Canada: New Goods and Services/Harmonized Sales Tax Rules

The purpose of this article is to provide a simple illustration of how the new proposed Goods and Services/Harmonized Sales Tax (GST/HST) rules are to apply to the sale of goods made on July 1, 2021 or later, by a retailer that is a nonresident of Canada and not registered for GST/HST purposes, when the goods are stored in a fulfillment warehouse in Canada before being sold and delivered to Canadian consumers and only when those sales are made through a GST/HST registered distribution platform.

For the purposes of this article, we will consider the following facts:

• A retailer located outside Canada imports goods into Canada to be stored in a fulfillment warehouse awaiting to be sold to Canadian consumers. When importing the goods into Canada, the retailer pays the 5% GST to Canadian customs calculated on the value for importation of the goods.
• The nonresident retailer has no other presence in Canada and is not registered for GST/HST purposes.
• The retailer sells all its goods to Canadian consumers online through a GST/HST registered distribution platform.
• In addition to storing the goods, the fulfillment warehouse also delivers the goods sold by the retailer directly to the Canadian consumers.

New Rules

Under the new GST/HST rules coming into effect on July 1, 2021, every person that is a nonresident person (i.e., the retailer) that does not carry on business in Canada will not be required to register for GST/HST purposes when all the sales are made through a GST/HST registered specified distribution platform.

Instead, it is the operator of the specified distribution platform that will be required to charge any applicable GST/HST on the sales it facilitates on behalf of the non-GST/HST registered retailer when the goods are delivered to the Canadian consumers from a place in Canada.

However, the “drop-shipment” rules may still apply to deem the fulfillment warehouse to have sold the goods to the non-GST/HST registered retailer at fair market value (i.e., at the price at which the goods are sold by retailer to the Canadian consumer).

The purpose of this rule is to prevent the loss of tax revenue that would result otherwise on the sale of goods made by the non-GST/HST registered retailer to the Canadian consumer. This tax would be an unrecoverable cost to the retailer, and would apply in addition to the GST/HST charged by the specified distribution platform to the Canadian consumer. To prevent the double incidence of taxes, including the tax charged by the fulfillment warehouse to the retailer, changes will be made to the current drop-shipment rules.

Distribution Platform Operator Certificate

New subsection 179(3.1) of the Excise Tax Act (ETA) will provide a new exception to the application of the general rule in subsection 179(1) in respect of the sale of goods, or of a service in respect of goods, that is made in Canada by a registrant to an unregistered nonresident person that is not a consumer of the goods or service.

This new subsection provides that, in certain circumstances, a certificate (referred to as a “distribution platform operator certificate”) may be issued that has the effect of nullifying the sale of goods that is deemed to have been made by the registrant (i.e., the fulfillment center) under subsection 179(1), thereby relieving the registrant from having to remit GST/HST on that deemed sale.

Who is a Distribution Platform Operator?

A distribution platform operator will be a person that controls or sets the essential elements of the transaction between the third-party vendor and the purchaser, for example by providing listing services for the sale of goods and setting payment terms and delivery conditions.

If no such person exists, the operator will be a person that is involved, directly or through arrangements with third parties, in collecting, receiving or charging payment for the sale and transmitting payment to the third-party vendor. Examples of a distribution platform operator could be Amazon or Shopify.

The certificate also has the effect of deeming the sale of the goods, or the sale of a service in respect of the goods (other than a service of shipping the goods), to have been made outside of Canada. Therefore, the GST/HST is relieved on that sale by the registrant to the unregistered non-resident person.

Conditions for Issuing a Certificate

New subsection 179(3.1) generally provides that a distribution platform operator certificate may be issued if the following conditions are satisfied:

• a registrant makes a sale in Canada of goods, a service of manufacturing or producing goods, or a commercial service in respect of goods (other than goods of a person that is resident in Canada), to an unregistered nonresident person that is not a consumer of the goods or service;
• the registrant causes the transfer of physical possession of those goods at a place in Canada to a consignee (i.e., the Canadian consumer) that is acquiring physical possession of the goods as the recipient of the sale of the goods;
• the sale of the goods is deemed, under new subsection 211.23(1) of the ETA, to have been made by a “distribution platform operator” (as defined in new subsection 211.1(1)) that is registered under Subdivision D of Division V of Part IX, and would, in the absence of subsection 211.23(1), have been made by an unregistered nonresident vendor;
• the unregistered nonresident vendor (i.e., the retailer) gives to the registrant (i.e., the fulfillment warehouse), and the registrant retains, a certificate that acknowledges that the consignee acquired physical possession of the goods as the recipient of the sale and that the distribution platform operator is required to collect tax in respect of that sale, and that states the distribution platform operator’s name and GST/HST registration number.

Additional Rules

Some additional rules will also apply.

• Recovery of tax on inputs: Registered distribution platform operators would be eligible to claim input tax credits in respect of the tax paid at the border by non-registered third-party vendors (i.e., the retailer) that import their goods into Canada and sell their goods through distribution platforms (i.e., there would be a flow through of the input tax credits). Therefore, the retailer could provide a copy of the import documentation to the distribution platform operator to allow it to recover the 5% GST paid to Canada customs on importation.
• No tax on platform services: Distribution platform operators would be deemed to not have made a supply to the non-registered third-party vendor of services relating to the deemed supply of goods made through the platform. This proposed deeming rule recognizes that non-registered third-party vendors are unable to claim input tax credits in respect of the tax paid on inputs used in their commercial activities, and helps avoid the embedding of the GST/HST in the final price of goods for which the distribution platform operator would be deemed to be the supplier. As such, there would be no GST/HST charged by the distribution platform operator to the non-GST/HST registered retailer on their service fees to facilitate the online sale of the goods.

The above commentary is not intended to replace the proposed new legislation which has not yet been enacted (at the time of writing) and may still be subject to changes before July 1, 2021. It is strongly advised to seek professional assistance to better understand how these complex rules may apply to your particular circumstances.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Frédéric Pansieri, CPA, CA is Partner, Commodity Taxes, with Crowe Soberman LLP.

The author may be contacted at: frederic.pansieri@crowesoberman.com