You pay your monthly subscription fee to Netflix, book your holiday accommodations on Airbnb, and Uber your way around the city.
What you didn’t do is check your online order receipt to see if you paid the applicable sales tax. Well, the good news is, you didn’t. The bad news is, you should.
Under the current tax rules—which allow foreign companies, like those mentioned, to avoid paying sales tax because they don’t have a physical presence in Canada—the onus is on the consumer to pay. That means we should keep track of what we spend, reach out to the Canadian Revenue Agency (CRA), and pay the tax we owe.
“We are supposed to file, but effectively nobody does,” says C.D. Howe policy analyst, Rosalie Wyonch, author of the report, Bits, Bytes, and Taxes: VAT and the Digital Economy in Canada, released last August. According to the report, approximately $97 million in annual revenue from the six biggest e-commerce giants—Netflix, Spotify, Uber and ride-sharing services, Airbnb and room-sharing services, Kindle e-book (Amazon) and StubHub—currently goes unclaimed. Wyonch believes Canada’s tax law should be updated to reflect the global digital marketplace.
Explained Finance Canada in an email statement to CPA Canada: “Foreign vendors that do not carry on business in Canada and make digital supplies, such as online services, are generally not required under the GST/HST legislative rules to register and collect GST/HST because those supplies are considered to be made outside Canada. The Canadian consumer is generally required to self assess and pay the applicable GST/HST on those purchases directly to the CRA.” As a general tax rule, nothing is due if the amount owing is $2 or less.
But the CRA is not enforcing this on consumers or foreign businesses, so the tax goes unpaid. “It would be unpopular and not beneficial to the CRA administratively,” adds Wyonch.
Trevin Stratton, senior economist with the Chamber of Commerce, points to the growth in ecommerce activity and the impact on Canada’s small- and medium-sized businesses.
“More and more consumers and businesses are turning to e-business as an option. It’s more than just a trend. It presents a lot of opportunity … and its changing the way they do business and sell goods,” says Stratton.
“Currently, [foreign businesses] are not required to remit [sales tax]. This situation puts Canadian businesses at a disadvantage compared to foreign companies.”
Doing business beyond our borders
Until recently, things worked much the same south of the border. Last month, a U.S. supreme court ruling changed that, enabling all states to collect sales tax from out-of-state vendors, which could further hinder Canadian companies who conduct business online in the U.S.
“This decision will have an impact worldwide on how other countries deal with the implementation on this,” says Stratton. “In terms of our own Canadian companies, if they are operating in the U.S., they will be subject to the new tax rules. If those tax rules are not tabled in Canada, then those principals of fairness are going to be important.”
The debate over how to enforce sales tax in an e-commerce world indeed extends beyond our borders. Other countries—including those in the European Union, New Zealand, Australia, Japan, Switzerland, and South Africa—have taken notice, modernizing tax laws in line with the OECD’s international VAT/GST guidelines.
The end goal? To create a level playing field across the globe, from a tax perspective, between all companies operating digitally or on the ground and selling competitive products or services.
So, why is Canada slow on the pick-up? And why would our government not be inclined to claim revenue that is rightly theirs? Wyonch points to Canada’s smaller marketplace, initial fear that big players might pull out, and a lack of understanding from consumers on the tax itself.
“We’ve known about it for almost 20 years…yet Canada is one of the last countries to move on the issue,” she says. “It’s collectively unpopular because people think it’s a new tax, but it’s just shifting responsibility for collecting and remitting the tax.”
Prime Minister Justin Trudeau isn’t convinced, stating a year ago in response to a proposed five per cent tax on broadband internet service, “We’re not going to be raising taxes on the middle class through an internet broadband tax. That is not an idea we are taking on.”
According to Finance Canada, the issue will be addressed again in the House of Commons’ fall session. “While the government has been clear that it will not make Canadians pay more for their online services, it is also examining the implications of the rapid growth in electronic commerce for tax systems,” it added.
In its 2018 pre-budget submission, CPA Canada recommended the federal government undertake a comprehensive review of our country’s tax system to address issues such as the taxation of the digital economy. The submission calls for the extensive review to be led by an independent expert panel and look to reduce complexities, address inefficiencies, improve fairness for all Canadians, and ensure economic competitiveness.
Nafta retail woes
Amid NAFTA negotiations between Canada and the U.S. comes another debate around raising duty limits—or “de minimis thresholds” (the value of postal and courier shipments that can be imported without duties or taxes), currently set at $20 in Canada—with a push from the U.S. to match its US$800 threshold. This may be good for Canadian shoppers and small- and medium-sized businesses that pay more for imported business inputs than their global competitors but could be a nightmare for bricks-and-mortar stores as they struggle to keep up with online competitors.
Get up-to-date with CPA Canada's tax courses
Join in the two-day specialized GST/HST course (September 12 to 13, 2018) and expand your knowledge on international tax with an in-residence course, from September 29 to October 3, 2018.
Pressure is mounting nationally for enforcing sales tax on foreign e-commerce companies, as e-commerce consumer revenues in Canada soar to an estimated to be more than $20 billion, or seven per cent of our countries total retail spending.
In April, the Standing Committee on International Trade (CIIT) tabled its report—E-commerce: Certain Trade-Related Priorities of Canadian Firms—in the House of Commons pushing for the taxation. Several organizations including Business Development Bank of Canada (BDC), Canadian Manufacturers & Exporters and Export Development Canada, and Canadian Radio-television and Telecommunications Commission (CRTC) are also behind the movement.
Most notably, in April, Quebec became the first province to implement a mandatory sales tax of 9.975% QST on businesses with no physical or significant presence in Quebec, slated to come into effect next January. This could see other provinces follow suite. C.D. Howe policy analyst Rosalie Wyonch worries this could increase fragmentation across the country, forcing businesses (domestic and abroad) to adhere to incompatible tax systems. “With the lack of federal lead, it’s not likely to act in a harmonized way and could be detrimental to the [overall] system,” she says.
Stratton agrees adding that inter-provincial trade barriers and regulations need to be adjusted across the country. “Adding digital taxation to the mix won’t help improve the situation,” he says.
“We need to think about how to apply sales tax evenly and predictably across the country according to a principle of fairness. “We need to do this to avoid the balkanization of individual provinces moving ahead with separate proposals,” he adds.
And all of this, at a time when a CRA projection was released stating federal tax owed—from individuals, businesses and corporations—was on track to hit more than $47 billion by 2020. The tax owed by businesses and corporations, which accounts for just over half, includes unpaid GST and payroll deductions. Public service cuts are being blamed for the tax debt back log.