Are you billing GST correctly on Internet sales?

Website owners should be aware of recent developments on the collection of GST from non-Canadians on web based sales.We went to Canada’s specialist on GST, David Sherman, to get the facts on this complex area and status of the current changes to the rules.

Take it away David…

If you’re collecting GST when you don’t need to, you’re pricing your product too high. And if you’re not collecting GST or HST when you should, you’re setting yourself up for a very expensive assessment if you’re audited by the Canada Revenue Agency (CRA).

I’ve seen many CRA assessments in the hundreds of thousands of dollars, totalling up the GST not collected over four years and adding interest and penalty. And pleading ignorance will not get you out of the assessment! Your business could be ruined (and, if it’s incorporated, you can be personally liable as a director).

Unfortunately, the GST is horrendously complex. This article may seem technical and complicated, but it’s actually highly simplified and doesn’t cover all the special rules. You should obtain your own professional advice about your business to ensure that you’re handling the GST/HST properly.

General Rules
In general, if you’re based in Canada, then unless an exception applies, all your sales are taxable under the GST/HST. You must collect and remit 6% GST, or 14% HST in Nova Scotia, New Brunswick or Newfoundland & Labrador (the HST provinces). You also get a refund for all the GST or HST you pay on your business purchases, in the form of “input tax credits”.

Once you (combined with others in your associated “group”, such as any companies you control) have total annual sales exceeding $30,000, you must register for GST and charge GST (or HST) on your sales.
Some goods are always GST-free - for example, most groceries and medical devices.

For web sales, the primary way for sales to be GST-free is sales to non-residents. However, some sales to non-residents are taxable, as we shall see.

Before you can determine whether your sale is taxable, you have to know what it is: “goods”, “services” or “intangible property” (such as a right to something). This can be a very complex determination. For example, shrink-wrapped software is goods, a software download is intangible property, and web site hosting is considered a service.

For web sales, see CRA Technical Information Bulletin B-090, “Electronic Commerce”, on cra.gc.ca.

Goods
If you’re selling goods (technically called “tangible personal property”), then you do not collect GST if you are shipping the goods out of Canada, regardless of whether the billing address is in Canada. (Keep good records to prove you exported the goods!) If you ship goods to an HST province, you must charge 14% HST, even if you’re shipping from a non-HST province (e.g., you’re in Ontario and the customer is in Nova Scotia). Shipping costs take on the same status as the goods for tax purposes.

(You may also need to collect provincial sales tax, depending on what province you’re in and where your customer is.)

Services
Most services supplied to non-residents are GST-free. “Supplied to” refers to who is liable to pay (i.e., who you are billing), not who benefits from the service. Determining who is a non-resident is a complicated question, but in most cases, a billing to an address outside Canada identifies a non-resident.

There are some exceptions, such as if the customer is in Canada while dealing with you, or where the service relates to property in Canada. Such services are normally taxable.

Once a service is taxable, if you perform the service in an HST province it is generally taxable at 14%, while if you perform it in another province it is generally taxable at 6%, regardless of where in Canada the customer is. There are some complex exceptions to this rule.

Intellectual Property
If you are supplying intangible property which is also “intellectual property”, such as a copyright, patent, trademark or trade secret, or a right or licence to use such property, then there is no GST provided your customer (the one liable to pay) is non-resident and is not registered for GST. If the customer is GST-registered (some U.S. businesses are), you must charge GST.

So, for example, if an unregistered non-resident pays to download software from your web site, there is no GST, because they are paying for a license to use your intellectual property.

Unfortunately, this rule does not extend as far as you might think. In the recent case of Dawn’s Place Ltd., the Federal Court of Appeal ruled that payments by U.S. customers to a Canadian website to download adult images and videos were taxable. (But see the next section below.) Dawn’s Place argued that it was providing copyright to the downloaded images, but the Court ruled that granting a right to download an image is not the same as granting a copyright.

New Rule! Other Intangible Property
In response to the Dawn’s Place case and other complaints from the industry, the Department of Finance announced in the March 19, 2007 federal budget a new rule: all intangible property will be GST-free when billed to non-residents who are not GST-registered. If the customer is an individual, they must be outside Canada at the time of the sale. Again, there are some exceptions, such as intangible property that relates to property in Canada or to a service that is taxable.

This new rule is currently before Parliament in Bill C-52, Once enacted, it will be retroactive to the introduction of the GST in 1991, but will not apply if you charged or collected GST. (If you were assessed for not collecting such GST in the past, you will be able to get a refund.)

More Information
CRA web site - see Technical Information Bulletin B-090 for detailed information on website sales. However, note that the new rule introduced by the March budget has not yet been passed by Parliament and will likely not be included in Bulletin B-090 for some time even though it is already effectively in force. See the Budget 2007 information for information about the new rule.

And consult your professional accountant or lawyer for specific advice on your business. You don’t want to risk being ruined by an assessment for four years of uncollected taxes!

By David M. Sherman, LLB, LLM
Tax Lawyer & Author