In this episode, we dive into the complex world of Canada’s sales tax system, covering the Goods and Services Tax (GST), Harmonized Sales Tax (HST), and various provincial sales taxes (PSTs). Our guest, Jeremy Scott, shares insights on navigating tax compliance and the evolving registration rules, including the recent changes of the “Netflix tax.” 

We break down the distinctions between federal and provincial obligations and explore what these mean for international businesses operating in Canada. Drawing on his experience as both a practitioner and in-house tax leader, Jeremy provides a unique perspective on the challenges organizations face in this multifaceted landscape.

Key Takeaways:

• Understand Canada’s sales taxes: Know the basics of GST, HST, and PST.
• Expert perspective matters: Jeremy Scott shares insights from his experience as a tax practitioner and in-house tax leader.
• Be aware of the Netflix tax: Learn how it affects non-resident businesses.
• Prepare for international challenges: Navigating Canadian tax obligations can be complex for foreign businesses.
• Know the differences: Distinguish between harmonized sales taxes and provincial sales taxes.

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Welcome to Saltovation.

The Saltovation show is a podcast series featuring the leading voices in SALT where we talk about the issues and strategies to help you make sense of state and local tax.

In part one of our conversation with Jeremy Scott, we explore Canada's sales tax landscape from GST, HST to provincial PSTs to how the Netflix tax change registration rules for non residents. Jeremy also shares insights from both sides of the desk as a practitioner and as an in house tax leader. Let's dive in.

All right, Jeremy, thank you so much for being here on this Saltovation podcast. It's great to have you here.

Thanks so much. It's great to be here.

So we know you have some private sector experience in your background. Can you tell us about it, what you've done, how you got to where you are and just let us get to know you a little bit?

Certainly. So as a professional tax practitioner, I've taken sort of a non traditional route to get where I am.

So I did go to business school and then I went and did a law degree at the University of New Brunswick here in Canada. I practiced for a while with a local municipal government, but I had always had an interest and a passion for tax.

That was sort of my focus in my undergrad degree and then in my law school program.

So after practicing for a period of time with the local municipality, I actually went to a mid tier accounting firm, spent a number of years there in the tax department, really refining my tax skills. But interestingly enough I focused not necessarily on corporate tax or income tax like most tax practitioners do.

I actually focused on what we in Canada call either sales tax or commodity tax or indirect taxes. We kind of have a bit of an identity crisis, so we're always trying to figure out who we are.

But generally I will refer to us as sales tax practitioners.

So I practiced sales tax within a large public accounting firm for a number of years and then my largest client at the time happened to be the number two grocery store in Canada. So publicly traded company with about $20 billion a year in sales. They got frankly tired of paying consulting fees and asked me to join them.

So I joined. At that point in time it was the Sobeys group of companies. I joined Sobeys as their head of indirect, ran that tax department for about eight years.

And then for the last couple of years of my career at Sobeys, I was the head of the entire tax department. So I took on corporate tax, customs, those sorts of things as well.

So for about 10 years I was on the inside trying to Manage tax compliance, tax risk. We had a team of about 20 professionals and we were always focused on processes and risk management and identifying risks and opportunities.

In addition to running the tax department for a large wholesaler and retailer, we also did a number of transactions and acquisitions during that time. So I was involved with some really interesting transactions. We acquired Canada Safeway, I think that was a $6 billion acquisition.

So was involved with a lot of day to day operations and then a lot of acquisitions as well. So it was really interesting.

And then after doing that for about a decade, I took my experience and headed back out to be a consultant and advisor and tax practitioner again. Here I am five years later, still practicing within my own law firm.

So that's kind of my background as to how I got here and I do think it allows me to add a unique perspective when I'm talking to clients. I understand not only the tax technical and the dealing with the tax authorities as most tax practitioners do, but I was also on the inside.

So I've got the practical experience dealing with tax teams or with the non tax teams and accountants that you have to deal with inside of organizations.

Well, yeah, so you can speak to both. It's like. Yeah.

And we kind of find ourselves in the same boat where it's like here as a, as a practitioner, I need to tell you the technically correct answer, the legal answer, but then there's the application perspective of. Right, we'll appreciate that, you know, you might not be set up to do everything everywhere right now.

And so where can we, you know, reasonably, from a business perspective, take that? Business perspective.

Yeah, that's right. So I ran into that.

Yeah, I ran into that a lot with, you know, it's one thing to have sort of the tax technical memo and understand how the rules work.

It can be another thing to actually implement the rules throughout, you know, your operational arm, you know, not just the finance arm, but the operations arm as well of most businesses. So always a challenge.

So you know us as practitioners, state and local tax practitioners. We're, you know, even though Meredith and I physically sit in Colorado and we have some Colorado based clients, we are multi state.

So understanding that, you know, Canada has its provinces and everything, I'm guessing from your experience, you're very well versed in all the different taxes for all the provinces.

Yeah, that's. That is a fair statement. So Canada is geographically large, so obviously the country has a.

We have a national sales tax and I can talk about that in a little bit. But we, in addition to the national levels of Sales tax.

We also have 10 provinces and three territories that all levy their own sort of provincial or territorial taxes as well. So really, what I would say for most international businesses.

So I do deal quite frequently with international businesses who have a Canadian branch or have sort of a Canadian geographic region. And a lot of times, you know, it's a US company or a European company, and maybe 3, 5, 10% of their sales are in Canada.

So they have just enough sales in Canada to need to care about Canadian tax, but don't necessarily have Canadian tax practitioners on staff. So really what I often talk to those folks about is I say, look, in Canada, we have a national sales tax that almost everybody needs to think about.

We call it the gst, the goods and services tax. It's a value added tax.

So it is recoverable throughout the supply chain, which isn't always something that my US Clients think about as much as the European ones do. The Europeans are a little more familiar with the value added tax system. But in Canada, we have a national value added sales tax called the gst.

And in five of the Canadian provinces, they have done away with their old provincial sales taxes and have actually harmonized their sales taxes with, with the federal GST. So federal GST applies across the country at 5%, except if you get into one of those provinces that have harmonized their tax.

So in some instances it's harmonized at 15%. Some instances it's like Ontario is harmonized at 13%.

So the nice thing about a value added tax regime like that is once you're registered, once you're registered across the country, so whether you have sales on the east coast, the west coast, central Canada, you're registered for one regime and you're collecting and reporting all of that tax through one mechanism outside of the federal gst. We do have four provinces that have their own provincial sales taxes still. So we have the Province of Quebec.

They have a Quebec sales tax that effectively mirrors the gst. So it applies in very much the same way. And it's also a value added tax.

So Quebec is, you know, you can think of them as being somewhat harmonized because the rules are harmonized, but the administration is still separate.

And then we do have three other provinces, British Columbia, Manitoba and Saskatchewan, that all have provincial sales taxes that would operate much more similarly to state sales tax in the US So those are sort of the broad strokes for what we have in Canada. We do have a number of excise taxes as well that are sort of item specific.

So excise taxes at the federal and Provincial levels on products like fuel or tobacco or alcohol, those sorts of things.

And then as far as definitions and taxability and things like that, I mean, are those pretty similar even amongst the provinces that have their own sales tax?

Yeah, so unfortunately they're not, so.

Of course they're not.

Yeah, exactly right.

So for the gsthst, that applies nationally and the Quebec sales tax, which, like I said, somewhat mirrors the same rules, a lot of the definitions are the same. And the short story is all goods or services are subject to the GST or the QST in Quebec, except for a number of numerated items that are tax exempt.

Once you get into British Columbia, Manitoba, Saskatchewan, those provinces with their own PSTs, all bets are off, so to speak. So they've all got their own PST legislation.

The PST legislation in those provinces has been around for a really long time, and they've all kind of separate legislation, separate taxing jurisdictions, separate policy reasons for why and how they do things. So, yeah, unfortunately we do have a number of different sets of rules that have to be sort of managed and reviewed accordingly.

Well, that's not unlike our states here in the us so not a huge surprise. But even our locals obviously too. So, you know, in the state of Colorado, we've got local taxes like the cities.

A lot of the cities have their own and their rules can vary even from the states. So just goes to show that, you know, we're not necessarily unique in that way.

Yeah, and I would say so in Canada, we have less of that local taxing jurisdiction. So at the municipal level, you don't see it as much.

We do have sort of annual property taxes that are levied on property owners, but as sort of a transaction tax, there's not really all that much at the municipal level. Some municipalities are starting to create their own municipal taxes on things like hotel levies or in some instances Airbnb type levies.

But other than that, we're generally not seeing a lot of tax at the, at that sort of municipal jurisdictional level in Canada.

Yet one of the things I do like to point out for a lot of my US based clients is in the US And I remember this from my days of being the head of tax at sort of a public company in Canada that had some operations in the US we would talk about all the many thousands of different sales taxes that you can find across the US and you can often find robust service providers, tax engines to help you manage those processes. Given Canada's relatively small population in comparison to the US and our relatively limited number of taxing jurisdictions and applicable taxes.

We typically find that the tax engine software isn't as robust in Canada as it might be in the US So what we are finding, or what I find is that you'll have organizations, businesses, taxpayers who need a little bit more of the, you know, the tax specialist support. Because they can't necessarily get as much information from their.

From the tax engines now, doesn't mean that the tax engines don't have some Canadian support. They certainly do. It's just I don't think there's as many options and as many ideal options as there as there are for US Taxes.

So then would you find that taxpayers are kind of manually computing it?

I would say they're using technology to compute the taxes, but they are probably a little more manual in their tax determinations at the front end.

So if you've got a client that's using like a software package like SAP, for example, determining their tax coding in the system, when they're going to charge GST or when they're going to charge British Columbia's provincial sales tax, they're making that determination a little more manually than you would see, I think in the US where you can get a bit better support on helping organizations determine when to turn the tax on or turn it off.

Well, and I guess and then kind of speaking to like turning that tax on or off, like what creates the duty to have to be subject to.

Right.

You know, states have kind of a bright line threshold of, you know, generically 200 transactions or $100,000 in sales. Is there kind of a similar threshold or what's the impetus of having to collect.

So traditionally, whether it was for GST or provincial sales tax purposes, the test was typically, is your organization carrying on business in Canada, or are you carrying on business in one of the PST provinces?

So that's something similar to like a nexus test in the US So typically we were looking at simply coming to Canada as a U.S. business and having sales in Canada wasn't typically enough. We used to look at things like, did you have employees that were physically in Canada performing services?

Did you have a Canadian permanent establishment?

Did you have a Canadian bank Account, were you concluding contracts in Canada, taking payment in Canada, all those sorts of things, reactively soliciting work in Canada. Traditionally that was, that was the test in Canada. Wayfair kind of came and went in the US and in Canada there were some politicians that took note.

And it worked so well in Quebec that the federal government followed suit with the gsthst and then all of the other provincial sales tax provinces have implemented their own similar regimes. But really what I'm talking about is under these new simplified regimes, we typically called them the Netflix tax in Canada.

That's colloquially what it was known as. So we were talking about, or what we have in Canada now is almost like a two pronged test for determining registration status.

So there is the old traditional carrying on business test, but now there is this simplified regime in pretty much every taxing jurisdiction in Canada that says really, let's look at what goods or services you're providing through electronic commerce means. So through electronic platforms.

And if you're providing those services to consumers, not necessarily businesses, but to consumers in Canadian jurisdictions, you may have to be registered for GST Quebec sales tax under these new simplified regimes. And like I said, the PST provinces all created similar rules as well. But essentially we went from hey, are you carrying on business in Canada?

To okay, even if you're not carrying on business, you may still need to be registered under the simplified regime if you're making essentially sales into Canada through electronic means to consumers who otherwise would be paying tax. So I did mention, we referred to it as the Netflix tax.

And really what it was was if you thought about it as an example, all of the big cable service providers in Canada would be charging consumers, call it $100 a month plus HST plus Quebec sales tax in Quebec, those sorts of things, that's what consumers did, they acquired those services, they paid tax on those services on a monthly basis.

But if you consumers, as the digital economy started to grow as more and more non resident companies who weren't really carrying on business, so the Netflix type organizations of the world, as they started to have sales into Canada, there was a realization that hey, these non resident companies aren't carrying on business in Canada, so they're not required to be registered for HST or gst, so they're not necessarily charging tax on their services.

So while consumers were happy not to necessarily be paying tax on those services, governments were realizing a loss of revenues and competitors that were based in Canada were complaining because the competition didn't have to charge tax. And you've got some jurisdictions that the tax rate is as much as 15%.

So it is a sizable amount and can make a big difference in a competitive market.

So is the threshold really kind of arbitrary or is it, is there some kind of, you know, like we have in the U.S. right. The, all these states have the rules around, you know, some kind of bright line number. Right.

$100,000 or whatever their, you know, whatever their number might be. How does Canada look at that?

Yeah, that's a great question.

So in Canada, there is for gsthst, so for the federal tax, there is a, a bright line test that it's $30,000 in sales in Canada over, we'll call it over the past year, it's technically over the past previous four calendar quarters, but over the last year it's a $30,000 test. For Quebec's QST, the test is similar. It's $30,000 in sales into the province of Quebec.

Now, for both of those taxes, it's a little bit academic how you're going to calculate the $30,000. If you're under the traditional carrying on business test, you're looking at all your sales.

If you're under one of the simplified regimes, you might only be looking at your sales to end consumers. So there's some nuances to that. But then when you get into the provincial sales tax provinces, it gets a little trickier.

They don't really have a clear bright line test in the way that the federal, the federal government does. So in bc, Manitoba or Saskatchewan, you could be tripped up as early as your first sale into those provinces. Wow. Yeah.

Okay. And then how does that kind of relate then to the income tax?

Well, so from an income tax perspective, I generally don't get too, too deep into the income tax rules with most of my clients. I try to pass them off to one of my colleagues who specialize in those areas.

But I will say, like there are tax treat sort of between a number of countries. So what I try to remind folks is that you'll have your income tax compliance that you'll have to take care of as a matter of recourse.

As a general statement, though, none of the tax treaties really impact Canadian sales taxes. So whether or not you really have to register for Canada's GST or British Columbia's pst, really there are no real tax treaties that impact that.

It's more of a test of what are you doing in the country or in the province. And do you have to be registered?

Right. Yeah. Because, I mean, one of the things that we talk to our clients about. Right. Is from a state perspective.

So many of our states are being more aggressive and looking at sales tax registrations and then saying, oh, where's your corresponding income tax filing then? And so I wasn't sure if Canada was maybe taking some of those same tips from the states.

Yeah, I don't think we're seeing that as much.

I think we're probably seeing it the other way in that we're figuring out that people have filed something from a corporate tax perspective or perhaps more so from an import perspective.

If there's compliance that's happening at the time goods are being imported into Canada, that might be leading the CRA to ask questions about sales tax registrations. And that actually leads me to a thought I just had as well.

So we talked a little bit about our, you know, Canada's got our federal GST and it's a recoverable tax.

So really, you know, any business, whether it's a Canadian based business or a foreign based business, if you're registered for Canadian GST under the traditional method, you would charge GST or hst, I'll use that term interchangeably.

You charge GST on your sales to your Canadian customers, but as an offset or a credit, you would actually get to claim credits for any GST HST have paid in the course of selling those goods or services. And one thing that I find a lot of businesses don't appreciate is that.

So we have the GST that applies on transactions and people can get their head around that. Right. You imported some goods into Canada and you sold them to a Canadian customer and you had to charge them 5% GST or 13% HST. Fine.

People understand that what they often don't appreciate is there's also GST triggered when the same goods were imported into Canada. So typically goods get imported into Canada. There's a 5% GST that's charged and collected by the Canada Border Services Agency.

And then you've got somebody who's ultimately supplying or selling the goods somewhere in Canada and having to collect the tax. So you'd have the tax you've collected on your sale, but you'd have the tax you paid at the time of importance.

And you do get to claim credits for the tax you paid at the time of import.

So I've run into a lot of organizations that frankly don't appreciate that they've paid GST at the border and don't Realize that it's a recoverable tax they've paid at the border.

Gotcha. Is there any way to not pay tax at the border?

And where I'm thinking of this right is the US has a use tax concept such that you know, if you're purchasing a taxable good and sales tax wasn't charged that you then have to kind of self assess use tax. Is there that kind of corresponding concept in Canada?

And maybe it could be more applicable to like digital goods of services, you know, that maybe that obviously weren't shipped and had to make it across a border. But is there that concept?

Yeah, so there are a few things to think about there.

So if you've got physical goods that are coming across the border, at the end of the day Canada Border Services Agency is going to collect GST or HST on those imports. So CBSA will only collect 5% GST on commercial imports. But everything commercially coming over the border is getting taxed.

It's effectively part of the customs import duties process. So when everything else is being process to bring the goods in, one of the things that's in the paperwork is a 5% GST.

And that's I think in part why some people don't appreciate that it's there is because it just kind of gets paid along with some of the processing and often it's done by the customs brokers. Right. So people may not even realize they've paid tax.

Yeah, we've had a lot of clients kind of come asked, it's like well, you know, do we have to register for Canadian, you know, gsthst, et cetera. And it's like well we've been shipping stuff into Canada for years.

It's like, well maybe look at your UPS contract or FedEx because it's probably buried in there if you don't affirmatively know if you're paying. Sounds like your goods are not coming into the country without it being that 5% being collected in some capacity.

Yeah, that's right. So the 5% is absolutely being collected at the border. I mean there are zero rating provisions.

So there are some products that can be sold in Canada non taxable. So a broad, simple category is a lot of basic groceries. So produce is a good example.

So produce coming into Canada would not have the 5% GST levied at the border. But you know, typical business assets, parts for you know, equipment, anything like that, inventory generally that's all going to be taxable.

Now there are, you know, I do love to explain to people like all good tax legislation The Excise Tax act is the legislation that creates the gst.

The GST is created in literally one sentence and then there's 2,000 pages of tax jargon and special rules and all kinds of good stuff that goes with it.

So there are some provisions that do allow, there are some instances where people can import goods into Canada, pay GST at the border and pass along that GST to their customers and allow their customers to claim it as a credit to recover it. But the processes are a little more cumbersome than you would think they should be. So I'm always kind of hesitant to throw that out there cavalierly.

But there are some processes to help people recoup tax that was paid at the border if the importer record wasn't a GST registrant. The other thing, so you know, I normally get, when I get the question from non resident businesses, are we required to be registered for gst?

There's a short answer that, well, we have to do a carrying on business test or we have to look at that simplified, it depends.

We love that answer.

But the other thing is that because GST is recoverable, there is a side piece that says, hey, even if you're not required to be registered, you might actually want to be registered.

So if you're importing goods into Canada and we've decided no, you're not carrying on business so you don't have to be registered, but maybe you are paying a bunch of GST at the border, or maybe you are paying a bunch of GST on warehousing fees or something like that, there might be some value in being registered to get back the tax you've paid in the course of your operations in Canada.

The other piece of advice I often end up discussing with clients is, and again, not to be completely cavalier, but if you're uncomfortable with the Canadian tax rules, you can structure your transactions so that they occur outside of Canada.

If there's a scenario where US based, if there's a company based in Buffalo and they don't want to be the importer of record and they don't want to handle or be concerned about Canadian sales taxes, there might be ways to restructure their agreements to say, hey, look, we'll sell all this stuff, we'll sell it at our dock in Buffalo and you, Canadian customer can be the importer of record and you can handle all of the Canadian tax and we'll just stay outside of the regime by staying outside of the country.

So I do end up with a lot of clients sort of thinking about those sort of concepts and how they might be able to avoid being caught up in Canadian tax rules as well.

So sometimes we hear about goods being stuck at the border. What are some scenarios where that happens?

Yeah, I think the biggest challenge at the border is just poor importation paperwork and so it's not necessarily tax related, but it could be customs and duties related. And it often probably has to do mostly with goods being improperly declared. So goods being poorly coded.

All goods coming into Canada have an HS code, so they're identified as a particular type of product for customs and other reasons. And if they're. If the paperwork is improperly filled out, I think that's probably what gets things stuck at the border most frequently.

Okay, this podcast is for educational purposes only and is not intended, nor should it be relied upon as legal tax, accounting or investment advice. You should consult with a competent professional to discuss specifics of your situation and the applicability of the information presented.