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Canadian VAT Issues for U.S. Sellers: Goods & Services

Tax and Harmonized Sales Tax Requirements

THURSDAY, MAY 30, 2019, 1:00-2:50 pm Eastern

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May 30, 2019

Canadian VAT Issues for U.S. Sellers

Cyndee Todgham Cherniak, Founder

LexSage, Toronto, ON

cyndee@lexsage.com

Brian Litvin, Principal

Litvin Muir, Toronto, ON

info@litvinmuir.com

Notice

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY

THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY

OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT

MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR

RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

You (and your employees, representatives, or agents) may disclose to any and all persons,

without limitation, the tax treatment or tax structure, or both, of any transaction

described in the associated materials we provide to you, including, but not limited to,

any tax opinions, memoranda, or other tax analyses contained in those materials.

The information contained herein is of a general nature and based on authorities that are

subject to change. Applicability of the information to specific situations should be

determined through consultation with your tax adviser.

FOR: STRAFFORD PUBLISHING

BY: CYNDEE TODGHAM CHERNIAK (@CYNDEELAW)

BRIAN LITVIN, LITVIN MUIR

DATE: MAY 30, 2019

Canadian VAT Issues for US Sellers: Goods and Services

Tax and Harmonized Sales Tax Requirements

6

Part I. Structure of Canada’s federal

and provincial sales tax/VAT system

∞ A. Goods and Services Tax

∞ Applies in every province and territory

∞ 5%

∞ B. Harmonized Sales Tax

∞ Applies only in Ontario, Nova Scotia, New Brunswick,

Newfoundland/Labrador, Prince Edward Island

∞ 6-10% depending on province

∞ C. Quebec Sales Tax

∞ Applies only in Quebec

∞ D. Provincial Sales Tax

∞ Applies in British Columbia, Saskatchewan, Manitoba

Knowledge

7

Part I: Canadian Sales Taxes Rate

Chart (as at May 30, 2019)Province/

Territory

GST/HST

Rate

PST

Rate

GST

Included in

Prov Rate

Combined

Rate

British Columbia 5% 7% No 12%

Alberta 5% 0% No 5%

Saskatchewan 5% 6% No 11%

Manitoba 5% 8%

(July 1

= 7%)

No 13% (July 1

=12%)

Ontario 13% N/A No 13%

Quebec 5% 9.975% Yes 14.975%

Nova Scotia, New

Brunswick,

Newfoundland, PEI

15% N/A No 15%

Territories 5% N/A No 5%

Insight

8

Part II: Registration

Requirements

∞ Persons carrying on business in Canada must register

for GST/HST purposes

∞ Persons carrying on business in Quebec must register

for QST under the Quebec Sales Tax Act (separate

registration than Federal GST/HST)

∞ Persons selling into British Columbia, Saskatchewan

and/or Manitoba must register for PST under the

separate systems

∞ Some services are not taxable in PST provinces

∞ Some intangible property (e.g., computer programs) is

taxable

Value

9

Part II.A. Small Supplier

Exception

∞ If a person make supplies that are less than

$CDN 30,000 a year, then the person is not

required to register

∞ For non-resident persons, the test is $CDN

30,000 in world-wide sales (not sale in Canada)

∞ Small suppliers do not charge, collect and remit

GST/HST

∞ Quebec has a similar small supplier exception

Practical

Advice

10

Part II.B. Security Requirements

∞ Non-residents must post security

∞ Usually amount of security is 50% of anticipated

net tax (GST or GST/HST) depending on the

province

∞ Can post a bond or cash

Experience

11

Part III. NEXUS Requirement

∞ For income tax purposes, a non-resident must pay

Canadian income tax if the NR has a permanent

establishment in Canada

∞ For GST/HST/QST purposes, a non-resident must

register for GST/HST and QST (for Quebec) if it is

carrying on business in Canada/Quebec.

∞ Carrying on business is covered by written policies

Justice

12

Part IV: Basic Rules as to

GST/HST Tax Status

∞ Real property that is in Canada is subject to GST/GST

∞ TPP delivered in Canada is subject to GST/HST

∞ TPP delivered outside Canada is not subject to GST/HST

∞ Services delivered in part in Canada are subject to

GST/HST

∞ Services delivered wholly outside Canada are not subject to

GST/HST

∞ Services in respect of real property or TPP located in

Canada are subject to GST/HST

∞ Intangible property that can be used in Canada is subject to

GST/HST

∞ Intangible property that cannot be used in Canada is not

subject to GST/HST

Strategies

13

Part IV: Special Import Rules

∞ There are 4 categories of GST/HST supplies:

∞ Taxable supplies

∞ Zero rated supplies (GST/HST rate is 0%)

∞ Exempt supplies (no GST/HST is exigible)

∞ Non-Taxable supplies (limited list)

∞ There are 2 categories of GST/HST imposition rules:

∞ Domestic Supplies

∞ Imported Taxable Supplies

∞ TPP that is imported is subject to GST/HST at the border before

release

∞ Importers must self assess GST/HST on imported services and

intangible property

Strategies

14

Part IV: Special Rules for Non-

Canadian E-Commerce Resellers

∞ Quebec imposes QST on digital/streaming services

∞ Saskatchewan imposes PST on digital/streaming services

(“E-commerce Services”)

∞ Alberta, British Columbia & the Territories do not

currently impose sales tax on E-commerce Services

∞ Issue: whether E-commerce Services are subject to

GST/HST if supplied by non-resident

∞ General rule:

∞ Non-residents are not required to register for GST/HST if

they supply E-commerce Services to Canadian customers

∞ Canadian customers must self assess GST/HST as

imported taxable supply of E-commerce Services

Strategies

15

Part IV: Special Rules for Non-

Canadian E-Commerce Resellers

Strategies

Type of Product Type of Vendor Monetary

Threshold

Payment of Collection

Mechanism

Digital Products or

services purchased

online (music, e-books,

Netflix)

Non-residents If <$2 Vendor does not register/customer

does not pay

If >$2 Vendor does not register/customer

pays to Canada

Domestic/ Residents If small supplier Vendor does not register/customer

does not pay

If not small supplier Vendor registers and customer

pays

Physical products being

imported into Canada

after being purchased

online

Non-Resident If <$20* & shipped

by post

No GST/HST is paid

If <$20* & shipped

by post

CBSA collects GST/HST at

border

If <$20* shipped by

courier

CBSA collects GST/HST at

border

If imported by

customer

CBSA collects GST/HST at

border

* Threshold increases under USMCA

17

Part V. Calculating

GST/HST/PST

∞ Determining the correct tax rate to charge on

the supply of property or service is subject to the

Place of Supply rules

∞ Sale of Goods – generally made in province

where legal delivery takes place.

∞ Deemed Supply – if supplier either:

– ships TPP to province that is specified in contract for

carriage of the property OR

– transfers possession to a common carrier that supplier

retained on behalf of recipient to ship property to province

Strategies

18

Part V. Calculating

GST/HST/PST (Cont.)

∞ Real Property – supply is in the province in

which the property is situated

∞ Intangible Personal Property – general rule is

based on where the rights may be used

Strategies

19

Part V. Calculating

GST/HST/PST (Cont.)

∞ Services – there are specific place of supply rules for

certain types of services, such as (partial list):

∞ Personal Services

∞ Services in relation to TPP

∞ Services in relation to real property

∞ Computer related services

∞ Premium telephone services

∞ Services not specified- there are general rules

∞ Rule 1 – Recipient’s address in Canada obtained – province of

address

∞ Rule 2 – Recipient’s address in Canada not obtained –where service

is performed primarily (>50%)

∞ Rule 3 – Recipient’s address in Canada not obtained – service

performed equally in more than one participating province, supply is

made in province supplier is most connected.

Strategies

20

Part V.A. General Calculations

∞ Supplier in Ontario sells and delivers

product to customer in Ontario – charges

13% HST

∞ Supplier in Ontario sells product to retailer

in Manitoba – charges 5% GST

∞ Supplier in British Columbia sells to

retailer in British Columbia– charges 5%

GST

∞ Retailer in British Columbia sells to

customer – charges 5% GST plus 7% PST

Experience

21

Part V.B. Charging GST/HST on

Discount Sales

∞ Various treatments depending on type of

discount:

∞ Reimbursable fixed $ amount coupons – supplier charges tax

on full value of sale and then deducts the coupon value

∞ Non-Reimbursable Coupon – supplier has choice to charge

tax on discounted value or value before discount

∞ Reimbursable percentage off / BOGO – treated as reduction

in consideration, tax on discounted value

∞ Manufacturers Rebates or similar – manufacturer can choose

to include tax or not. If includes tax must provide written

notification with rebate to that effect

∞ Volume rebates are treated as price adjustments. Supplier

can choose to include tax in VR. Must provide credit note

detailing rebate.

Analysis

22

Part V.B. Charging GST/HST on

Discount Sales

∞ Early Settlement discount – does not include tax. Tax

charged on full value of invoice.

∞ Example: Sale price $100

Tax - 5% 5

Invoice Total $105

Early settlement discount: 2%/30 days - $2.10

Tax to remit / ITC to recipient = $5

∞ Exception to “early settlement rule” – price on invoice is

net of early discount.

∞ Example: Invoice states pay $108 by March 23 thereafter $118

Analysis

23

Part VI. Remittance process and

input tax credits∞ GST Registrants are required to remit returns for

particular reporting periods.

∞ mandatory to remit returns, whether tax is payable, a

refund is requested or it is a NIL return

∞ Reporting Periods are based on revenue from taxable

supplies of property and services made in Canada

∞ Does not include:

∞ Non Canadian supplies of property or service

∞ Zero-rated exports

∞ Exempt supplies

Strategies

24

Part VI. Remittance process and

input tax credits (Cont.)∞ REPORTING PERIODS

∞ Reporting periods are determined based on annual turnover per

the following table:

Strategies

Annual Taxable Supplies

Threshold Amounts

Assigned Reporting Period Optional Reporting Period

CAD $1,500,000 or less

Annual Monthly, Quarterly

More than CAD

$1,500,000 up to CAD

$6,000,000

Quarterly Monthly

More than

CAD $6,000,000

Monthly Nil

25

Part VI. Remittance process and

input tax credits (Cont.)

• Currency for Returns – must be completed in Canadian

Dollars

• Filing Dates:

• Monthly and Quarterly Filers – one month after last date of

reporting period

• Annual Filers – three months after last date of reporting period

Strategies

26

Part VI. Remittance process and

input tax credits (Cont.)

∞ Annual Taxable Supplies > $1,500,000 – file electronically

∞ Annual Taxable Supplies < $1,500,000 – file electronically or by

mail

∞ Quarterly Instalments - Annual filers whose net tax for the previous

fiscal year > $3000, and expected current fiscal year net tax >$3,000

are required to make quarterly instalment payments

∞ Amount per instalment – ¼ of previous years net tax

∞ Due one month after the end of each fiscal quarter – so for a

December Y/E: Due dates are April, July, October and January

∞ If instalments aren’t paid subject to penalties and interest

Strategies

27

Part VI. Remittance process and

input tax credits (Cont.)

INPUT TAX CREDITS

∞ a credit that GST/HST registrants can claim for

GST/HST paid or payable

∞ for property or services they acquired, imported into

Canada

∞ Available if for use, consumption, or supply in the course

of their commercial activities.

∞ ITC’s allow businesses/suppliers to recover tax paid

∞ Not available to businesses/suppliers who are involved in

“exempt” activities

Strategies

28

Part VI. Remittance process and

input tax credits (Cont.)

INPUT TAX CREDITS (CONT.)

∞ Must be a registrant to claim ITC’s

∞ Registrant – registered or required to be registered

∞ Timing of registration is VERY important (best before

incurring costs that attract GST/HST)

∞ In certain situations retroactive registration can be

achieved to recoup pre registration ITC’s

∞ Exception to “registrant” requirement for non-resident

non-registered suppliers

∞ S180 allows flow-through of ITC for tax paid on importation by

non-registered non-resident, to Canadian recipient

Strategies

29

Part VI. Remittance process and

input tax credits (Cont.)

INPUT TAX CREDITS (CONT.)

∞ There are a few costs for which ITCs are limited or can’t

be claimed

∞ ITCs are recovered by being set off against taxes billed on

sales for remittance purposes, the net amount is remitted

∞ ITCs relate to GST/HST. ITRs (Input Tax Refunds) is the

terminology for describing input taxes in so far as QST is

concerned.

Strategies

30

Part VI. A. Documentation Rules

∞ There are certain documentary requirements for a

taxpayer to be able to validly claim an ITC

∞ CRA has been denying ITCs because of insufficient

documentary requirements

∞ Common documentary problem areas:

∞Recipient – not properly named on invoice (or agent)

∞ Seller’s GST/HST/Business number missing

Strategies

Documentary Requirements Table

Information required Total sale

under $30

Total sale of

$30 to

$149.99

Total sale of

$150 or more

Suppliers Business or trading name yes yes yes

Invoice Date or, the date on which the GST/HST is paid or

payable

yes yes yes

The total amount paid or payable yes yes yes

GST/HST charged or statement that the amount includes the

GST/HST

no yes yes

Supplier’s business number no yes yes

The buyer's name or trading name or the name of the buyer's

duly authorized agent or representative

no no yes

A brief description of the property or services no no yes

The terms of payment no no yes

*An intermediary is a registrant who, under an agreement with you, makes a supply on your behalf, or causes

or facilitates the making of the supply by you.

Documentary Requirements

32

Part VI. A. Documentation Rules :

GST Example - Simplified

∞ Assume that the following transactions occurred during a

retailers reporting period:

∞ Purchases inventory - $500,000 plus 5% GST $25,000 –

pays supplier $525,000

∞ Pays rental and other overhead expenses - $100,000 plus

5% GST $5,000 – total paid $105,000

∞ Pays payroll (does not attract GST) - $200,000

∞ Sells merchandise $1,300,000 plus 5% GST $65,000, so

collects $1,365,000 from customers

Strategies

33

Part VI. A. Documentation Rules :

GST Example - Simplified

∞ On Retailers GST Return

Strategies

GST Collected on Sales $65,000

Input Tax Credits (All) ($30,000)

Net Payment/(Refund) $35,000

35

Part VII. Accounting Records

Requests

∞ You must maintain records for 6 years

∞ When you register for GST/HST purposes, you must sign

a “Books and Records” form and agree to make records

available for audit

∞ Recently, the CRA has asked a non-resident registrant to

provide a complete electronic copy of their accounting

records (including sales outside Canada)

∞ CRA also asked for suppliers list and complete customer

list

Strategies

36

Part VII. Accounting Records

Requests

∞ If you file a refund request (either a refund return or a

refund application), you will likely be audited

∞ The Refund Integrity Unit will ask for support for refund

requested

Strategies

37

Part VIII. Audits of Non-Resident

Sellers

∞ The Canada Revenue Agency will audit non-resident sellers

∞ If books and records are not located in Canada, the non-

resident must pay for the CRA to come to them (travel,

accommodation, per diem for food)

∞ Non-resident registrants (like Canadian registrants) cannot

control length of audit

∞ Registrants cannot control number of visits by the auditor

∞ CRA conducts mandatory and selective/random audits

Experience

38

Part IX. Audits

Top 10 +1 Audit Issues for Non-Residents

1. Failure to collect GST/HST as required

2. Did not register at the right time/failure to collect GST/HST

3. Charging the wrong tax rate

4. Failure to file GST/HST returns on time

5. Record GST/HST/QST in incorrect currency (should be in CDN$)

6. Incorrectly claiming ITCs for provincial sales taxes

7. Remitting tax to the wrong jurisdiction

8. Documentation Requirements for ITCs

9. Wrong party claiming ITCs

10. Failure to claim ITCs on imported goods & GST paid to customs brokers

11. Using incorrect value for duty/origin/tariff classification and not paying

enough GST to CBSA

Strategies

39

Part IX. Tips and Strategies

∞ Incorporate a Canadian subsidiary

∞ Benefits:

∞ Isolate scope of audit (CRA cannot look at parent company sales)

∞ Do not have to post security

∞ Faster registration (income tax number assigned immediately and

director can open GST/HST number by telephone)

∞ If books and records are in Canada, you do not have to pay for

the CRA to audit

∞ No need for resident directors if incorporate in Alberta,

British Columbia or Nova Scotia

∞ GST/HST returns can be filed online and taxes paid

online

Strategies

40

Part IX. Tips and Strategies

∞ Common Mistake: The wrong party claims the ITCs

∞ Example:

∞ USCo sells to Canadian customers

∞ USCo incorporates a Canadian subsidiary (CanCo) to act as the

importer of record and recover GST paid at the border

∞ CanCo imports the goods and claims the ITCs

∞ ITCs are denied

∞ Why: Because CanCo is not the seller to the Canadian customer

Strategies

41

Example: Does not

work properly

USCo

Canadian

Customer

Sale of goodsCanCo

Importer of Record

Pays 5% GST at

border

Claims ITCs

Problem: no

sale b/t

CanCo &

customer

42

Example: Proper

Structure to claim ITCs

USCo

Canadian

Customer

CanCo

Importer of Record

Pays 5% GST at

border

Claims ITCs

Sale of goods

by USCo to

CanCo

Supply by CanCo

to customer in

Canada, CanCo

collects GST/HST

43

Part IX. Tips and Strategies

∞ Register early – before importing into Canada

∞ Place of Supply – be sure to charge correct tax

∞ Proper documentation processes in place

∞ Bookkeeping system can track taxes billed and taxes

paid

∞ Ensure GST/HST is charged to correct entity

∞ GST/HST on leases – pay attention

Strategies

Cyndee Todgham Cherniak

cyndee@lexsage.com

Mobile: (416) 389-8999

Twitter: @CyndeeLaw

The Gooderham "Flatiron" Building

49 Wellington Street East , Suite 501

Toronto, Ontario M5E 1C9

Phone: 416-307-4168/416-389-8999

Main Office: 647-290-4249

Fax: 416-760-8999

Contact

44

45

brian@litvinmuir.com

Mobile: (647) 886 - 2789

1950 Highway Seven, Suite 2200

Toronto, Ontario L4K 1W5

Phone: (416) 619 - 7764

Fax: (416) 352 - 5583