changes to the Excise Tax Act to address deficiencies in taxing international e-commerce, effective July 1, 2021. With these proposals, the federal government is entering a space already occupied by a patchwork of provincial sales taxes and adding its own, different rules. The cumulative obligations for non-residents are far more onerous than the simple system envisioned by the OECD when it advocated mandatory registration for non-residents, although the proposed federal rules appear to have been designed with compliance burdens in mind.

The current federal GST/HST rules generally do not require non-residents to register and collect tax on Canadian sales unless they carry on business in Canada. Such supplies are deemed to be made outside Canada, and the consumer is required to self-assess the tax—a system widely acknowledged as ineffective—which results in revenue loss and competitive inequity. This was noted in the OECD’s BEPS action 1. The federal government signalled its concern in the 2014 budget but, until now, did not take any action.

Under the proposals, a “specified non-resident supplier” (defined to mean a non-resident that does not carry on business in Canada and is not registered under the existing rules) and certain “distribution platform operators” (subject to exclusions, defined as a person that controls or sets the essential elements of the transaction; or that collects, receives, or charges and transmits the consideration to the supplier) will be required to register under a simplified system if they exceed $30,000 in sales of specified supplies to specified Canadian recipients (that is, business-to-consumer [B2C] sales) in any 12-month period after June 2021. “Specified supply” essentially means a taxable supply of intangible personal property or a service that is considered to be used or consumed in Canada. “Specified Canadian recipient” essentially means a person who is not GST/HST registered and whose usual place of residence (as defined) is in Canada. Notably, digital platform operators would have full liability for the tax on supplies made through their platform by specified non-resident suppliers. Consistent with OECD recommendations for simplified registration, persons registered under these rules will not be entitled to input tax credits (ITCs).

The proposals also include rules essentially requiring non-resident suppliers and digital platform operators to register under the normal registration rules in respect of sales of tangible goods, other than those sent by mail or courier from outside Canada. The rules are aimed at situations where goods are sold by unregistered non-residents but are fulfilled from within Canada. Although such goods may have been already taxed at import (under division III), there are concerns that this is inadequate. Related proposals have also been made to ensure that these rules give appropriate ITCs for the tax paid on import and work properly with the drop shipment rules.

The federal government, through the GST/HST, now joins Quebec, British Columbia, and Saskatchewan in significantly broadening registration rules for non-residents who do not carry on business in Canada. This will add another level of complexity for non-residents, since each regime has similarities and differences. Quebec’s registration rules are the most similar in scope to the federal rules, applying to sales of services and intangibles by non-resident suppliers and sales through digital platforms by non-residents (although not to sales of tangible personal property [TPP]). The registration threshold is $30,000 in sales to Quebec consumers over 12 calendar months. British Columbia’s rules for non-resident suppliers apply to sales of taxable services and telecommunication services (defined to include digital content). The registration threshold is $10,000 in BC sales over 12 months. Finally, Saskatchewan requires both non-resident suppliers and “marketplace facilitators” to register and collect tax on sales of TPP and services (defined to include digital content). There appears to be no explicit registration threshold.

Shahrukh Khowaja and Simon Thang
Thang Tax Law, Toronto

Canadian Tax Focus
Volume 11, Number 1, February 2021
©2021, Canadian Tax Foundation