On November 30, 2020, significant changes to Goods and Services Tax (GST) and Harmonized Sales Tax (HST) were proposed in the Federal Finance Minister’s 2020 Fall Economic Update (the “Update”).  The new rules, which have very recently come into effect, will affect operators of electronic platforms, non-resident vendors engaged in the sales of digital products and services to Canadian customers, or goods supplied through fulfillment warehouses located in Canada.

Vendors and operators are encouraged to review the upcoming changes to determine how their businesses will be affected. The Update proposes significant modifications to the current tax treatment related to the following three types of supplies:

  • Sales of cross-border digital products and services;
  • Sales of goods through fulfillment warehouses; and
  • Sales of short-term accommodation through digital platforms (ex. Airbnb).
Sales of cross-border digital products and services

Currently, non-resident vendors that do not carry on business in Canada are not required to register, collect or remit GST/HST. Under the upcoming changes, non-resident vendors that sell digital products or services to Canadian customers (and the distribution platform operators that facilitate such sales and services) will be required to register for, collect and remit GST/HST under a new simplified GST/HST registration and remittance system, if their total taxable supplies of digital products or services made to consumers in Canada exceed or are expected to exceed CAD $30,000.00 over a 12-month period. These vendors and distribution operators may choose to instead register under the normal GST/HST rules in order to be able to claim input tax credits (ITCs) for GST/HST paid on their expenditures, as they will be unable to claim such credits under the new system.

The new rules will apply to cross-border supplies of digital products and services to the extent the consideration for such supplies becomes due on or after 1 July 2021 or is paid without becoming due.

Sales of goods through fulfillment warehouses

Non-resident vendors that sell goods to Canadian consumers through digital distribution platforms often store their goods in fulfillment warehouses in Canada, which are responsible for the shipment of such goods to the consumers.  The upcoming changes will inter alia require distribution platform operators to register for, collect and remit GST/HST under the normal GST/HST rules unless their total sales are below the $30,000 registration threshold (which is calculated differently for vendors and platform operators). Furthermore, non-resident vendors will be required to register under the normal GST/HST rules and to collect and remit the GST/HST for sales of goods that are stored in fulfillment warehouses in Canada when such vendors make such sales on their own account.

These changes apply for supplies made after June 30, 2021 and supplies made before July 2021 if all the consideration is payable after June 30, 2021.

Sales of short-term accommodation through digital platforms

Many individual property owners participate in the short-term accommodation sector by renting out their residences through digital platforms. Under the current GST/HST rules, the supply of short-term accommodations made through a digital platform may or may not be subject to GST/HST depending on various factors.

The new rules will require that accomodation platform operators[1] register for the GST/HST if that person facilitates or expects to facilitate more than $30,000 in taxable supplies of short-term accommodation in Canada for third-party suppliers of the accommodation who are not registered. An accommodation service provider that carries on business in Canada and is required to register under the existing rules will continue to be subject to the regular GST/HST registration system.

Non-resident accommodation platform operators that do not carry on business in Canada would be able to register under a simplified system, allowing them to use a specific online portal for simplified GST/HST collection and remittance. They would be required to collect and remit GST/HST for supplies of short-term accommodation made to consumers (defined to be a person not registered for GST/HST); however, they would not be required to collect and remit GST/HST for supplies to a registrant. Under the simplified system, they could not claim ITCs to recover GST/HST paid on business expenses.

Accommodation platform operators would also be required to file an information return with the Minister of Revenue containing prescribed information, including information on the third-party property owners using their platforms.

Non-resident vendors and e-platform operators should determine how their business operations will be affected and which processes and systems will have to be adjusted to comply with these new obligations.

[1] An accommodation platform operator is a person (other than the supplier of the accommodation) that controls or sets the essential elements of the transaction between the third-party vendor and the customer.

 

Article by Martin Aquilina with assistance by Andrea Parodis.