Non-Residents Registering for Canadian Sales Tax
The US Supreme Court expanded the rules for requiring out-of-state sellers to collect sales tax. How does this compare to Canadian sales tax?
In South Dakota v. Wayfair, Inc., et al, 585 US (2018) (“Wayfair”), the United States Supreme Court overturned its previous ruling in Quill Corp. v. North Dakota, 504 US 298 (1992), which only permitted states to impose sales tax obligations on firms with ‘physical presence’ in the state. Wayfair opens the door for US states to require out-of-state firms who sell remotely to remit state sales tax, provided they have substantial nexus with the state (in Wayfair, substantial nexus was satisfied in the case of a law requiring a seller without physical presence to remit sales tax if they exceed sales thresholds of $100,000 or 200 transactions annually).
For Canadian firms selling to the US, an obvious question is whether the Wayfair ruling affects them. The answer is not entirely clear: the taxpayer in Wayfair was a US-resident out-of-state seller and the main issue was interstate constitutional jurisdiction. Thus, the limits of states’ ability to impose sales tax rules on foreign sellers was simply not before the court.
By rejecting physical presence in favour of a substantial nexus test, Wayfair has clearly broadened the reach of US sales taxes. How does this compare the Canadian rules for non-residents? Unlike the situation prior to Wayfair, Canada’s federal Goods and Services/Harmonized Sales Tax rules did not turn on an explicit, bright-line ‘physical presence’ requirement. Instead, the issue in Canada is whether a non-resident seller is ‘carrying on business’ in Canada (provincial sales tax rules may differ and provincial jurisdiction raises different issues. Read our earlier post for information about broad, sweeping Quebec Sales Tax proposals targeting non-resident e-commerce).
Two main tests to determine whether a non-resident is carrying on business in Canada are set out in case law (Grainger & Son v. Gough (1896), 3 TC 462 (HL), and F.L. Smidth & Co. v. F. Greenwood (1922), 8 TC 193 (HL)). These tests look to the place where a non-resident’s contract was formed and the place where the non-resident’s profits arose to determine where the non-resident carried on business. Neither test hinges on physical presence in the sense of the Quill criteria—employees or real estate. Thus, the “carrying on business” standard applicable in Canada is arguably more multi-faceted than the US standard in Quill before it was overturned by Wayfair.
Non-residents who carry on business in Canada will generally be liable to register for, collect, and remit GST/HST on taxable sales on their taxable supplies made in Canada (subject to a $30,000 threshold for small suppliers). They will also be subject to most of the same rules applicable to Canadian businesses, including ability to claim input tax credits (below), requirements for filing returns and record-keeping, and liability for audits. The GST/HST is generally only intended to be levied on final consumers, so the businesses can often claim input tax credits for the GST/HST. Thus, they may be indifferent to paying GST/HST to a duly registered non-resident.
It is also important to note that the GST/HST rules can present opportunities for non-residents. For example, a non-resident may pay GST/HST to Canadian vendors or upon importing goods into Canada. Like other registrant, a registered non-resident may be able to claim ITCs and offset any GST/HST collectible on sales. Generally, a registrant is entitled to refund if ITCs exceed GST/HST collectible. In other instances, Canadian vendors may not be required to charge GST/HST to non-residents to begin with (certain sales to non-residents are “zero-rated”). The interactions of these various rules should be considered to ensure that risks are reduced and tax is not overpaid.
Simon Thang, LL.B, LL.M (Taxation) is Toronto tax lawyer practising exclusively in the areas of sales tax (GST/HST, PST), and customs and trade. He is the principal of Thang Tax Law.
This post was written with the assistance of Nicholas Shatalow, JD Candidate at Osgoode Hall Law School. For more, read Nicholas’s article in Canadian Tax Focus Volume 8, Number 3, August 2018.