U.S. businesses making sales to Canadian customers should know whether their activities require them to register for Goods and Services Tax/Harmonized Sales Tax (GST/HST). Even if you don’t have a permanent establishment in Canada, you may be required to register to pay GST/HST.
GST/HST is a value-added sales tax that applies to the supply of most goods and services in Canada. Registrants are required to collect tax at the applicable rate (5%, 13% or 15%) on their taxable supplies made in Canada.
Businesses that are expanding into Canada also need to review their activities to determine whether they are required to register for GST/HST.
If registration is not required, it can be done on a voluntary basis. GST/HST registrants are generally able to claim refunds of the GST/HST paid on costs, including GST/HST that is paid on the import of goods into Canada. Therefore, becoming registered for GST/HST – whether required or on a voluntary basis – results in a reduction in costs associated with making sales in Canada.
The GST/HST is levied under the Excise Tax Act (ETA). The ETA provides that every non-resident person who makes a taxable supply in Canada while carrying on a business in Canada is required to be registered for GST/HST purposes, except where the person is a small supplier (i.e., annual worldwide taxable sales, including those of the person's associates, do not exceed CAD $30,000). For this article, we will assume that most U.S. businesses expanding their sales to Canada have annual global sales exceeding CAD $30,000 and are therefore not small suppliers.
Supply made in Canada
GST/HST only applies to supplies (or sales) made in Canada. Supplies made by a non-resident are deemed to be made outside Canada if the non-resident is not carrying on business in Canada. This deeming provision allows non-residents to make sales to Canadian customers on an occasional basis without becoming registered. However, GST/HST registration is required where the level of activity in Canada is sufficient for the non-resident to be considered carrying on business in Canada.
Note: A non-resident who is not carrying on business in Canada may choose to become registered for GST/HST on a voluntary basis.
Carrying on business
As discussed above, GST/HST registration is required when a non-resident makes a taxable supply in Canada while conducting business in Canada. A non-resident can be carrying on business in Canada for GST/HST purposes even without a permanent establishment in Canada.
The term “carrying on business” is not a defined term. Rather, it is based on several factors. Canada Revenue Agency (CRA) set out its administrative position regarding the factors to be considered when making such a determination in a policy statement issued in 2005. The view of the CRA is that the importance of each factor may vary depending on the circumstances and nature of the supplies being made (e.g., goods, services and intangible personal property).
The position of the CRA is that a non-resident person must have a significant presence in Canada to be considered carrying on business in Canada. Where some of the factors are present, judgment must be applied to consider the weight and importance of each factor.
Per the policy statement, the factors to be considered in determining whether a non-resident person is carrying on business in Canada for GST/HST purposes include:
- The place where agents or employees of the non-resident are located
- The place of delivery
- The place of payment
- The place where purchases are made or assets are acquired
- The place from which transactions are solicited
- The location of assets or an inventory of goods
- The place where the business contracts are made
- The location of a bank account
- The place where the non-resident's name and business are listed in a directory
- The location of a branch or office
- The place where the service is performed and
- The place of manufacture or production
Obligations of a registrant
A non-resident who becomes registered for GST/HST purposes is subject to the following obligations:
- To charge and collect GST/HST as required on taxable supplies made in Canada
- To file periodic GST/HST returns with the CRA – reporting periods may be annual, quarterly or monthly, depending on the level of sales in Canada
- To remit to the CRA the net amount of tax – total GST/HST on sales less total GST/HST payable during that particular reporting period that can be claimed as refunds
- If a registrant is an annual filer, it may also have to make quarterly installments starting in its second year of registration
- To satisfy information requirements on sales invoices
- To update its accounting systems to record the GST/HST collected, collectible and/or paid or payable as the case may be
- To maintain books and records in accordance with the CRA’s policy
Landmark decisions in the U.S. regarding online sales have had ripple effects in Canada as the federal government has adopted a more aggressive approach to non-residents who make sales via websites or web-based sales platforms.
Expanded GST/HST registration requirements apply to non-residents of Canada who make the following supplies:
- Digital products such as streaming services or computer software
- Operators of digital distribution platforms
- Operators of websites facilitating sales of goods in Canada, and
- Non-residents selling goods through a fulfillment warehouse located in Canada
U.S. businesses providing goods and/or services offerings into Canada should be sure to examine and evaluate their GST/HST issues. Reviewing whether GST/HST is required and completed where necessary will minimize any potential future risks with the Canadian tax authorities.
If GST/HST registration is not required, non-residents of Canada can register voluntarily. The benefit is that registrants are generally entitled to claim refunds of GST/HST paid on costs such as warehousing, shipping and the import of goods into Canada. Thus, GST/HST paid on costs does not represent a cost to the U.S. business.
Our expert team is pleased to answer any questions you might have on this matter, and can assist in determining whether GST/HST registration is required for your business.