Despite many news articles to the contrary, there is—and always has been—Canadian sales taxes on foreign digital content services and foreign digital content intangibles supplied in Canada.
Specifically, if a Canadian consumer acquires the digital content from an unregistered nonresident, the Canadian consumer is generally required to self-assess the applicable Canadian sales taxes on their purchase.
However, as very few consumers are aware of this obligation, and fewer still report the receipt of the supply by complying with the required filing obligation and remitting the applicable sales taxes to the government, including the goods and services tax (“GST”)/harmonized sales tax (“HST”) and Québec sales tax (“QST”), it is likely that very little tax is actually paid when unregistered vendors do not collect the applicable Canadian sales tax.
Further, since the current federal government has stated that they will not impose a “Netflix Tax,” one may wonder whether the Canada Revenue Agency is likely to enforce the current rules against consumers.
Given the explosion in the consumption of foreign digital services worldwide, including Canada, a great deal of tax likely goes uncollected, representing a significant loss of revenue to the government.
Recently, two Canadian provinces, Québec and Saskatchewan, have created an explicit sales tax on digital supplies, or extended the requirements for nonresident vendors to register to collect sales taxes, in an attempt to ensure that taxes on such foreign digital services are collected and remitted in a more effective and reliable manner.
In both Québec and Saskatchewan, the new regimes require the supplier to register for, charge, collect, and remit sales tax to the respective province. However, it is unclear the extent to which these provinces will be able to enforce their new regimes since the foreign suppliers typically do not have any nexus or establishment in Canada.
In response to the low level of compliance with self-reporting of QST, Québec became the first Canadian province to impose an explicit tax on the digital economy.
As of January 1, 2019 the new regime obligates certain nonresident suppliers to register under An Act respecting the Québec Sales Tax and to collect and remit the QST applicable to taxable supplies of services or incorporeal movable property made to Québec consumers.
For this purpose, a Québec consumer is a person who is not registered for sales tax purposes and whose usual place of residence is in Québec based on information collected by the supplier at the time of making the supply, such as the person’s billing address, residential or business address, IP Address, bank-related information, location of landline, IP address, data from SIM card and any other relevant information obtained by the supplier in the course of its operations.
In practice, the application of the new regime shifts the burden of collection and remittance from the consumer to the supplier in these circumstances.
Nonresident suppliers that are not collecting the applicable QST from Québec consumers that are registered will have to obtain confirmation that such recipients are registered for sales taxes purposes and keep sufficient records establishing this fact (including copies of the recipient’s QST numbers). Recipients that are registered for sales tax purposes and that have paid the QST by error to such nonresident suppliers can only obtain refunds of this tax by requesting the nonresident supplier refund the tax charged to them.
These new registration and collection measures also apply to certain operators of digital platforms, provided that such operators control the essential elements of the transactions, such as billing, the terms and conditions of the transaction, and the terms of delivery. Operators of such digital platforms who receive an amount in respect of a taxable supply of a service or incorporeal movable property by certain non-Québec suppliers to a specified Québec consumer will also be required to register and to collect QST.
In addition, and only effective beginning September 1, 2019, similar rules will be applicable for inter-provincial supplies. As such, Canadian suppliers with no presence in Québec will also be required to register for QST with respect to supplies of services or incorporeal movable property made to non-registered consumers in Québec and also with respect to supplies of goods to such Québec consumers.
While the rules impose new compliance and collection obligations on the suppliers and operators of digital platforms, the rules also introduce penalties for consumers that provide incorrect information to avoid being considered Québec-based consumers.
The new measures proposed by Québec are similar to other sales tax regimes that have been enacted across the globe in respect of e-commerce, but constitute the first attempt in Canada to implement such registration and collection requirement on suppliers having limited ties with Canada.
Similar to the GST rules, when a nonresident vendor is not licensed to collect provincial sales tax ("PST"), the Saskatchewan customers are generally required to self-assess and remit the tax directly to the Minister of Finance.
As of January 1, 2019, Saskatchewan revised its rules to require suppliers located outside of Saskatchewan to register for PST, regardless of whether the supplier carries on business in Saskatchewan or has any nexus in Saskatchewan, so long as the supplier makes retail sales of tangible personal property or taxable services in the province (effectively where a person sells or provides tangible personal property or a taxable service to a consumer or user in Saskatchewan), or leases taxable goods in the province.
This registration requirement affects nonresidents of Canada as well as out-of-province (but Canadian resident) suppliers. It should be noted that Saskatchewan PST applies not only to supplies of tangible personal property, but also to taxable services such as telecommunication services, which include “any transmission, reception or distribution of signs, signals, words, writings, images, symbols, sounds or intelligence of any nature by means of electromagnetic waves,” and would thus apply to a number of digitally delivered services.
How do the New Rules Affect Nonresident Suppliers?
Under the Excise Tax Act (the Act dealing with GST/HST), nonresident businesses are generally only required to register for GST if carrying on business in Canada.
In contrast, the provincial regimes discussed above require a nonresident with no presence in Canada and who does not carry on business in Canada to register for the respective provincial tax, i.e., PST in Saskatchewan and QST in Québec, so long as the conditions set out above are met.
This nuance may provide challenges to Saskatchewan and Québec in enforcing the new extended rules. In particular, it is unclear how, or if, Québec or Saskatchewan will be able to force foreign suppliers to register when the same foreign suppliers do not have any physical assets in Canada.
We understand that Revenu Québec has been proactive in trying to reach out to non-Canadian suppliers and operators of digital platforms that are perceived to be subject to this new registration and collection regime prior to the coming into force of the rules.
Companies should review the new rules to determine if they apply to the company’s business, and if so, what the impact of the new rules will be.
Notwithstanding the questions on enforceability raised above, if the new rules technically apply, companies also have to consider the options if they choose to not comply with these rules. For instance, a nonresident supplier will have to consider whether not complying with Canadian provincial laws will be damaging from a public relations point of view.
For this reason, the new regimes appear to be working the way the governments intended, as a number of large nonresident companies have chosen to register for these taxes, and it is likely the regimes will continue to cause at least some nonresidents to register and collect the taxes despite the uncertainty of enforceability.
Alain Fournier and Alan Kenigsberg are Partners at Osler, Hoskin & Harcourt LLP, Canada