Canadian taxpayers must check sales taxes for inaccuracies

According to tax specialists, e-commerce businesses must assess their Canadian sales tax duties to avoid compliance risks and fines.

As federal and provincial tax rates vary, tax directors would do well to invest in automated tax systems and engage in extensive consultation to guarantee compliance with legislation. At a time when firms are experiencing economic uncertainty, the risks of noncompliance might be significant.

In order to prevent compliance problems and fines, tax specialists have urged e-commerce enterprises to evaluate their Canadian sales tax requirements immediately.

Concerns have intensified following a spate of recent changes to goods and sales tax (GST), harmonised sales tax (HST), and provincial sales tax laws (PST). These restrictions have also targeted e-commerce and online marketplaces.

According to Colleen Ma, a partner at Miller Thompson LLP in Calgary, repeated revisions to sales tax legislation have caused confusion among businesses.

“It’s tricky from an international perspective, for sure. But even from a Canadian [perspective, it’s tricky,” says Ma. “So even across the country, it is confusing people.”

John Frim, director of indirect tax at EY in Ontario, explains that these taxes on international online marketplaces and e-commerce are all relatively new provincial and federal requirements.

These include British Columbia's decision, effective July 1, 2022, to apply a new category of taxable services to online marketplace services.

“It’s [the taxes] really because non-resident e-commerce businesses that were not conducting their business in Canada had a sales tax advantage over Canadian resident e-commerce businesses. Additionally, the federal and provincial governments were not receiving sales taxes from many non-resident e-commerce companies,” says Frim.

According to him, the laws target non-resident marketplaces and e-commerce companies that sell to Canadian customers and other end users. In the past, these vendors were not required to register for Canadian sales tax, but the new regulations have altered this.

“The first thing that most non-resident businesses look at is GST and HST, but they may not realise that certain provinces have similar legislation that has only recently been introduced,” says Frim.

Tax leakage

The Canada Revenue Agency (CRA) has enacted new measures to combat tax leakage as a result of the expansion of e-commerce and cross-border transactions. This has led in a surge of legislation that attempts to regulate ecommerce and online markets across provincial and international borders.

On July 1, online marketplaces and intra-business activity involving physical property became taxable. British Columbia approved a new category of taxable services for online marketplace services on the same date.

In December 2021, Manitoba implemented its own retail sales tax (RST) to include online sales platform owners and online retailers. This would be expanded to include internet streaming services, music, and television programmes.

In January 2020, Saskatchewan was the first jurisdiction to implement a PST charge on e-commerce and online marketplaces.

The inconsistent federal and provincial sales tax rates across the country, which went into effect at different periods and at different rates, have also been a major concern. This has raised the compliance burden on firms.

In addition, provincial revisions were implemented at separate dates, resulting in mismatched rates in British Columbia, Manitoba, and Saskatchewan.

The GST and HST are imposed to both services and goods at rates ranging from 5 percent to 15 percent, depending on the province where the supply is made.

British Columbia, Manitoba, Saskatchewan, and Quebec impose a provincial sales tax in addition to the GST and HST.

Typically, the seller or service provider is responsible for sales tax compliance. However, e-commerce companies and online marketplaces must now account for sales taxes on behalf of the merchants on their platforms.

As a result, enterprises must monitor five distinct sales tax systems around the country in addition to federal tax rates.

“In the past, if you had a small business, you only really would be selling in your province. You wouldn’t have customers in multiple provinces, or you wouldn’t have US companies selling into Canada as much as you have now,” says Ma.

These shifts in commercial marketplaces and the expansion of technology have led to the enactment of laws designed to capture these new revenue sources.

In particular, the Canadian government amended the law to regulate transactions involving non-resident suppliers of commodities to Canada in greater detail.

Winds of shift

The expansion of the internet and technology has presented organisations with both challenges and opportunities. Companies' access to markets has expanded, but the cost of tax compliance has increased.

“Before, if you weren’t carrying on business in Canada you generally didn’t have to register [for sales tax] and it was really down to the end user to self-assess,” says Ma.

The expansion and expanded involvement of companies like Netflix, Spotify, and software-as-a-service (SAAS) providers in the economy have prompted the CRA to make online marketplaces and e-commerce businesses responsible for GST collection.

These changes have taken e-commerce enterprises off guard. In the past, these enterprises may not have been required to register for Canadian sales tax; however, they must now account for this.

This implies that these businesses must analyse their transactions and systems to see whether GST and HST payments are required.

Changes can be divided into two categories: those involving companies that sell SAAS or streaming services. There have been both federal and provincial modifications for non-resident businesses.

These risks of noncompliance might cause businesses to face penalties and interest. “There is always the interest risks, non-filing penalties and late remittance interest charges,” says Frim.

He advises businesses to ensure that their systems contain the appropriate regulations for place of supply. He adds that many firms should speak with advisors to guarantee compliance with the legislation.

By fLEXI tEAM