The federal government’s latest fall economic update included a series of tax proposals that carry implications for businesses and households.

Ottawa is looking to raise revenue in the coming years via the digital economy. Through a series of proposed taxes on digital goods and services, the federal government aims to raise $6.5-billion over the next five fiscal years (ending in 2025-26).

Some of that would come from adding sales taxes to digital services such as Netflix, which currently doesn’t charge such taxes at the federal level. The bulk would come from a corporate tax on Big Tech companies, although details are coming next year. Canada, like many other countries, is working with the Organization for Economic Co-operation and Development on a multilateral plan. However, Ottawa is “concerned about the delay in arriving at consensus” – hence the reason it’s prepared to go alone.

The announcement comes less than two weeks after the auditor general told MPs that Canada is losing out on at least $247 million annually in unpaid Goods and Services Tax/Harmonized Sales Tax (GST/HST) on digital products and services.

A Fair Tax System for the Digital Economy

As more of our lives move online, our economy and our society are changing. The lockdowns brought on by the COVID-19 pandemic have accelerated the shift towards digitalization, globally and here at home, as both businesses and consumers do more business online. 

Retail e-commerce was up nearly 70% in the first eight months of this year. 

Digitalization of the global economy has made it easier for businesses to sell goods and services to anywhere in the world, from anywhere in the world. 

Under current rules, foreign-based digital businesses can sell their goods and services to Canadians without charging the Goods and Services Tax/Harmonized Sales Tax (GST/HST), which puts the burden on Canadian consumers to remit the sales tax. This gives foreign-based digital corporations an unfair advantage, and undercuts the competitiveness of Canadian companies. It also deprives the government of tax revenues that could be used to better the lives of everyone.

The government proposes a number of changes to level the playing field by ensuring that the GST/HST applies to all goods and services consumed in Canada, regardless of how they are supplied, or who supplies them. At the same time, the government will continue to work with the international community, provinces and stakeholders to ensure that the sales tax system is fair and provides a level playing field for Canadian and foreign-based businesses. 

The government is also proposing action with respect to corporate-level tax to ensure that digital corporations pay their fair share of taxes in respect of their activity in Canada.

Fair Taxation of Cross-Border Digital Products and Services

Foreign-based vendors with no physical presence in Canada do not, currently, have to charge the GST/HST on sales of digital products or services – like mobile apps, online video gaming and video and music streaming. This has put Canadian vendors of digital products and services at a distinct competitive disadvantage.  

*To level the playing field, the government proposes that foreign-based vendors selling digital products or services to consumers in Canada be required to register for, collect and remit the GST/HST on their taxable sales to Canadian consumers.

Canadians also often purchase digital products or services through digital marketplace platforms (e.g., “app stores”). To ensure that the GST/HST applies equally to these sales, the government proposes that digital marketplace platforms be required to register for the GST/HST, and to collect and remit the tax on the sale of digital products or services of foreign-based vendors to Canadians that the platform facilitates. This will ensure greater fairness for Canadian retailers.

To help promote compliance, the government proposes that foreign-based vendors and digital marketplace platforms be able to register and account for the GST/HST under a special simplified regime.

This proposal is in line with recommendations of the Organisation for Economic Co-operation and Development on the digital economy and is consistent with the actions of many other countries and jurisdictions. 

These changes are proposed to be effective July 1, 2021, which will provide time for the government to consult stakeholders on the proposed changes and for stakeholders to comply with these proposals.

It is estimated that the proposed measure will increase federal revenues by $1.2 billion over 5 years, starting in 2021-22.

Fair Taxation of Goods Supplied through Fulfillment Warehouses

Canadians are increasingly going online to buy the things they need. Online vendors and the digital platforms that host them are often based outside Canada, but use fulfillment warehouses here to store goods and deliver them to Canadians in a timely way.

Under the current rules, there is generally no requirement for foreign-based vendors to collect the GST/HST on the final price paid when their goods are sold in Canada, including when the sales are facilitated by digital platforms. By comparison, Canadian vendors using digital platforms and fulfillment warehouses in Canada are required to collect the GST/HST on the final price paid for their goods. This is putting Canadian vendors at a disadvantage.

* To level the playing field between Canadian and foreign-based vendors, the government proposes to apply the GST/HST on all sales to Canadians of goods that are located in Canadian fulfillment warehouses. Under this proposal, the GST/HST will be required to be collected and remitted by either the foreign-based vendor or the digital platform that facilitates the sale.

These changes are proposed to be effective July 1, 2021, which will provide time for the government to consult stakeholders on the proposed changes and for stakeholders to comply with these proposals. 

It is estimated that the proposed measure will increase federal revenues by $1.6 billion over 5 years, starting in 2021-22.

Remote-work Expenses

Also of note, the federal government said those working from home because of COVID-19 will be able to claim up to $400 in expenses for 2020 as part of a simplified process. Claimants won’t need to track detailed expenses, while the Canada Revenue Agency would “generally” not require a signed form from employers. The deduction amount would be based on how long an employee worked from home. The deduction would carry an estimated cost of $210-million this fiscal year. In October, there were 2.4 million Canadians working from home who normally do not.

“We’re encouraged by the government’s commitment to continue to support individuals and businesses through the crisis and to ensure e-commerce giants pay their fair share of tax, but additional measures are needed to reduce inequalities and to pay for the costs of the crisis,” said Toby Sanger, an economist and director of Canadians for Tax Fairness.

Source: The Government of Canada
Source: The Globe and Mail
Source: Canadians for Tax Fairness