How Will Canada Address GST/HST on Digital Downloads?
Over the past year, you may have read in the news the issues concerning GST/HST as it relates to digitally downloaded movies, TV shows and music. There have been comments made by the Canadian Taxpayers Federation that current rules are unfair to Canadian providers of digital entertainment, as they are required to charge for GST/HST, while foreign providers are not required to charge. Depending on the province you are located in, the rules can add up to an additional 15% to the cost of your download.
The current CRA rule states: Relating to electronic commerce, every person who makes a taxable supply of intangible personal property (which includes digital downloads) or services in Canada in the course of a commercial activity engaged in by the person in Canada must register for GST/HST purposes, unless the person is a small supplier, or a non-resident person who does not carry on any business in Canada. Specifically, non-resident persons (other than small suppliers) making taxable supplies of intangible personal property or services in Canada are required to register for GST/HST purposes if the supplies are made through a permanent establishment in Canada, or in the course of carrying on business in Canada. For example, a server at a particular location in Canada could constitute a permanent establishment of a non-resident person. In GST/HST Technical Information Bulletin B-090 the CRA states that the website of a non-resident person, including a website that is being hosted in a typical website hosting arrangement, does not, in itself, constitute a permanent establishment of the non-resident person for GST/HST purposes.
Companies are getting around these rules by housing their servers in countries other than Canada and limiting their actual physical presence in Canada; therefore, they have no permanent establishment in Canada, and thus no requirement to register.
Last year’s Federal Budget stated that the Canadian government would consult on the idea of levying sales taxes on digital products. While nothing was released in the current budget to update this matter, it is an issue that must be addressed. This is not only an issue with the Canadian tax system, but also other countries such as Australia. In Australia, it is expected that their upcoming Budget will require overseas companies to impose their version of the GST on digital downloads. While currently in Switzerland, they require digital service providers to register and collect their sales tax provided their income is over a certain threshold per year (although this threshold may be abolished in 2016). Granted, there are issues that will need to be overcome, such as how can our laws take enforcement action on foreign corporations with no real physical presence in Canada. On the other hand, would an additional compliance burden on foreign companies force them to block out the Canadian market from accessing their products? As we continue to become more and more digital, this will continue to be a sizable tax leakage that Canada must start to address.