When to Charge Canadian GST/HST and Sales Tax & How Much?
A question that commonly arises with businesses (especially with non-residents) is: How much GST/HST and other Canadian sales taxes do I charge? Identifying the current Canadian sales tax rates is easy. A simple internet search will bring up the current rates. The map below illustrates this graphically:
But the more important (and difficult) questions are which Canadian sales taxes to charge and when? As the map above reveals, Canada is a patchwork of sales taxes. Businesses that fail to register for all applicable Canadian sales taxes and charge the correct amount of tax are at risk for assessment by the tax authorities.
The federal GST/HST has two components: A 5% federal GST which applies everywhere across Canada and a provincial HST (between 8 – 10%) which applies only in certain “HST” provinces (see map). A single GST/HST registration covers the GST and HST in all relevant provinces. In addition, a few provinces (British Columbia, Saskatchewan and Manitoba) have provincial sales taxes (PST), which are broadly similar to US sales and use taxes. Quebec has a separate Quebec Sale Tax, which is similar in scope to the GST. Businesses may also be required to register and charge PST and QST, which have their own rates and rules.
A business trying to determine which Canadian sales taxes to charge and how much to charge should consider a number of factors, including:
- Whether it is currently registered for GST/HST, provincial sales tax (PST) or Quebec Sales Tax (QST). If so, the issue is generally when to charge a particular tax, e.g., PST versus HST, and at what rate.
- If not registered, the question is whether the business is required to register for GST/HST, PST or QST. This in turn looks at questions such as:
- Is the business resident or have an establishment in Canada, in Quebec, or in a PST province?
- What is the extent of the business’s activities in those jurisdictions?
- What are its sales revenues?
- What does the business sell and how does it sell? It is not always obvious. For example, what is an online subscription? Is it a service or a right (intangible property)? The applicable rules may depend on this characterization.
- If it sells goods, where are customers located and where does title pass? Are the goods imported in Canada?
- If it sells services, where are they performed? What is the nature of the services? Where are customers’ billing addresses?
- If it sells intangibles, are there restrictions where they can be used? What is the nature of the intangibles?
- Are any customers outside Canada?
- Are the customers consumers or other businesses?
As with most tax-related issues the “Devil is in the details,” which can quickly get complicated. For example, a non-resident corporation sells widgets across the world. Canada was not initially an important market but as business grew, the non-resident began selling into several Canadian provinces. The widgets are shipped from the non-resident’s home country. It has no employees or establishment in Canada. It sells some widgets directly through its website, but mostly through a few local independent distributors. The distributors forward orders to the non-resident but do not conclude sales. The non-resident also contracts with a local Canadian company to perform after-sale services. The widgets are generally used by businesses in production.
Is the non-resident required to register and collect Canadian sales taxes? Which ones? (Note the answer is not necessarily the same as whether the non-resident has any Canadian income tax obligations; this is a separate issue). The key issues here include: Does the non-resident have or is it deemed to have an establishment in Canada? Is the non-resident “carrying on business” in Canada under the legal test? Where are the widgets legally delivered to the customer – inside or outside Canada? Also consider some less obvious but important questions: Should the Canadian distributors and after-service contractor be charging the non-resident Canada sales taxes on their fees? Who is paying customs duties and sales tax when the widgets are imported? The example illustrates some of the complexities that arise with the sale of tangible goods. Things can get even more complicated with online services and intangibles.
Simon Thang, LL.B, LL.M (Taxation) is Canadian tax lawyer practising exclusively in the areas of Canadian sales tax (GST/HST, PST), and customs and trade. He is the principal of Thang Tax Law.