QST changes to tax digital economy affect wide range of Quebec non-residents

Quebec’s March 27, 2018 budget announced the implementation of a new Quebec Sales Tax (QST) regime to collect QST from suppliers that are non-residents of Quebec. The Quebec government says its goal is to reflect the advent of online transactions and improve tax fairness between non-resident suppliers of Quebec and local businesses, which are required to collect and remit the QST.

The rules are aimed at levelling the playing field between Quebec businesses and non-Quebec businesses selling “taxable supplies of incorporeal movable property and services,” which include cloud services and downloads of digital software, music and entertainment products. Non-resident operators of certain digital platforms are also affected by these rules.

Essentially, the new rules require suppliers with no physical or significant presence in Québec to collect and remit the QST on taxable supplies of intangible property and services they supply in Québec to specified consumers. In addition, suppliers with no physical or significant presence in Québec that are located in Canada will be required to collect and remit the QST on taxable property they supply in Québec to specified consumers. A “specified Quebec consumer” is one who is resident in Quebec and not registered for QST.

Suppliers outside Canada who are subject to these new rules generally have to register, and start collecting and remitting tax at 9.975 per cent, by January 1, 2019. Canadian suppliers outside Quebec have until September 1, 2019. Registration is also mandatory for some digital platforms acting as an intermediary between suppliers and consumers, with exceptions for platforms that only provide transportation services, access to payment systems or advertising services. For non- resident suppliers selling through a qualifying intermediary platform, it’s the digital platform that needs to register, and not the non-resident supplier.

A non-resident supplier must register for the new QST regime from the first day of a calendar month in which their income exceeds $30,000, based on their sales to Quebec consumers. So, as of their registration deadline (i.e. January 1 or September 1, 2019), non-resident suppliers need to determine, on the first day of that month, whether they have exceeded the income threshold of $30,000. If they haven’t, they need to redo the calculation on the first day of every following month to see whether their income has tipped over the threshold for registration.

What should do before the registration deadline?

Affected businesses need to act quickly to get ready for the fast-approaching deadlines. Before then, suppliers outside Quebec and operators of digital platforms for the distribution of intangible property or services need to determine whether they are required to use the registration service and, if so, register for the QST using that service. They must then collect the QST on certain taxable supplies made in Quebec to consumers, and report and remit the QST collected.

Businesses also need to identify which of their customers have a usual place of residence in Quebec but are not QST-registered so that they can determine whether to charge QST under the new system. 

The interaction between Quebec’s existing QST system and the new mandatory system for non-Quebec suppliers may complicate the process. The budget documents say: “A person who is registered under the general registration system and who pays the QST in error to a non-resident supplier registered under the specified registration system must go through the non-resident supplier to obtain a rebate of the QST paid by mistake.” So suppliers outside Quebec that are registered under the new mandatory registration system cannot simply charge and collect QST from all their customers in Quebec.

This underscores the importance for suppliers outside Quebec of determining whether they are required to comply with the new system and, if so, to start gathering information now to determine which of their customers is a specified Quebec consumer. To validate a customer’s usual place of residence, non-resident suppliers will be required to obtain two, non-contradictory pieces of information from the customer.

How will Quebec enforce these rules?

Given the virtual nature of digital economy transactions, enforcing these rules will be challenging for Revenu Quebec. The consequences of non-compliance may be severe, however. Recipients of taxable goods and services that falsely claim they are not specified Quebec consumers in order to avoid the tax may suffer a penalty of $100 or half the QST payable, whichever is higher, for each transaction for which the false information was provided.

However, the budget papers also suggest Revenu Quebec will aim to make it easy for non-residents to comply. For example, no penalties for non-compliance may be levied for lapses by taxpayers that have taken reasonable steps to meet their new obligations.

Detailed guidance now available

Until recently, details of the new rules were uncertain. Detailed guidance now available on Revenu Quebec’s website offers some direction about how these complex new rules may apply. Among other helpful information, the website includes an interactive questionnaire to help you determine whether you are required to register for the QST using the registration service reserved for suppliers outside Quebec. In addition, Revenu Quebec is sending out letters to select non-resident businesses that may be subject to the new QST registration regime, advising them of their obligations.

Quebec’s rules are based on principles for digital taxation developed under the Organisation for Economic Co-operation and Development’s Action Plan on Base Erosion and Profit Shifting. Whether the federal government will enact similar rules for Goods and Services Tax/Harmonized Services Tax purposes – and whether other provinces will agree – remains to be seen.

Keep the conversation going

What additional areas of uncertainty or complexity have you come across in determining how the new QST rules may apply to your non-Quebec business clients making digital supplies to customers in Quebec? Post a comment below.

CPA Canada’s Tax Blog is designed to create an exchange of ideas on tax policy and practice issues, and their impact on those who practice tax. Your comments can provide helpful input into the public interest advocacy positions developed by CPA Canada.

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The views and opinions expressed in this article are those of the author and do not necessarily reflect that of CPA Canada.