On April 19, 2021, the Government of Canada unveiled its first official budget in two years (“Budget 2021”) and announced certain important commodity tax measures. Budget 2021 includes proposed amendments to past proposals, as well as some completely new rules.
The highlights of Budget 2021 from a commodity tax standpoint are set out below.
1. Application of the GST/HST to E-commerce
In its 2020 Fall Economic Statement, the federal government announced (1) the implementation of a new and parallel mandatory GST/HST registration system for certain non-resident vendors, (2) the application of the GST/HST with respect to goods supplied through fulfillment warehouses in Canada, and (3) the application of the GST/HST on supplies of short-term rental accommodation facilitated through a digital platform. Starting July 1, 2021:
- certain non-resident businesses providing digital products or services will have an obligation to register and collect the GST/HST from their non-registered GST/HST Canadian clients under a simplified regime;
- certain distribution platform operators and non-resident vendors will have an obligation to register and collect the GST/HST (under the normal regime) with respect to the sales of goods that are located in fulfillment warehouses in Canada or shipped from a place in Canada to clients in Canada; and
- certain accommodation platform operators (including non-resident operators) will have an obligation to register and collect the GST/HST on supplies of short-term accommodation in Canada made through the platform.
However, Budget 2021 proposes certain amendments to the draft proposals that were released in the 2020 Fall Economic Statement, which attempt to take into consideration comments received from stakeholders.
Safe Harbour Rules
Under the original proposals, certain platform operators would be required to collect and remit the GST/HST on the supplies they facilitate by third parties that are not registered under the normal GST/HST regime. In theory, such platform operators will have to rely on information provided by third parties on the transactions they make in order to determine whether they should collect the tax or not. Budget 2021 proposes new rules to ensure that a platform operator is not held liable for failing to collect and remit tax as a result of having relied in good faith on information provided by a third-party supplier.
Budget 2021 includes new rules specifying that suppliers registered for the GST/HST under the new simplified regime would be able to deduct amounts for bad debts and certain provincial HST point-of-sale rebates to purchasers.
Threshold Amount Determination
With respect to the implementation of the new simplified GST/HST registration system for certain non-resident vendors of digital products and services, registration will be required:
- For a non-resident vendor, if their total taxable supplies of digital products or services made to consumers in Canada exceed, or are expected to exceed, $30,000 over a 12-month period.
- For a non-resident distribution platform operator, if their total taxable supplies of digital products or services made to consumers in Canada, including the supplies of digital products or services of non-resident vendors to consumers in Canada that the operator facilitates, exceed, or are expected to exceed, $30,000 over a 12-month period.
In this respect, Budget 2021 proposes to amend the original proposals to clarify that supplies of digital products or services that are zero-rated (i.e., taxable at 0%) should not be included in the calculation of the threshold.
Annual Information Return
It is currently proposed that certain platform operators would be required to file an annual information return with the Canada Revenue Agency (“CRA”). Budget 2021 clarifies that such requirement should only be applicable to platform operators that are registered or are required to be registered for the GST/HST.
Authority to Register a Person
Budget 2021 provides the tax authorities with the authority to register a person that they believe should be registered under the new simplified GST/HST regime. This authority already exists under the normal GST/HST regime. However, it is easy to see the potential extra-territorial challenge that such forced registration could cause in terms of tax collection and compliance.
Administration and Compliance Approach
Budget 2021 announces a 12-month transition period, beginning July 1, 2021, for affected businesses and platform operators to the extent such businesses can prove that they have taken reasonable measures but are not able to meet their new obligations. CRA is expected to take a practical approach to compliance and exercise discretion in administering the new measures.
2. Input Tax Credit Information Requirements
Specific information must both be obtained from suppliers and retained by registrants in order to support their input tax credit (“ITC”) claims with respect to GST/HST payable on their business expenses. The information that supporting documents should contain is more stringent when the amount paid or payable in respect of a supply equals or exceeds thresholds of either $30 or $150.
Moreover, with respect to information that must be provided to a recipient of a supply, either the supplier or a person defined as an “intermediary” (i.e., a person that causes or facilitates the making of a supply on behalf of the supplier) must provide its business name and, if a threshold is met, its GST/HST registration number, on the supporting documents. However, a technical issue exists when a billing agent (i.e., a person that merely collects consideration and tax for a supplier) is involved because such “agent”, which is not considered to be a true agent facilitating the making of a supply on behalf of a principal, does not meet the “intermediary” test. Therefore, billing agents are not allowed to provide their own GST/HST registration number and/or business name to recipients and ITC claims of such recipients could be in jeopardy if the actual underlying supplier does not provide this information.
For the sake of simplification, Budget 2021 increases the above-mentioned thresholds to $100 (from $30) and $500 (from $150). Moreover, it also allows billing agents to provide their own GST/HST number and/or business name for the purpose of the ITC information requirements. These measures should come into force as of April 20, 2021.
3. GST New Housing Rebate
An individual who purchases new housing may be entitled to a 36 percent rebate of the GST if he/she meets certain conditions. The calculation of the rebate is based on the total of all amounts paid by the purchaser to acquire the new home. However, the rebate is gradually reduced when the purchase price is greater than $350,000. It becomes nil if the price is equal to or greater than $450,000. The maximum GST rebate that can be claimed is $6,300.
Several legal conditions must be met in order for a homebuyer to qualify for such rebate. Notably, the homebuyer must be acquiring the new home for use as their primary place of residence or as the primary place of residence of a “relation” (i.e., generally means individual related to the first individual by blood, marriage, common-law partnership, or adoption). However, there is currently a practical issue when two or more individuals, that are not “relations”, buy a new home in co-ownership because all of those individuals must meet this condition individually.
Budget 2021 proposes to eliminate this problem and provides that the GST rebate (and the rebate with respect to the provincial part of the HST) should now be available as long as the new home is acquired for use as the primary place of residence of any one of the co-owners or a relation of any one of them. Similar rules will also apply to the GST rebate in respect of owner-built homes, co-op housing shares and homes constructed on leased land. Finally, this new measure will only apply to a supply made under a sale agreement entered into after April 19, 2021.
4. Excise Duty
Excise Duty on Tobacco
The excise duty rate on tobacco will increase by $4 per carton of 200 cigarettes. Budget 2021 also proposes to increase the excise duty rates for other various tobacco products. Moeover, inventories of cigarettes held by certain manufacturers, importers, wholesalers and retailers as of April 20, 2021 will also be subject to an inventory tax of $0.02 per cigarette.
Excise Duty on Vaping Products
A completely new tax on vaping products should be implemented in 2022 and Budget 2021 proposes a new excise duty regime for such products. Stakeholders are invited to share their view with respect to these proposals as the government wants to ensure that the imposition and collection of excise duties on vaping products will be effective. It is noteworthy that this new duty will be applicable to vaping products whether or not they contain nicotine.
5. New Luxury Tax
Budget 2021 proposes to introduce a new tax on certain luxury items such as personal aircraft and expensive cars and boats (the “Luxury Tax”):
- New vehicles, which include coupes, sedans, station wagons, sports cars, passenger vans and minivans for less than 10 passengers, SUVs and passenger pick-up trucks, will be subject to the Luxury Tax if priced over $100,000 (the “Vehicle Threshold”). On the other hand, the Luxury Tax will not apply to motorcycles, certain off-road vehicles, construction and farm vehicles, trucks/cargo vans, buses, police cars, ambulances, racing cars and motor homes designed for temporary living, sleeping or eating, vacation, seasonal camping or recreational use;
- New aircraft, such as airplanes, helicopters and gliders, will be subject to the Luxury Tax if priced over $100,000 (the “Aircraft Threshold”), with the exception of aircraft used in certain commercial activities (including public transportation or carriage of passengers, where the maximum carrying capacity exceeds 39 passengers) and in the public sector (police, military and rescue aircraft and air ambulances); and
- New boats, such as yachts, recreational motorboats and sailboats – but excluding floating homes, commercial fishing vessels, ferries, cruise ships and smaller personal watercraft – will be subject to the Luxury Tax if priced over $250,000 (together with the Vehicle Threshold and the Aircraft Threshold, the “Luxury Threshold”).
The Luxury Tax, which is to apply at the final point of purchase or upon importation of the item into Canada, will be imposed at a rate equal to the lesser of (i) 10% of the full value of the luxury item, or (ii) 20% of the value that exceeds the item’s respective Luxury Threshold. Upon purchase or lease, the vendor/lessor will be required to collect and remit the full amount of the Luxury Tax on the full value of the item. In the case of a lease, the treatment will be different than the GST/HST, which is generally only payable on the value of the lease payments and not on the full value of the leased good. Finally, Budget 2021 specifies that luxury items that are exported should not be subject to the Luxury Tax.
Amendments to the Customs Act are proposed to improve the collection of duties and taxes at the border on imported goods. Budget 2021 refers to the fact that certain importers with foreign connections may value their goods for customs purposes at a value that is lower than the value a Canadian importer would be attributing to the goods, when comparing it to previous foreign sale prices. Obviously, the Government of Canada believes that this causes less duty and tax to be paid upon importation.
The primary method to determine the value for duty of imported goods under the Customs Act is the Transaction Value Method (“TVM”). Subsection 48(1) of the Customs Act provides, inter alia, that: “[…] the value for duty of goods is the transaction value of the goods if the goods are sold for export to Canada to a purchaser in Canada and the price paid or payable for the goods can be determined […]”.
For the TVM to apply, three conditions must be satisfied: (1) the goods must be sold for export to Canada; (2) the sale must be to a “purchaser in Canada” (as defined in the regulations); and (3) the price paid or payable for the goods can be determined.
However, in theory, there could be successive sales of goods to a “purchaser in Canada” leading to the importation of the goods into Canada and also more than one “price paid or payable” fulfilling the requirements of a sale for export to Canada. Therefore, Budget 2021 proposes amendments to the Customs Act to ensure that the value of the last sale for export to a purchaser in Canada will be used for customs valuation purposes. It is noteworthy that New Zealand recently amended its legislation to adopt this “last sale for export” rule. This principle is also applicable in the European Union.
Furthermore, Budget 2021 also proposes changes to modernize the payment process for commercial importers.
7. Previously Announced Measures
Budget 2021 also confirms that the Canadian government intends to move forward with respect to certain previously announced measures (as potentially modified to take into account consultations with stakeholders), notably:
- Measures announced on November 30, 2020 regarding GST/HST relief on face masks and face shields.
- Legislative GST/HST proposals released on May 17, 2019 relating to virtual currencies, drop-shipment rules, freight transportation, and holding corporation rules.
- Remaining regulatory proposals released on July 27, 2018 relating to GST/HST.
- Original measures announced in Budget 2014 and later confirmed in subsequent budgets relating to the GST/HST joint venture election. In theory, a GST/HST joint venture election is available only if the activities of the joint venture are prescribed by regulation as eligible activities. Prescribed activities are generally restricted to certain specific endeavours. Budget 2014 proposed to significantly broaden the scope of permitted joint ventures activities for the purpose of the joint venture election. Based on this proposal, joint venturers would be allowed to make the election as long as the activities of the joint venture are exclusively commercial activities and the participants are engaged exclusively in commercial activities.