E-Commerce sales represent a huge chunk of the Canadian market. There’s no denying how important digital products and services are to Canadian businesses and consumers. In late 2019, e-Commerce retail trade sales added up to almost $1.85 billion (CAD), and approximately 28.1 million Canadians made purchases online.
Digital goods and services fall under different tax categories than physical goods, so when selling digital products to consumers in Canada it’s best to ensure you’re applying the right tax. In the same vein, Canadian businesses exporting digital products overseas must comply with tax laws of the countries where their customers live.
Non-resident importers who supply digital products and services
Under Canada’s current rules, non-resident importers (NRIs) who sell digital products and services to customers in Canada do not have to register for the goods and services tax (GST) or harmonized sales tax (HST). HST is usually a combination of the GST and a provincial sales tax (PST), but not all provinces have a PST on digital goods.
NRIs are responsible for customs declaration and calculating taxes and duties. You can include all the shipping, customs clearances, duties, and taxes in the shipping and handling fees or in the price of your digital products. This way your Canadian customers pay it. Consumers in Canada are supposed to self-assess the appropriate GST/HST on digital services purchased from NRIs and remit the tax to the Canadian Revenue Agency (CRA).
Read our article about how to become a non-resident importer in Canada to learn what your responsibilities are when importing digital products to Canada.
What counts as digital products or services?
If you want to sell digital products and services as an NRI in Canada, then you should understand what’s considered a digital product and what is not.
Generally, anything a customer receives or accesses over the Internet is a digital product. If the customer gets an email, downloads a file, or logs into a service portal after purchasing, then it’s a digital product or service. If a customer orders something online and it’s shipped to them via snail mail, that is not a digital product.
In Canada, digital products may also be referred to as a digital good, digital service, electronic good, electronic service, incorporeal moveable property, or intangible personal property. Examples of these products are:
- Downloads or streaming services for music, games, films, or other media
- Software, apps, or SaaS subscriptions
- Ebooks and some newspaper or magazine subscriptions
- App hosting and data warehousing
- Telecommunications services
Businesses with a physical presence in Canada that provide digital goods must pay the federal GST, as well as PST if applicable. For now, NRIs do not have to pay the federal GST or PST, except for in the provinces of Quebec (QST), Saskatechwan, and British Columbia. But this tax structure will soon change for NRIs….
Canada’s new tax affects foreign suppliers of digital goods and services
At the end of 2020, Canada announced a reform of its GST/HST structure that will require non-resident importers of digital products and services to register for the GST/HST and pay the same tax to the CRA that resident suppliers pay. Any foreign company that exceeds an annual threshold of $30,000 (CAD) will have to register.
The tax will impact:
- Cross-border digital products and services (such as mobile apps and movie/music streaming services)
- Goods supplied through Canadian fulfillment warehouses
- Short-term accommodation through digital platforms (e.g. Airbnb)
This kind of tax model was recently put into place in the provinces of Quebec, Saskatchewan, and British Columbia, but as of July 2021, it will be in effect for all of Canada.
Leveling the playing field
Why did the Canadian government propose these new tax rules? A report from the Office of the Auditor General (OAG) estimated that the government lost $169 million (CAD) in revenue to uncollected GST on digital services supplied by foreign companies. Asking consumers to self-assess and remit the tax to the CRA isn’t a reliable method for collecting the taxes owed.
Canada’s new tax model was also partially in response to a U.S. Supreme Court case involving the online retailer Wayfair. This case ruled U.S. states could apply state sales tax to goods being sold within their state, even if the supplier didn’t have a physical presence there. Canada’s nationwide application of GST/HST to foreign digital service providers and retailers helps level the playing field.
What the new GST/HST rule means for foreign digital service providers
Foreign digital products suppliers won’t have to charge GST/HST to individuals or companies who are already registered, but they will have to collect it from those who are not registered. To determine if a customer must pay GST/HST, foreign importers will have to gather information about customers’ residence so they can determine if the GST/HST applies.
Do Canadian exporters pay digital services taxes?
Canada-based businesses exporting digital products internationally typically must pay a digital service tax. Many countries have revised their VAT/GST rules so that Canadian businesses exporting their digital products and services must pay a tax on sales of digital services to customers in those countries. Currently, there are more than 60 countries or territories that charge some sort of value added or general service tax on digital goods. Countries that added a digital services tax in 2020 and 2021 include:
- Costa Rica
Canadian businesses looking to offer their digital products and platforms abroad should be aware of the duties and tax responsibilities of the country they’re selling to. If your business doesn’t register for the foreign government’s appropriate tax regime in time, you could face penalties after you’ve started selling your digital products there.
Understanding taxes on digital services in Canada is complicated enough. With the new rule taking effect in July, 2021, non-resident digital service suppliers will have even more to worry about. Border Buddy can help foreign and Canadian businesses understand their responsibilities when it comes to e-Commerce sales and importing or exporting digital products. To learn more, give us a call today.