The Quebec government recently tabled its 2018-2019 budget (Budget), which announced a number of tax measures, including an initiative to expand the scope of the Quebec sales tax regime (QST) by introducing an obligation for non-residents of the province to register, collect and remit under certain circumstances, the QST on supplies made in the province.
The QST regime is the Quebec equivalent of Canada’s Goods and Services/Harmonized Sales Tax (GST/HST) regime. The QST is charged at a rate of 9.975 per cent on taxable supplies (other than zero-rated supplies) and is generally recoverable through an input tax refund mechanism (ITR) only if the taxable supply is used by a QST registrant in making a supply (other than an exempt supply).
As mentioned in the Budget, there are currently no specific rules under the QST regime for online transactions. Supplies of movable property (corporeal and incorporeal) or services made over the Internet are generally subject to the QST if the property or services are supplied for consumption in Quebec (destination principle), regardless of whether the supplier is located in Quebec, elsewhere in Canada or outside Canada. However, the challenge that the digital economy presents is that currently, non-residents suppliers of taxable movable property or services over the Internet to consumers located in Quebec are generally only required to register for the QST, and collect and remit the tax to Revenu Québec, if they have a permanent establishment or are carrying on business in Quebec. Selling goods and services over the Internet does not in and of itself meet that threshold for such suppliers with no physical or significant presence in the province.
The government estimates that this leakage has resulted in uncollected QST on goods and services purchased online of C$270-million in 2017, of which C$43.1-million would be linked to online purchases made from suppliers situated in Canada, but outside Quebec, and C$226.8-million would be linked to purchases made from suppliers situated abroad. This uncollected QST is equal to about 1.5 per cent of the total QST revenue collected annually (C$17-billion) by the government.
The government justifies the proposed QST amendments by citing Organisation for Economic Co-operation and Development (OECD) initiatives regarding tax avoidance, and the Base Erosion and Profit Shifting (BEPS) Project more specifically. To this end, the government appears to have been inspired by BEPS Action 1, which addresses and identifies the main tax challenges that the digital economy poses for the application of existing international tax rules, and whose final report (issued in October 2015) outlines options to address such difficulties, taking a holistic approach and considering both direct and indirect taxation.
Over 110 countries, jurisdictions and members of the OECD/G20 Inclusive Framework on BEPS have agreed to push for a global “digital tax” solution by 2020. While the Quebec government is not itself a party to this BEPS initiative, the proposed QST amendments nonetheless underscore its desire to lead the way in the adoption of tax measures specifically aimed at the digital economy. For its part, the Canadian government, via statements from the Minister of Finance shortly after the release of the 2018 federal budget, has stated that it is currently studying the issue of whether a new digital tax regime is necessary in Canada.
Below we highlight certain notable measures that the Budget contains regarding the proposed QST amendments, which, according to the government, are designed to ensure the collection of legitimate tax revenue and a fairer competitive landscape among Quebec-based and foreign businesses.
The Budget proposes to amend the QST system to require certain non-Quebec resident suppliers to register with Revenu Québec, under a new registration system called the “specified registration system”, for the purpose of collecting and remitting the QST applicable to their taxable supplies of incorporeal movable property and services made in Quebec to certain identified Quebec consumers. The Budget adds that in the case of such non-Quebec resident suppliers located in Canada, but outside of Quebec, the obligation to collect and remit the QST applicable to their taxable supplies of corporeal movable property made in Quebec to Quebec consumers will also be required. It is not clear from the Budget how this latter requirement is intended to fit with the existing requirement for non-Quebec resident suppliers to collect QST from consumers under Section 409.1 of the QST legislation.
Similar to the existing general QST regime under which small suppliers are not required to register, the value of the consideration for all taxable supplies made by a non-Quebec resident supplier in Quebec (by any means) to individual customers must exceed a threshold of C$30,000 in order to be required to register under the QST specified registration system. For the purposes of determining whether such threshold is exceeded, the value of the consideration for all taxable supplies made in Quebec during the 12-month period preceding the month that includes such determination is made shall be taken into account for the non-Quebec resident supplier.
However, non-Quebec resident suppliers may elect to register voluntarily under the existing general QST registration system, provided they satisfy the optional registration requirements under the existing QST system (including presumably providing security of a value and in a form that is satisfactory to Revenu Québec). Such an election requires that the suppliers register under the federal GST/HST regime as well.
The Budget emphasizes that the proposed registration rules will also apply to digital property and services distribution platforms (Digital Platforms) with respect to taxable supplies of incorporeal movable property or services received by specified Quebec consumers, where the Digital Platforms control the key elements of transactions with specified Quebec consumers, such as billing, transaction terms and conditions, and delivery terms.
In general, a Digital Platform will refer to a platform that provides a service to non-resident suppliers, by means of e-communication (e.g., an application store or website), enabling them to make taxable supplies of incorporeal movable property or services in Quebec to specified Quebec consumers. However, a Digital Platform will not be considered to control the key elements of transactions if the platform supplies only a so-called “transport service” (such as Digital Platforms operated by Internet service providers and telecommunications companies), a service providing access to a payment system, or an advertising service informing customers of various types of movable property or services offered by a non-resident supplier and links them to the supplier’s website.
The mandatory registration measure will only apply to Digital Platforms that control the key elements of transactions with specified Quebec consumers, where the value of the consideration for all taxable supplies made through the Digital Platform by non-resident suppliers to individual consumers in Quebec exceeds the threshold of C$30,000 over a 12-month period.
Non-resident suppliers whose Digital Platforms are already registered under the general QST registration system are exempt from registration under the new specified registration system. The Digital Platforms will, however, be required to collect and remit the QST applicable to taxable supplies of incorporeal movable property or services they enable non-resident suppliers (in other Canadian provinces or outside of Canada) to make to specified Quebec consumers. The Budget does not contain any additional details on the exact circumstances where such obligation will exist, including whether any control over the key elements will be required.
NON-QUEBEC RESIDENT SUPPLIERS
The Budget identifies a non-resident supplier subject to the new specified registration requirement above as being a supplier with no permanent establishment in Quebec and who does not carry on any business in Quebec. We anticipate that these terms will have the meaning given in the current legislation despite the fact that the Budget contains no confirmation to that effect.
SPECIFIED QUEBEC CONSUMERS DESIGNATED AS QST PAYORS
Meaning of “Specified Quebec Consumer”
It is proposed that a “specified Quebec consumer” will refer to a person who is not registered under the QST regime and whose usual place of residence is located in Quebec (e.g., an end-consumer). Typically, the usual residence is the place where the person regularly lives or the place where the person’s domicile is established. This rule will be more complicated to administer than the normal “place of supply” rules for GST/HST and QST, which can rely on the address that the supplier receives from the recipient in the normal course of business. The government will authorize non-resident suppliers to require two non-contradictory pieces of information, such as the person’s billing address or personal address, the IP address of the device used or another method of geolocation, payment-related bank information or the billing address used by the bank, information from a SIM card, the place of the person’s landline, or any other relevant information. The government advises Revenu Québec to remain flexible where a non-resident supplier’s business practices do not allow it to obtain the two non-contradictory elements of information.
Some administrative measures have already been proposed in the Budget, including the right for a specified Quebec consumer to recover the QST paid in error to a non-resident supplier from Revenu Québec or the non-resident supplier.
The government intends to enable consumers to access the list of non-resident suppliers that will be QST registered under the specified registration system. This should reduce abuse, according to the government. However, the government also intends to provide for a penalty provision where a specified Quebec consumer provides false information to avoid paying the QST. Such person will be liable to a penalty for each transaction in respect of which such information is provided and the penalty will be equal to the greater of C$100 or 50 per cent of the QST payable on the transaction in respect of which a recipient avoided or attempted to avoid paying the QST. Revenu Québec shall collect information from the non-resident suppliers to verify the accuracy of information provided by specified Quebec consumers. The government does not seem to be inclined to hold the non-resident supplier liable for not having verified the accuracy of the QST number provided by the Quebec recipient.
SPECIFIED REGISTRATION SYSTEM GOVERNING THE NON-QUEBEC RESIDENT SUPPLIERS’ ROLE
The aim of the specified registration system will be solely to ensure that non-resident suppliers collect and remit the QST applicable to their taxable supplies made in Quebec to specified Quebec consumers. Consequently, the existing general QST regime should not apply to registrants under the specified registration system (that is, a registrant under the new specified registration system should not be a registrant within the meaning of the QST general system). One material implication of this distinction is that non-resident suppliers under the specified registration system will not be eligible to claim an ITR in respect of property and services acquired in the course of their commercial activities. Similarly, recipients registered under the general QST registration system who pay QST to a non-resident supplier registered under the specified registration system may not recover, by means of the ITR mechanism, the tax thus paid. It should be noted that in light of the definition of “specified Quebec consumer”, a registrant under the general QST system should not have to pay the QST to a non-resident supplier governed by the specified registration system. This may lead to an adverse outcome for such a registrant where QST is paid in error to the non-resident supplier, as the recovery of the payment made in error from Revenu Québec may not be easily obtained.
The Budget states that the specified registration system will be sufficiently clear and accessible for non-resident suppliers to be able to readily comply with their tax obligations. The proposed system will also provide information on how the QST system works, so that non-resident suppliers know how the QST applies to the supplies they make and can better meet their obligations to register, collect and remit the tax. To this end, the government has promised to deliver, for example, a specified registration system that will be supported by a new Revenu Québec online service. QST returns will be filed electronically, necessitating a minimal exchange of physical documents and electronic QST remittances will also be allowed. The system should also provide for the option to remit QST collected in a currency other than Canadian dollars, although the government may eventually limit this to certain prescribed currencies. The information will be available in French and English. The government is aware that the simplicity of the registration system, including costs associated with it, will be a major incentive for non-resident suppliers to identify themselves to Revenu Québec.
The government has also announced that during the 12-month period following the date of application of the specified registration system, Revenu Québec will adopt a practical approach to compliance. Where non-resident suppliers show that they have taken reasonable measures to meet their new obligations, by, for example, making changes to their internal collection system, but are unable to meet these obligations, Revenu Québec will assist such suppliers and no penalty will be imposed. After this 12-month period, the penalties provided for in the existing tax legislation will be imposed on non-resident suppliers not having complied with the new obligations.
Finally, the Budget proposes that the reporting period of non-resident suppliers registered under the specified registration system for QST remittances collected on their supplies will be based on calendar quarters and filing for a given quarter shall be filed within the following month. Similar to registrants under the QST general system, non-resident suppliers will be required to keep records and supporting documents for six years after the last year to which they apply.
The proposed measures will come into effect on:
- January 1, 2019 for non-resident suppliers outside Canada (including for Digital Platforms used by such suppliers)
- September 1, 2019 for non-resident suppliers located in Canada (including for Digital Platforms used by such suppliers).
The legislation introducing the measures is expected later this year.
Quebec has shown leadership with various tax policies and tax measures. However, the measures described herein pose a new potential extra-territorial challenge to the government, as it relates to tax collection and compliance. The government’s legislative authority is also constitutionally limited to direct taxation within the province. The proposed measure may also raise constitutional concerns given their expansive extra-territorial application to non-residents who do not have any physical presence or significant activity in Quebec.
The government is aware of these difficulties, but considers that the status quo regarding the digital economy to no longer be acceptable. It also feels justified acting on the basis of OECD initiatives (namely, BEPS Action 1). The government is bolstered by the fact that other jurisdictions in the world have implemented such measures (i.e., Australia, New Zealand, Russia and Singapore) and major international suppliers (which would account for the majority of non-resident suppliers of incorporeal movable property or services), have demonstrated a willingness to comply. The government’s proposed measures will be viewed by many as a welcome step towards greater tax fairness and a leveling of the competitive playing field between businesses with a physical or significant presence in Quebec and those without. The government points out in the Budget that the proposed QST amendments are designed to maintain the integrity of the QST system in capturing e-commerce transactions that should otherwise be subject to sales tax. Such approach appears to be intended to support the government’s legitimacy to adopt the proposed measures when examined in light of its obligations under the Memorandum of Agreement Regarding Sales Tax Harmonization with a View to Concluding a Canada-Quebec Comprehensive Integrated Tax Coordination Agreement, which was signed in September 2011 with the federal government, and which took effect January 1, 2013.
It remains to be seen how the Canadian government’s decision to study the issue of whether a new digital tax regime is necessary in Canada, and its decision on whether to move forward with new tax measures, will impact the Quebec government’s proposed QST amendments. The Quebec government intends to consult and initiate discussions with other Canadian jurisdictions in the coming months. The extent of Quebec’s success as the pioneering provincial jurisdiction may depend on these discussions.