Should you be registered for Canadian GST/HST?
Even without permanent establishment, you may be required to register
INSIGHT ARTICLE |
U.S. companies doing business in Canada should examine carefully, whether the nature of their business activities in Canada result in a requirement to be registered for the Goods and Services Tax/Harmonized Sales Tax (GST/HST).
Persons who are registered for GST/HST are obligated to collect the applicable tax on their taxable supplies and file periodic returns to report and remit that tax. However, a registrant is also entitled to claim refunds of the GST/HST paid on costs related to making taxable supplies. The result is that a registrant need only remit the net amount of tax to the Canada Revenue Agency (CRA). The net amount is calculated as the GST/HST collected on their taxable revenue stream less the recoverable amount of GST/HST paid on expenses incurred in Canada where GST/HST has been charged.
The GST/HST is levied under the Excise Tax Act (ETA). The ETA provides that every person that is a nonresident of Canada who makes a taxable supply in Canada, in the course of carrying on a business in Canada, is required to be registered for GST/HST purposes, except where the person is a small supplier. For example, a company with annual worldwide taxable sales not exceeding CAD $30,000 including those of the person's associates would not register. For the purposes of this article, we will assume that the majority of U.S. companies expanding to the Canadian market have annual global sales exceeding CAD $30,000.
Supply made in Canada
The ETA generally deems a supply (sale) made by a nonresident to be made outside Canada as long as the nonresident is not carrying on business in Canada. This deeming provision allows non-residents to make sales to Canadian customers without becoming registered. However, GST/HST registration is required where the level of activity in Canada is sufficient for the nonresident to be considered to be carrying on business in Canada. We note that a non-resident who is not carrying on business in Canada may choose to become registered voluntarily for GST/HST.
Carrying on business
As discussed, then, a nonresident that makes a taxable supply in Canada and is carrying on business in Canada is required to be registered for GST/HST. A person may be considered to 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 a determination that is based on a number of factors. The Canadian tax authority (CRA) set out its administrative position regarding the factors to be considered when making such a determination in a policy statement issued in 2005. According to the CRA, the importance of each factor may vary depending on the circumstances and on the nature of the supplies provided (e.g., goods, services, intangible personal property, etc.). However, the CRA generally requires a nonresident person to have a significant presence in Canada to be considered to be 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.
According to the policy statement issued by the CRA, the factors to be considered in determining whether a nonresident person is carrying on business in Canada for GST/HST purposes in a particular situation 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 nonresident's name and business are listed in a directory
- The location of a branch or office
- The place where the service is performed
- The place of manufacture or production
A nonresident who is required to be registered for GST/HST purposes, or chooses to become registered voluntarily, will be subject to the following requirements:
- To charge and collect GST/HST as required on the sales of goods and services made in Canada to Canadian customers
- To file a GST/HST return with the CRA for each reporting period. The filing frequency may be annual, quarterly or monthly, depending on the level of sales in Canada
- To remit to the CRA the total amount of GST/HST collectible or collected on sales made during a reporting period less GST/HST payable during that particular reporting period that can be claimed as refunds. If a non-resident is an annual filer, it may also have to make quarterly installments starting in its second year of registration.
- To satisfy information requirements on invoices.
- To update its accounting systems to capture 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.
U.S. companies looking to expand their goods or services offerings into Canada should be sure to examine and evaluate these Canadian sales tax issues as part of their new initiative process. Ensuring that the determination of “carrying on business in Canada” has been completed, and registration for GST/HST is confirmed where necessary, will minimize any potential future risks with the Canadian tax authorities.