FOR LIVE PROGRAM ONLY Canadian VAT Issues for U.S. Sellers...
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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
FOR LIVE PROGRAM ONLY
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May 30, 2019
Canadian VAT Issues for U.S. Sellers
Cyndee Todgham Cherniak, Founder
LexSage, Toronto, ON
Brian Litvin, Principal
Litvin Muir, Toronto, ON
Notice
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY
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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
∞ 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
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
Mobile: (647) 886 - 2789
1950 Highway Seven, Suite 2200
Toronto, Ontario L4K 1W5
Phone: (416) 619 - 7764
Fax: (416) 352 - 5583