Canadian sales tax implications for non-resident e-commerce businesses

Fuller Landau team • October 21, 2024

The Goods and Services Tax (GST) and Harmonized Sales Tax (HST) are sales taxes administered by the federal government and applicable to most goods and services sold in Canada. All businesses, including e-commerce businesses, with operations or sales in Canada, must consider the impact of these taxes. Failure to register and remit the correct amounts can result in significant penalties. As of 2021, new digital e-commerce legislation has come into effect which expands the number of businesses required to register and remit GST/HST.

The following topics are covered in this article:

Understanding GST/HST

GST/HST is imposed on the supply of taxable and zero-rated goods and services. All goods and services made or imported into Canada, such as clothes, footwear, and electronics, are taxable supplies. Exempt supplies are goods and services on which GST/HST cannot be charged and include medical services and most residential real estate. Zero-rated supplies are taxable supplies on which 0 per cent GST/HST is charged. Examples of zero-rated supplies are basic groceries, prescription medicine, and transportation services.

GST/HST registration

Non-resident companies may be required to register for GST/HST if they have sufficient factors suggesting they are carrying on business in Canada. The factors are determined on a case-by-case basis and include, among others, how many agents and employees a company has at a specific location in Canada, the type of goods or services supplied, and where the company is located. For more information about GST/HST mandatory registration requirements, and the potential benefits of registering voluntarily, read our article on GST/HST for Canadian businesses.

Generally, a non-resident in the business of supplying property located in Canada by way of lease will be considered to be carrying on business in Canada and will need to register for GST/HST if it is not a small supplier as explained in the noted article.

Identifying supplies

The form of a supply is an important consideration when determining the GST/HST rate applicable to the sale. A supply made electronically, other than the supply of physical goods ordered online, will generally be considered either a supply of intangible personal property (IPP) or a supply of a service. The factors and characteristics of each supply must be considered in order to determine the correct form. These include:

Supply of intangible personal property	Supply of service
The supply is made for a particular client, but the supplier retains ownership over the item being used.	The service is work that is being performed by an employee or contractor for a particular customer.
The sale of a right to use a product or a right to a product.	There is no right being sold to the customer while the service is performed, or the right being provided is incidental to the service.
The supply is an item that already exists.	The service is performed by a human.
Sale of the right to duplicate a digitized product.

Example #1 – IPP vs service

A customer pays a company to use software that the company has developed. The software is downloaded from the company’s website to the customer’s device for their use. The software will be considered a supply of IPP because it is an existing item, and the customer is receiving the right to use it.

Example #2 – IPP vs service

A customer pays a fixed subscription fee to a company to watch a variety of movies and TV shows on their platform. In this example, the subscription gives the customer the right to watch, but not own, content on the company’s platform, which makes it a supply of IPP.

Example #3 – IPP vs service

A customer contacts a company’s technical support line for assistance with a problem they are having with the company’s software they previously purchased. The customer has a call with a support agent and the agent helps solve the customer’s problem directly. In this case, the support is a supply of a service because there is no sale of rights and the service is performed by a human. If the agent only provided a digital document or manual that the customer used to solve their problem, this would instead be a supply of IPP. This is because there is a right or digitized product being provided and the service does not have direct human involvement.

Place of supply

Once the form of supply is defined, it is necessary to determine the place of supply in order to establish the correct rate of GST/HST to be charged. Firstly, was the supply made in Canada or outside Canada? If the supply was made in Canada, in which province or territory the supply was made? The province or territory in which the supply is made will determine the rate of tax that the company should charge. For example, Nova Scotia and New Brunswick have an HST rate of 15 per cent whereas Ontario has an HST rate of 13 per cent. British Columbia has a GST at a rate of 5 per cent. Generally, there is no requirement to collect and remit GST/HST on a supply made outside of Canada.

Place of supply in or outside of Canada

IPP

A supply of IPP is considered to be made in Canada if the property may be used in any part of Canada or is related to a property located in Canada. The determination of whether the supply is made in or outside of Canada is based on whether the related written agreements contain terms prohibiting the use of the IPP in Canada. If the agreement indicates that the IPP may not be used in Canada, the supply will be considered to be made outside Canada, and GST/HST will not apply. If the agreement does not limit the use of the IPP, the supply will be considered a supply made in Canada, regardless of whether the IPP is actually used in Canada or not.

Despite the rule discussed above resulting in many supplies of IPP being considered to be made in Canada, these supplies will generally be zero-rated where the recipient is an unregistered non-resident of Canada.

Services

A supply of a service will be considered made in Canada if the service is performed in whole or in part within Canada. This determination can be difficult, since many companies provide their services electronically. If any components of the service are performed in Canada, the service will be considered made in Canada. Two instances where a component of a service would be considered to be made in Canada are:

Property located in Canada, such as a computer, is receiving the direct benefit of the service.
Property located in Canada, such as a server, is used to perform the service

Please note that the first instance noted above does not apply to a supply wholly performed outside of Canada, where the results are subsequently delivered electronically to a computer located in Canada. An example of this would be programming performed outside of Canada with the final code delivered via e-mail. Despite the e-mail being received on a Canadian computer, the supply will not be considered to have been made in Canada.

Similar to supplies of IPP, supplies of services made to unregistered non-residents of Canada will generally be zero-rated supplies.

Example #4 – Service rendered in or outside of Canada

A non-Canadian technical support company has an agent located in the United States, who is assigned a Canadian client. To help solve the client’s problem, the agent accesses the client’s device located in Canada from their computer in the United States. Although the service is rendered by a person physically in the United States, the property on which the service is performed is located in Canada. As such, the service will be considered made in Canada.

Example #5 – Service rendered in- or outside of Canada

A non-Canadian tech service company has an agent located in the United States, who is assigned a Canadian client having an issue accessing the provided service. To assist the client, the agent accesses the company’s server located in Canada. Although the service is rendered by a person physically in the United States, the property through which the service is being performed is located in Canada. As such, the service will be considered made in Canada.

Place of supply in a province or territory

IPP

The GST/HST rate charged on a supply of IPP made in Canada is based on which province it can be or is used in.

If there are restrictions on the use of the IPP in Canada, the GST/HST rate will be based on the province or territory in which the IPP is most used.
If there are no restrictions on where the IPP can be used, the GST/HST rate will be based on the address of the customer most closely associated with the supply of IPP.
If the supply of IPP relates to a property located in Canada, the GST/HST rate will be based on the location of the property.

If a single GST/HST rate cannot be determined using these rules due to the IPP being used equally in multiple provinces or territories, the GST/HST rate will be the highest rate of those provinces and territories with equal usage.

Example #6 – Place of supply in a province for IPP

A software company sells licenses to a company located in Ontario. The software license is restricted to use in Ontario, Alberta, and Nova Scotia. The customer has the most employees located in Alberta, with fewer in Ontario and none in Nova Scotia. As the use of the IPP is restricted, the IPP will be considered to have been supplied in Alberta, as that is the province in which the IPP will be used most. If the licenses were not restricted, the supply would instead occur in Ontario, which is the location of the customer.

Services

The GST/HST rate to be charged for a supply of a service will generally be based on the address of the customer most closely associated with the supply.

If an address is not provided, the GST/HST rate will be based on where the majority of the service is performed.
If the service is conducted in relation to property in Canada, the GST/HST rate will be based on the location of the property.

If the GST/HST rate cannot be determined with these rules due to multiple related addresses being provided, or the service being performed equally in multiple provinces or territories, the GST/HST rate will be the highest rate of those provinces and territories.

If the supply is of a computer-related service, the GST/HST rate will be based on whether there are single or multiple recipients of the service. There will be multiple recipients of the service in situations where a company’s employees will be the recipients of the service as opposed to the head office being the sole recipient.

Where there is only one recipient, the place of supply will be the province or territory in which they are located. Where there are multiple recipients, the place of supply will be based on the mailing address of the customer, unless:

Each final recipient receives the service under an agreement;
Each final recipient will use the service in a single location; and
The supplier can determine this address for each final recipient.

If there is only one recipient, and their location cannot be determined, the place of supply will also be based on the mailing address of the customer.

GST/HST for digital economy businesses

As of July 1, 2021, digital economy businesses and digital platform operators who are not otherwise considered to be carrying on a business in Canada may be required to register for and collect GST/HST. These rules differ from the general GST/HST rules discussed earlier in the article. Failure to register under these new rules may result in the application of penalties and interest. The new legislation affects companies that sell cross-border digital products and services, provide platform-based short-term accommodation, or supply physical goods in Canada.

Registration under these rules is determined based on the non-resident’s threshold amount. The threshold amount includes all taxable supplies of IPP and services other than:

Supplies which may only be used or consumed outside of Canada
Supplies related to real property located outside of Canada
Supplies of IPP related to other properties located outside of Canada

Registration is required if the supplier’s threshold amount exceeds CAD30,000 in any 12-month period with respect to supplies made to unregistered Canadian customers.

Cross-border digital products and services

Cross-border digital products and services are taxable supplies without physical components that are sold by non-resident businesses. Examples of these products and services include video streaming services, digital reports, online consulting, and digital video games.

These rules also apply to distribution platform operators, which are companies that supply or accommodate the supply of digital products and services through their platforms. If a company sells taxable digital products or services through a third-party platform, the platform operator will bear the responsibility to register, collect, and remit GST/HST for these sales, unless non-resident supplier is registered for GST/HST under the general rules. The company using the platform will not have any responsibilities associated with GST/HST, and these sales will be excluded from the threshold amount noted above. However, if a non-resident supplier is registered for GST/HST, they are required to collect GST/HST on all taxable supplies, including those made through a distribution platform.

Platform-based short-term accommodation

Platform-based short-term accommodation refers to short-term housing that can be acquired through a digital platform, such as short-term residential rental websites.

As noted previously in this article, non-residents of Canada in the business of supplying property located in Canada by way of lease will generally be considered to be carrying on business in Canada. As such, the digital economy business rules discussed in this section will generally not apply to these suppliers.

These rules instead apply to short-term accommodation platform operators. These are the companies operating the platform through which short-term accommodations are being provided. The threshold amount for these operators includes supplies of short-term accommodations and related services for which a booking fee, administration fee, or other similar charge was levied through their platform, other than those supplies made by GST/HST registrants.

Similarly to digital products and services, if a non-resident supplier is registered for GST/HST, they are required to collect GST/HST on all taxable supplies, including those made through an accommodation platform. If a non-resident supplier is not registered for GST/HST and makes supplies of short-term accommodations through an accommodation platform, it is the accommodation platform operator that is responsible for the collection of GST/HST.

Supply of physical goods in Canada

These rules can also apply to non-resident businesses selling physical goods into Canada. If the non-resident is not required to register under the normal requirements by virtue of not carrying on a business in Canada, it will be required to register if it sells physical goods into Canada, and these sales exceed CAD30,000 in a 12-month period. Please note that there is no requirement that the recipient of the physical goods be unregistered. This will commonly apply to non-resident businesses selling goods into Canada via their website.

Sales made through a distribution platform operator, a third party operating an online platform for the distribution of goods, are excluded from the CAD30,000 threshold. The responsibility to collect GST/HST on these sales is instead transferred to the distribution platform operator so long as the supplier is not a registrant.

In conclusion

There are many complexities associated with the operation of an e-commerce business making sales in Canada. As discussed, the requirement to register, characterization of sales, and rate to charge can all require significant analyses. If you are wondering about any of these items, or have any questions regarding sales taxes in Canada, the Fuller Landau Tax team would gladly help in answering your questions.

About the authors

Robert Davies, CPA is a Senior Manager in our Canadian Tax group. He can be reached at rdavies@fullerllp.com or 416-645-6507.

Amaan Usmani was a Junior Tax Specialist in our Canadian Tax group during his 2023 and 2024 co-op terms.

Next / Back