Key Takeaways
- Non-resident businesses may have Canadian GST/HST registration obligations even without a physical presence in Canada.
- E-commerce activities and sales to Canadian consumers can trigger additional registration requirements.
- Simplified and traditional GST/HST registrations have different rules, including differences in Input Tax Credit eligibility.
- Voluntary registration may allow eligible businesses to recover GST/HST paid on certain business expenses.
- Understanding registration requirements can help businesses manage compliance obligations and identify potential tax recovery opportunities.
Debate and discussion regarding the ongoing trade relationship between Canada and the U.S. have served to highlight just how integrated our relationships are at a retail level. E-commerce platforms have all but turned the borders invisible to Canadian consumers, with order fulfillment often taking place north of the 49th parallel. Order fulfillment in Canada, where goods have already been imported by the merchant, means that no customs clearance takes place between the time goods are ordered and the time they are delivered to the buyer.
Unlike the U.S., where sales and use taxes are most often calculated and remitted by the platform operator, Canada still requires merchants to register independently for Goods and Services Tax/Harmonized Sales Tax (GST/HST), even if all their sales are made through a platform like Amazon or eBay.
But how does a non-resident of Canada know when they need to register for GST/HST?
“Carrying on Business”
Until 2021, the Excise Tax Act (ETA) only required non-residents to register if they were “carrying on business” in Canada. Carrying on business is a similar concept to that of “nexus”—a business must assess its level of activity and connection to a jurisdiction to determine whether it is required to register for tax.
GST/HST Policy Statement P-051R2, entitled Carrying on Business in Canada, instructs that for a non-resident person to determine whether their business presence in Canada amounts to carrying on business, they should consider a number of factors, such as:
- Place where agents or employees of the non-resident are located
- Place of delivery
- Place of payment
- Place where purchases are made or assets are acquired
- Place from which transactions are solicited
- Location of assets or an inventory of goods
- Location of a branch or office
- Place where the service is performed
- Place of manufacture or production
- Place where the business contracts are made
- Location of a bank account
- Place where the non-resident’s name and business are listed in a directory
This test is not a mathematical exercise, and the importance placed on each indicator is determined by the nature of the business activities of the person. It is, ultimately, a judgment call. There are obvious limitations in using the carrying on business test to compel a non-resident to register for GST/HST. For instance, it is estimated that Netflix had between 7 – 8 million Canadian subscribers to its streaming services in 2020, but as it had no physical presence in Canada, it was not “carrying on business,” and Canadian subscribers enjoyed GST/HST-free access to the streaming service until 2021 as a result.
E-Commerce
On April 1, 2021, a new tier of registration was created in the ETA that required anyone selling $30,000 CDN of goods or services directly to consumers to register for GST/HST, regardless of their physical presence in Canada. This new obligation fell in line with the U.S. Supreme Court’s findings in the case of South Dakota v. Wayfair in 2018, which changed the way online retailers had to assess their obligations to collect and remit sales and use taxes in states where they had no physical presence.
In Canada, this registration obligation applies to non-residents who:
- Sell goods in Canada through online platforms or their own websites to consumers in Canada
- Sell services or intangible property to consumers in Canada
- Operate accommodation and distribution platforms, like Airbnb and Amazon, that facilitate transactions between merchants and consumers in Canada
Simplified Registration
Although not open to retailers of tangible property, there is a simplified registration process for suppliers of services and intangible property in Canada. While this system offers some conveniences, such as streamlined registration and foreign currency options in reporting and remitting tax, there are important differences between these registrations and those under the traditional GST/HST registration regime, including:
- The inability of a person with a simplified registration to claim Input Tax Credits (ITCs)
- The inability of a person with a traditional GST/HST registration to claim ITCs to recover tax paid to a person with a simplified registration
- The obligation of a person with a simplified registration to exempt a person with a traditional registration from the obligation to pay GST/HST when they are furnished with that person’s GST/HST registration number
- Tax paid in error by a person in the traditional registration system to a person with a simplified registration can only be recovered by having the vendor reverse the tax that was charged. Remediation of an overcollection of tax cannot be achieved by filing for a rebate or ITC to recover the tax.
Simplified registrations are now indicated by the suffix “RT9999” at the end of the account number, which is required to be disclosed on invoices and receipts issued by the supplier. It is important for all registrants to identify the nature of the registration giving rise to the collection of tax.
Benefits to Voluntarily Registering for GST/HST
Voluntarily registering for GST/HST may offer significant benefits to a non-resident of Canada, even if they are not carrying on business in Canada or compelled to register under the e-commerce rules.
GST/HST is a value-added tax, which behaves much differently than a retail sales tax or a sales and use tax. Each participant in the supply chain only remits the difference between the tax they collect on their sales and the tax they pay on their inputs. The resulting net tax reflects the GST/HST due on the value added to the registrant’s inputs at their place in the supply chain. The only person who shoulders the burden of GST/HST is the end consumer; in all other stages, the tax should be revenue neutral to the registrant.
If a non-resident is incurring GST/HST in conducting their business dealings in Canada, consideration to voluntarily register is an option to take advantage of the opportunity to reduce what would otherwise be a sunk cost associated with GST/HST. For instance, GST assessed on goods being imported into Canada and GST/HST paid on travel expenses and materials that are acquired within the country to facilitate the execution of a service contract in Canada may be, in whole or in part, recoverable.
Evaluating Your GST/HST Registration Obligations
For non-residents doing business in Canada, determining whether GST/HST registration is required is only part of the consideration. Depending on the nature of the business and its activities in Canada, voluntary registration may also provide an opportunity to recover GST/HST that might otherwise become a cost. Understanding which rules apply can help businesses meet their obligations while taking advantage of available tax recovery opportunities.
This website content should be used for general informational purposes only, and not as a substitute for consultation with professional tax, legal, or other competent advisors.
Before making any decision or taking any action based upon information contained on this website, you should consult with a DMA professional.