Canada Considers “Netflix Tax” Again

streamingReport: Canadian Government Fails to Collect $169 Million in Sales Taxes Annually on Digital Goods & Services

Canada loses approximately $169 million annually in sales tax revenue, according to a recent report from the nation’s interim auditor general. These losses are the result of Canadians failing to pay taxes on digital purchases from foreign vendors. As a result, the auditor general’s office noted Canadians often pay more for domestic digital goods than their foreign counterparts.

Interim AG: Most Canadians Do Not Pay Their Own Sales Tax on Foreign Purchases

Interim Auditor General Sylvain Ricard submitted a series of five performance audits to the Parliament of Canada on May 7. One of these audits focused on the taxation of e-commerce. The audit noted the rapid rise of e-commerce, particularly with respect to “digital products” for music and video, creates “challenges for assessing” the federal goods and services tax (GST) and the harmonized sales tax (HST).

 

Domestic sellers of digital goods and services are required to collect GST and HST from individual consumers and remit those payments to the government. But foreign vendors with no “permanent establishment” in Canada are not required to make such collections under federal law. This does not mean that foreign sales are exempt from taxation. Rather, if an individual consumer’s total purchases of foreign digital goods results in a GST or HST tax liability of more than $2, it is that consumer’s responsibility to fill out a form and pay the applicable tax.

 

In practice, most Canadian consumers simply ignore this duty. According to Ricard, while approximately two-thirds of Canadian adults “purchased digital products from both foreign and domestic vendors between July 2017 and June 2018,” only 524 people filed GST or HST forms on those purchases. And the Canada Revenue Agency (CRA) only has “limited authority” to ensure compliance.

 

For instance, Ricard noted, while the United States government requires all payment processors to provide their financial data to the Internal Revenue Service, the CRA lacks a similar ability to collect such third-party information without first obtaining a court order. This, in turn, reduces the CRA’s ability to “detect and deter non-compliance.”

 

The costs of this non-compliance are not insignificant. Ricard’s office estimated the total GST losses for the 2017 fiscal year alone was $169 million. And given the increasing role of cross-border e-commerce in Canada’s economy, Ricard recommended the CRA “implement mechanisms to track, monitor, and report the number of compliance activities it conducts to manage the risk of non-compliance.”

Cross-Party Opposition to Any “Netflix Tax”

But it may not be that simple. Enforcing sales tax collection on foreign digital goods, especially popular U.S.-based services like Netflix, is unpopular with Canadian politicians. During the 2015 federal election, then-Prime Minister Stephen Harper released an ad saying his Conservative Party was “100 per cent against a Netflix tax,” according to a recent report in the Toronto Star. Harper’s rival, Liberal Party leader and current Prime Minister Justin Trudeau, also came out against efforts to require Netflix and other non-Canadian vendors to collect the GST and HST.

province flags

Some Canadian provinces, however, are taking a harder line. The auditor general’s report noted the British Columbia provincial government has independently “reached an agreement with a major foreign accommodation sharing platform” to “voluntarily collect the provincial sales tax (PST) and remit it directly to the government.” Meanwhile, the Quebec National Assembly has passed its own legislation requiring foreign businesses to “register for, collect, and remit sales taxes,” regardless of whether they have a “permanent establishment” in Quebec or Canada.

 

As federal law currently stands, according to Ricard, the CRA lacks the “legislative authority or flexibility” to follow either British Columbia or Quebec’s example. And with the next federal election expected later this year, there may be little incentive for any of the major political parties to pursue the issue in the short-term.


Looking for Canadian Sales Tax Rates for your business?  Zip2Tax has easy, fast downloadable tables.  Or look here for general tax rates by province.


 

What is the Canadian sales tax system?

Canadian sales tax system

Canada has a Goods and Services Tax (GST)

Canada’s Goods and Services Tax (GST), or, as a tip of the beret to our French-speaking northern neighbors, Taxe sur les produits et services (TPS), is a multi-level value added tax (VAT) that was introduced on Jan. 1, 1991. The GST replaced a 1920s-era Manufacturers’ Sales Tax (MST) which had been blamed for hindering exports.

Canada’s sales tax differs from that in the United States in a fundamental way: it is essentially a coordinated two-level sales tax structure. The federal government, in the form of the Canada Revenue Agency, collects 5% of all retail sales that are not tax exempt (not zero-rated sales) in every province and territory countrywide. Each sub-national unit then has the option to collect its own VAT, Retail Sales Tax (RST), or no tax at all.

Sales tax in Canada is determined by province and territory boundaries.

In addition to the federal GST, Canada’s territories and provinces can fall under the jurisdiction of either the Harmonized Sales Tax (HST) or a form of a Provincial Sales Tax (PST). For the sake of simplicity, Zip2Tax has grouped the differing kinds of PST into a single column on our sales tax table. The Quebec Sale Tax (QST, or TVQ [Taxe de vente du Québec]) and RST amounts will appear in the PST column.

One ungainly “hitch” with the provinces of Quebec and Prince Edward Island is that they have elected to apply the VAT tax after the GST has been added to an item’s retail price. In the sales tax table for these regions you will note that the column for “Sales Tax Rate” will reflect the “effective” total sales tax rate and not the sum of the individual tax districts to compensate for this seeming “tax on a tax”.

While not exactly elegant, the Canadian sales tax system has far fewer convolutions than nearly any of those in the United States which have been known to layer on special tax districts with no discernible pattern and vary randomly from state to state in rates, jurisdictions, exemptions and remittance.

You can look at America’s tax system as being additive, while the Canadian sales tax system takes the opposite approach. In the United States, each state can hike taxes in individual jurisdictions whenever lawmakers in a municipality wish to raise funds for a certain project. In Canada’s subtractive solution, everyone in a given province or territory is taxed at the same rate and then granted VAT relief in the form of rebates based on income and tax exemptions returned to the consumer as a tax refund.

Along with exemptions for various grocery items, special treatments are provided for other activities including small businesses, nonprofit organizations, charities, the so-called MASH (municipality-academic-school-hospital) sector, tourist expenditures by non-residents, real estate, and financial institutions.

Even though it is controversial to this day, the Canadian sales tax system has proven to be not only successful, but has some innovations that could be used as a model by the United States should calls for a federal sales tax gain traction.

For detailed information, check out the paper “SALES TAXES IN CANADA: THE GST-HST-QST-RST “SYSTEM,” by Richard M. Bird and Pierre-Pascal Gendro, available on the American Tax Policy Institute’s web site.

Sources: the American Tax Policy Institute, the Canada Revenue Agency, and Wikipedia