Bruce Goudy:
The first thing is knowing what registrations you need. You need to know your threshold for each jurisdiction and monitor your sales every month. And you also need to know what information do you need to gather to support either not having to register or if you do have to register, not having to collect the tax.
Craig Mulcahy:
Welcome back everyone to the latest episode of the Cross-Border Tax Podcast Series. My name is Craig Mulcahy. I sit on the senior leadership team for tax and also on the leadership team for technology, media, and telecommunications here at BDO. In today's podcast, we have the pleasure of discussing how Canada's regulations are reshaping the digital marketplace for platform operators. The specifics of the new rules, their impact on operations and the compliance deadlines. So joining me to help uncover these issues, I have Bruce Goudy, a director in the indirect tax practice here at BDO, and Michelle Minor, the senior manager also with indirect tax practice. Bruce and Michelle, welcome.
Bruce Goudy:
Thank you, Greg. Glad to be here.
Michelle Minor:
Happy to join the discussion.
Bruce Goudy:
So Craig, as you mentioned, there are a lot of new rules and compliance obligations that were introduced for digital platform operators in the past few years. In the good old days, platform operators that were not resident in Canada and not carrying on business in Canada, they were generally not required to register to collect any of Canada's federal or provincial sales taxes on transactions to Canadian consumers that they made through their platform. And they had few, if any, reporting obligations from a sales tax perspective or even from an information reporting perspective. So that created a lot of opportunity for tax leakage where the governments didn't receive taxes on purchases that being made by Canadian consumers via these non-resident platform operators. And that gap was fairly consistent among all five of our Canadian sales taxes, namely our federal GST/HST, and our four provincial sales taxes in Quebec, British Columbia, Saskatchewan, and Manitoba. Well, that's all changed, and a significant compliance burden is now placed on digital platform operators with customers in Canada, regardless of where the platform operator is based.
Craig Mulcahy:
Okay. So Bruce, when you say digital platform operator, are you talking about the big guys, Amazon, Airbnb, Lyft, Uber?
Bruce Goudy:
Yeah, Craig. Those are good examples to start, but there are also a lot of other smaller and midsize platform operators that are emerging globally that have customer bases in Canada. And maybe before we get into the weeds, I should clarify what is a digital platform operator? So generally, a digital platform operator or a DPO as they're referred to, are businesses that offer an online marketplace that allows sellers to offer their products online for sale to buyers. Products can range widely from various streaming services, which many of us are familiar with, software, and goods that actually get delivered to your door. In general, the platforms that are caught by the new rules exercise some level of control over the essential elements of the transaction. And the DPO's role is critical to making sure the payment for the purchases on the platform make it safely from the buyers to the sellers.
Michelle Minor:
Yep. And over the last few years, the Canadian, federal, and provincial governments have kind of revamped their sales tax frameworks. So this basically increased the responsibility for the DPOs with customers in Canada to register for and collect the sales taxes. It's increased the responsibility to file sales tax returns and also these information returns in some jurisdictions. Because of these changes, many of these businesses who didn't previously have to care about the sales taxes in Canada may now find themselves offside. Some taxing jurisdictions are even sending letters out to these companies and requesting that they register and make these changes.
Bruce Goudy:
Yeah. So we've gone from a landscape where non-resident DPOs had little, if any, sales tax compliance in Canada and the provinces, and now they have to register to collect and remit up to five different sales taxes each with their own unique rule. So in addition to sales tax collection, as I mentioned before, and remittance responsibilities, they also have to file information returns federally and also with Quebec and British Columbia if they have customers in those provinces. And third, in case it isn't enough, Canada also introduced a 3% digital services tax that currently has retroactive effect to 2022 that applies mainly to the larger DPOs, but that means more reporting and more tax obligations for DPOs with customers in Canada that meet certain thresholds.
Michelle Minor:
Yeah, and this is also changing the relationships between sellers on the platform and also the DPOs themselves because there's now this huge burden of responsibility on DPOs to collect information about their sellers and about their buyers so they know whether to remit the tax to the authorities themselves or whether they need to forward this tax that's been collected to sellers to remit it on their own sales tax returns. The DPOs will also need to collect information for all transactions facilitated through their platforms for not only filing purposes, but also to report on their information returns. That's a lot of information for DPOs to collect, and it's a requirement that they might not have had before.
Craig Mulcahy:
Okay. So you two live this every day, but I'm going to be honest, for me, this sounds complicated. So Michelle, can you give us a brief overview of these rules?
Michelle Minor:
Yeah, sure. So putting the digital services tax aside from a sales tax perspective, the general idea here is that platform operators that are based outside Canada that happen to have customers in Canada are now required to register for the federal GST, HST if the non-resident sellers that are not registered for GST, HST make more than $30,000 of sales in a rolling twelve-month period to Canadian customers and consumers through the platform. What this really means is for the DPO, they need a structured process to identify whether the sellers on the platform are non-residents of Canada, whether they're registered for GST, HST, and whether these Canadian customers themselves are registered for GST, HST. This generally involves the DPO requiring the buyers and the sellers to supply information electronically, such as the registration numbers and other key information regarding their locations. This information is really required to determine one, whether the DPO is required to register for the GST, HST. Two, whether the DPO is required to collect the sales tax and three, on those sales, what rate of tax to charge.
Bruce Goudy:
Actually interesting, Michelle, is that if they don't obtain all this information, the downside here is that if the seller is a resident of Canada or registered for GST, or if the buyer is not a GST registrant, unless they obtain that information, they've got to count all those transactions toward determining whether or not they exceed that $30,000 registration threshold.
Michelle Minor:
Yeah. And I guess even once a DPO registers for GST, HST, that information is still required for them to determine whether they need to collect the tax on the transaction because even if the tax is collectible, unless the DPO obtains the seller's GST, HST account number, the obligation is really on the DPO rather than the seller to collect and remit that appropriate sales tax. And we've seen so many issues lately where sellers didn't provide a DPO with their registration number and then they later came back and they're trying to get the tax flowed through to them for reporting, but a DPO may have already remitted that tax to the government. So that's creating a lot of confusion and uncertainty for both the DPO and the sellers out there.
Bruce Goudy:
The nice thing is that Quebec's new rules are quite similar to those for GST, HST, so at least we have some consistency for platform operators there. So if you're selling to Quebec customers through a platform, or if you operate a platform and have sales through your platform that are going to customers in Quebec, you need to keep an eye on that.
Michelle Minor:
That's a really good reminder, Bruce. The other thing is the registration rules also differ for somebody selling services and intangible property versus somebody selling goods, but that's something maybe we can get into a little bit later.
Craig Mulcahy:
Okay. So Bruce, you touched on Quebec's rules and how they align with the federal GST and HST, but that leads to the obvious question. What about the other provinces?
Bruce Goudy:
Yeah, great question. So of course, once again, the theme is here is there's no consistency between what's going on with the three provinces out West with the federal rules and the Quebec rules. And although that might be something that we tax geeks like, it makes it really difficult for businesses to understand those rules when Canada may not be one of the largest jurisdictions, but it still has five different rules it's got to comply with. So in short, for BC, British Columbia, Manitoba and Saskatchewan, DPOs may be required to register for and collect the PST if the taxable sales made through the platform, seeks certain thresholds. They're not very high. BC is $10,000 for software telecommunication and goods, and there are no thresholds for Manitoba and Saskatchewan for items that are taxed through a digital platform.
Even if a seller on a platform is registered for one of the provincial sales taxes, the responsibility for collection and remittance still falls onto the platform operator for British Columbia, Manitoba, and Saskatchewan. The good thing about this is these rules are reasonably consistent for the three provincial sales taxes out West, but unfortunately, as I mentioned before, they are not consistent with the GST, HST, and QST. So once again, administrative challenges were the DPOs.
Craig Mulcahy:
Okay. Michelle, any other items to keep in mind here?
Michelle Minor:
Yep, definitely. We've talked a lot about sales tax filings, but these new rules also brought about an information reporting requirement for certain types of platform operators. Platform operators that are required to register for the GST, HST are now also required to file an information return relating to their sellers. Starting in 2024, the federal information return are required to be filed with the CRA and they're due by January 31st of each year.
Bruce Goudy:
And Craig, in addition to those federal obligations, Quebec has had information return requirements also. Instead of January 31st, they're due July 1st of each year, and as British Columbia, their submission is due by August 31st of each year. And currently Saskatchewan and Manitoba do not have an annual information return requirement.
Michelle Minor:
Yep. I guess this means that DPOs with customers in Canada could have up to about eight different filings each year or different types of filings each year due to these new rules. We have our federal GST, HST, we have the QST, the three PST returns, and potentially three information returns. One federal, one in Quebec, and one in BC.
Bruce Goudy:
And Michelle, remember it doesn't stop there. Remember that starting in 2024 DPOs with at least $20 million of revenues from customers in Canada, of in scope revenues and €750 million globally, they're now subject to the 3% digital services tax. And in the first year, that tax is also calculated not just on 2024 calendar revenues, but also in 2022 and 2023. So it's got a retroactive effect.
Craig Mulcahy:
Okay. So I'm just going to say, wow. So there's a lot of responsibility for platform operators with customers in Canada. Bruce, any insights on how DPOs can ensure they are compliant with these complex rules?
Bruce Goudy:
The first thing is knowing what registrations you need. You need to know your threshold for each jurisdiction and monitor your sales every month. And you also need to know what information do you need to gather to support either not having to register, or if you do have to register, not having to collect the tax.
Michelle Minor:
What that really means is that DPOs would need to make sure they have very efficient systems in place to collect this information. The information is on where customers are located, whether customers are registered for certain types of taxes, and then whether the sellers on the platform are resident in Canada and register to collect that GST and HST and QST.
Bruce Goudy:
Yeah, and remember the registration status of a seller is irrelevant when it comes to the other three provincial sales taxes. The responsibility for collecting and as well as remitting still falls onto the DPO for those three provinces. There are also some nuanced rules for goods that are sold on a digital platform. Take BC for example, if the goods are physically outside Canada at the time the customer buys the goods on the platform, then the DPO doesn't have to collect the PST or the BC provincial sales tax in that case, but the DPO would still have to gather and retain that information to support not registering for BC PST or even if it was registered, to support not collecting the PST on that transaction that goes through its platform.
Craig Mulcahy:
Michelle, we've mentioned documentation a couple times here. What kind of documentation does a DPO need to have?
Michelle Minor:
Well, from the seller's end, a DPO should obtain documentation of the seller's residency and tax registration status. It would be really important for the DPO to collect the seller's GST, HST and QST account numbers if the sellers are registered for those. For goods a DPO should have clear documentation indicating where the goods are delivered or made available. This is usually the incoterms that clearly specify the location where the legal delivery to the customer occurs. And what's really important is really whether the goods are delivered inside or outside Canada. And then from the customer's end, it's very important to have the customer's address, whether the customer is registered for GST, HST or QST, those corresponding account numbers, and any taxes that are collected.
Craig Mulcahy:
So there is a lot for DPOs to do here. So I think Michelle, an obvious question to me seems to be what does a DPO do if they find their offside and should have been collecting sales tax?
Michelle Minor:
Well, they should come talk to us, Craig.
Bruce Goudy:
Yeah. And actually Craig, we can help them explore the requirements. We've had situations like this in many cases, and we've been able to explore options for a DPO finding itself offside, and they can even look to try to have their interest and penalties reduced through voluntary disclosure in some situations.
Michelle Minor:
Yeah, because some of these penalties can be really hefty. In some cases, there could be penalties of up to 25% of the liability, and that would cause even more interest on top of that. So I think the interest rate with the CRA is currently around 9%, which is fairly punitive. If a DPO discovers an error, they should contact us immediately because there could be some planning opportunities to minimize or even eliminate some of this exposure.
Craig Mulcahy:
Okay. Well, Bruce, speaking of planning, are there any planning opportunities that DPOs can start working on now?
Bruce Goudy:
One that comes to mind is that if goods are being sold to residents of Canada via a platform, it's not uncommon for legal delivery of the goods to occur outside Canada. And if that is the case, that needs to be clearly documented as such. That would mean the DPO would not be required to register to collect the tax from the customer in those situations. Instead, they could require their sellers to make arrangements with their customs brokers to use a so-called casual goods import method to import their goods to consumers in Canada. And in that situation, the federal GST and applicable provincial sales taxes are accounted for at the time of import. This can remove some burden from the DPO to collect taxes on the sale.
Michelle Minor:
Yeah. And DPOs should also ensure that they have the systems in place to collect all the required information. A lot of this information is usually collected at the time a seller opens an account with the DPO. So DPOs should review their seller sign-up interface and ensure that they have all of the required information as fillable fields. I mean, it's really the same thing on the buyer side when they make a purchase, just make sure all of those interfaces are updated with the required information.
Bruce Goudy:
And even when they do have the information all obtained, hopefully there's some form of validation check to be in place. We've seen situations where addresses are collected, but the city may have no connection to the province that's listed in the province field. And this is where DPO software or webpage can be updated to include validation fields with information from say, Canada Post.
Craig Mulcahy:
Okay. So those are some great tips for DPOs, but earlier you mentioned the digital services tax. So Bruce, anything interesting to note?
Bruce Goudy:
Yeah, great point. So with this new tax coming in, I think there's still a lot of confusion. People are becoming more familiar with the new rules. The critical part is that DPOs need to put systems in place to track their Canadian in-scope revenues. So they know whether they need to register for digital services tax by January 31st of 2025, so it is not long before the registration deadline comes up. And then they also need to know whether or not they need to file a return and make payment by June 30th of 2025. Keep in mind the registration threshold, it's $10 million for DPOs that have more than once again meeting both thresholds, €750 million of global revenues, even though there's the exemption on the first $20 million of in-scope revenue in Canada.
Craig Mulcahy:
Okay. So I think over the last 20 minutes we have hit people over the head, you two specifically, have hit people over the head with information on this topic. So I wanted to take this opportunity to thank both Bruce and Michelle for joining me today for their thoughts and comments on Canada's regulation of digital platform operators. I'm going to take a step back and I'm going to try and come up with four kind of key points that I just heard from both of you. So if I'm understanding this correctly, a brief summary of the key messages would be first, digital platform operators now face significant compliance burdens needing to register for, collect up to five different sales taxes in Canada. There's filing information returns requirements, and potentially dealing with a new 3% digital services tax. Number two was provincial rules. So they're different. With Quebec's regulations, aligning closely with federal rules while BC, Manitoba, and Saskatchewan have their own thresholds and requirements.
The third thing I heard was data collection requirements. DPOs must collect a ton of detailed information from sellers and buyers to determine their tax obligations and ensure compliance with the new rules. And then finally, and in tax we hate this, penalties. They can be hefty, but there are ways for DPOs to mitigate and eliminate their exposure if they find they’re offside. So those were my four key takeaways from what you had to say here today. So if you're a digital platform operator, or a seller on a digital platform and you need help with this particular situation, I think you've heard here today, you need to contact Michelle or Bruce. Thank you everyone for listening to the latest episode of the Cross-Border Tax Podcast. We'll be back soon, but for now, we're signing off. Thank you.