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  • Samer Tohme

Canada: The Government of Canada Implements a New GST/HST Framework for Nonresident Businesses

Things to Know

The latest GST/HST scheme will enter into force on 1 July 2021.

· Non-resident vendors may cause GST/HST registration to spike even if they do not operate in Canada or even provide products or services entirely outside Canada.

· Non-GST/HST certified Canadian customer vendors now need to retain documents to demonstrate they are not required to apply.

· Any Canadian clients might also have a GST/HST self-assessment requirement under existing regulations and may not be mindful of this obligation.

· Canadian clients of non-resident vendors can understand these guidelines to escape regulatory traps.

A Simple Registration Regime

New regulations go into force from 1 July 2021, significantly expanding non-resident companies' requirements to apply with and conform to the Goods and Services Tax or Harmonized Sales Tax (GST/HST) code of practices following the streamlined registration system (the Simplified Registration Regime). The non-resident retailer would be conditional on the Simplified Registration Regime even though they market their goods entirely outside the territory of Canada and therefore do not "promote the industry in Canada." The GST/HST laws have undergone a significant change and extension.

The updated Simplified Registration Regime would immediately impact all non-resident suppliers and Canadian organizations that do business with them. Sales to Canadian retailers in primarily GST/HST-exempt areas such as medical care, financial services, schooling, charities, residential rentals, and non-profit organizations can cause these regulations rather than sales to customers.

Canadian companies paying GST/HST under this system may exercise caution in determining whether a vendor is licensed under the simplified Registration System or the old framework. The former will exclude requests for input tax credits or reimbursement for tax paid in error.

The federal government introduced new guidelines for non-resident vendor purchases across internet portals and distribution warehouses in its 2021 budget.

Current Regulations

In general, GST/HST refers to property and facilities provided inside Canada. In two conditions: when activities are carried out entirely outside Canada or when services are primarily conducted in Canada, or where intangibles assets can be used in Canada, the company is not licensed with the GST/HST system. It may not operate on business within Canada. Non-Canadian companies providing facilities or intangible assets to Canadian citizens may not need to file and collect GST/HST under two cases.

· The first exemption applies to service rendered outside of Canada not dependent on HST or GST.

· The second exemption is the "non-resident override clause," which considers certain goods to be manufactured "outside" Canada.

New Registration System Simplified

For the provision of utilities and intangible assets, the Simplified Registration Regime was introduced. Under the following conditions, this regime creates a lower GST/HST entry requirement for non-Canadian businesses:

A non-GST/HST licensed Canadian shall be responsible for paying the provider's fees; the provider is not a permanent resident of Canada and shall not conduct business in Canada; facilities or intangibles can be "used or consumed." Notice the regulations on providing services or products that are not delivered directly in Canada, in full or in part, as long as these products can be used or utilized in Canada, and for a 12-month span the provider may owe, or fairly anticipate, a charge above C$30 000 in payments for such or intangible resources.

The Simplified Registration Regime aims at addressing competition problems under the existing GST/HST regulations. The new regulations encourage non-GST/HST registered users and organizations to stop paying GST/HST by purchasing goods from non-GST/HST registered vendors. Rationally, these consumers are required to determine GST/HST automatically for these transactions. This law remains generally unknown and impossible to enforce in practice. This effectively implies that a buyer sprat 5-15% (depending on the GST/HST rate), for example, by buying downloaded software from an international supplier rather than from a domestic one. The regulations are designed to remove this benefit and establish a GST/HST neutral marketplace for Canadian and international vendors by extending the registration obligations.

The new regime is also applicable for sales to the Canadian licensed GST/HST customers - in other terms, the "Company in Canada" threshold is still relevant if the non-resident corporation sells exclusively to registered GST/HST consumers.

Simplified Registration for Non-Resident Companies

The simplified registration regime for Canadian companies radically reduces the non-resident companies' registration threshold by dropping the registration criterion for "carrying company in Canada." A non-resident corporation may still maintain lists of Canadian citizenship metrics and the policy formulations of GST/HST of its Canadians as a possible demonstration of why it did not file with the Canadian Tax Office, the Canada Revenue Agency, under the Simplified Registry System.

Suppose a non-resident company triggers registration under the current scheme. In that case, it can consider registering under the standard GST/HST system, where the registered person may demand input tax credits. At the same time, these are not valid under the Simplified Registry.

Simplified Canadian Company Registration Problems

Organizations in Canada should check to see whether a non-resident vendor is unregistered, registered through the standard GST/HST regime, or listed under the Simplified Registration Regime. Commercial companies typically do not have input tax allowance or refunds for GST/HST payable to a registered company under the simplified registration regime. For non-GST/HST certified entities, the responsibility of the GST/HST self-assessment is notified of the non-resident vendor's tax status.

The lack of adequate identification of the GST/HST status of a non-resident seller can therefore contribute to the accidental payment of unrecoverable GST/HST by a registered GST/HST company. This leaves a non-GST/HST registered entity likely to be open to doubling GST/HST when paying a GST/HST fee to their supplier.

Conclusion

If a non-GST/HST licensed person or company pays a non-Canadian supplier for services or intellectual property, both the vendor and the consumer should check their existing GST/HST obligations and clarify if the Simplified Registration Regime changes these obligations.

Finally, somewhat close regulations still exist in Québec for the Québec Sales Tax. The Tax rules may impose registry and collection responsibilities on all businesses operating outside of Quebec, including Canadian companies with clients in the province. Québec also announced that it would amend its laws to reflect federal regulations. These modifications will also take effect on 1 July 2021.

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