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Canada’s digital tax rules are evolving, region by region. No matter where your business is located, if you’re selling to customers in the Great White North, you should get a handle on how digital products are taxed (or not taxed!) across the 13 provinces.
What counts as digital products in Canada?
Generally speaking, a digital product is anything the customer receives or accesses via the internet. After making a purchase online, the customer gets an email, downloads a file or a program, or logs into a service portal. These are all instances of digital products. If the customer makes a purchase online, and then receives the good via snail mail, that’s a physical product…and not what this article is about. 🙂
As a term, “digital product” is slippery. It has many other names: digital good, digital service, electronic good, electronic service, e-good, and so on.
In particular, some parts of Canada use these terms: “incorporeal moveable property” or “intangible personal property.”
Electronic services liable to tax throughout Canada include:
- downloads or streaming of music, games, and other media
- software, apps, SaaS or other website subscriptions
- ebooks and some newspaper subscriptions
- application hosting and data warehousing
- telecom services
What are the different taxes in Canada?
Get ready for a few acronyms…
On a nationwide level, Canada has a federal Goods and Services Tax (GST) of 5%.
GST is one of the various consumption taxes chosen by governments and applied to sales of goods and services (as you might have guessed!). Other countries might use Value-added Tax (VAT), the US uses sales tax, and Canada has GST.
On a regional level, some places in Canada might have a Provincial Sales Tax (PST), which typically varies between 7 and 10%. Not all provinces use PST. Some don’t have any regional tax, while Québec uses its own version: Québec Sales Tax (QST).
When the federal GST and the local PST are added together on a transaction, this is sometimes called the Harmonized Sales Tax (HST).
What are the digital tax laws in Canada?
Digital tax laws in Canada are complex, because no single law applies across the board.
Digital goods and services are taxed according to:
- where your business is located
- the province where your customer lives
Federal GST applies to local sellers or “domestic” digital sales
The federal GST does apply to digital services, but only if the seller has a “permanent establishment” or physical presence within Canada: an office; agents or employees; place of delivery and payment; or where inventory is stored.
If your business does not count as a resident, then you don’t need to worry about Canadian GST — for now! Some experts predict a nationwide digital tax rule in the next few years.
Only two provinces tax foreign digital services…so far
Quebec and Saskatchewan both have specific laws for digital services that are sold by foreign businesses. British Columbia will enact a foreign digital tax law very soon. Each province has its own tax rate and tax registration threshold rule.
- Québec applies a PST rate of 9.975% with an annual registration threshold of C$30,000 in sales to local consumers. Sales to tax-registered businesses don’t count.
- Saskatchewan applies a PST rate of 6%, with no threshold at all. That means from the very first sale in the province, you are responsible for Saskatchewan PST.
- British Columbia will soon apply a PST rate of 7% with an annual registration threshold of C$10,000 in sales to local consumers. Sales to tax-registered businesses don’t count.
How to register for taxes in Canada
Canadian online businesses should register for federal GST as well as the provincial sales tax wherever they have customers.
Foreign businesses register for QST or PST as a “non-resident” supplier, and it’s only required if your sales surpass the threshold. You don’t need to hire a local tax representative to do it for you; there are simple online registration options.
Québec, for example, has a service portal called “My Account for suppliers outside Québec,” which offers everything from registration to tax payments to filing returns.
How to comply with Canadian GST, PST or QST
- Always verify the customer’s location, then apply their local tax rate.
Similar to EU VAT laws, Canadian digital tax rules require two pieces of customer location evidence that ensure the local tax must be applied. Any two of the following will do:
- the buyer’s billing address
- the buyer’s home or business address
- the IP address of the device used by the buyer at the time of the transaction (or some other geolocation information)
- the buyer’s payment-related bank information or the billing address used by the bank;
- the information from a subscriber identity module (SIM) card used by the buyer
2. In B2B sales, validate the buyer’s tax number.
Since tax isn’t charged on B2B sales, it’s important to make sure the buyer is indeed a tax-registered business! For validating a GST/HST number for B2B sales, there’s a GST/HST Registry, which is free to use. QST numbers can be validated here.
3. File tax returns on time. Pay attention to the potential differences between GST returns and PST or QST returns. The frequency will depend on the province where you’re registered and perhaps the annual turnover of the business. The more you sell, the more often you file.
How to manage Canadian digital tax
Quaderno stays up-to-date on all of your sales in Canada, recording the location of customers, whether they are B2C or B2B, and tracking your total sales in the country and provinces (so you don’t need to constantly monitor whether you’ve passed the tax threshold). Not only that, Quaderno handles all of the GST, PST and QST related stuff: charging tax at the point of sale, delivering an accurate invoice, and logging the tax information for your records.
Since Canadian digital tax policy is evolving (remember, British Columbia will roll out new rules soon!), Quaderno stays up-to-date on the legal maze, too. Our software will alert you about any changes in GST policy and help you understand it.
Curious how we can help? Give Quaderno a try for 7 days.
* At Quaderno we love providing helpful information and best practices about taxes, but we are not certified tax advisors. For further help, or if you are ever in doubt, please consult a professional tax advisor or accountant.
