Changes to Quebec Sales Tax rules put collection onus on digital service providers
If doing business in Quebec was already tricky for companies residing outside of La Belle Province, it’s now become even more complex thanks to important amendments to provincial tax legislation.
Many organizations would be forgiven for missing changes to the Act Respecting the Quebec Sales Tax, which took effect on January 1, 2019. The amendments introduced new Quebec Sales Tax (QST) registration requirements for non-resident service providers and, for the first time, providers of digital services that maintain only a virtual connection to the province.
The changes will now oblige non-resident digital-based organizations, as well as software-as-a-service platform providers with no fixed address in Quebec, to charge and remit QST on service invoices, as well as some goods sold within the province. Previously, businesses that did not maintain a fixed business address in Quebec—an office or a production facility, for example—were exempt from charging their clients QST.
A Canadian tax first
The changes make Quebec the first jurisdiction in Canada to tax the provision of digital services by suppliers from outside the province. The only other jurisdiction to introduce similar rules is Saskatchewan, which now requires some non-resident vendors of goods or services to collect and remit PST.
Under Quebec’s revised rules, two new categories of businesses—‘Specified Suppliers’ and ‘Specified Digital Platforms’—have been created to widen the scope of organizations that qualify for QST remittance. ‘Specified Suppliers’ are organizations with no physical presence in the province, while ‘Specified Digital Platforms’ are defined as digital platforms that sell goods or services to consumers within the province. Now, qualifying companies with annual sales in excess of $30,000 will be required to register and remit QST.
Even non-resident firms with no substantial business connection to the province other than selling digital services will be required to comply with the legislation. To determine whether they qualify to remit QST, service providers must be able to provide customers’ residency information, such as a home or IP address.
Compliance challenges loom
Where it gets slightly more complicated is in the fact that out-of-province suppliers are required to register for QST based on sales to individual Quebec-based consumers (individuals who purchase SaaS-based products, for example), but must collect QST based on sales to specified Quebec consumers, which includes both individuals and corporations that purchase their goods or services totalling more than $30,000 in sales.
The law already applies to foreign companies that conduct sales in the province, and will take effect for Canadian suppliers and digital platform operators on September 1, 2019.
The revised QST remittance requirements will be familiar to Canadian organizations that do business in U.S. states that, in recent years, have implemented stringent tax-collection regimes to ensnare businesses deemed to have ‘nexus’ in their jurisdictions. In some cases, this may include digital sales, or activities as benign as passing cargo through that state en route to another.
The tax net widens continent-wide
This is very much a Pan-North American trend. In the digital era, jurisdictions are slowly amending their tax laws to capture service providers that maintain no physical presence in their territories—and likely never will—but to date have sold their goods or services to residents without having to collect and remit local taxes. As e-commerce volumes continue to grow and SaaS-based platforms become even more ubiquitous, we can expect the issue to be taken up by more state and provincial governments.
Although many CEOs have long raised concerns about doing business in Quebec due to language barriers and more cumbersome labour and employment laws, organizations outside the province shouldn’t see the new QST requirements as a deal-breaker that prevents them from catering to Quebeckers. While the rules do add another layer of administrative burden for time-pressed CEOs and their financial teams, collecting and remitting provincial sales taxes is relatively simple.
The benefits of a proactive, strategic approach
Our recommendation is to work with your chartered professional accountant to develop a compliant remittance strategy that makes sense for your business, and then communicate the change to your Quebec-based clients. While explaining that the QST amendments require your team to collect and remit the tax, leverage this communication to engage with those customers and perhaps update them on important product or service developments across your business, or other relevant news. In other words, view this as an opportunity to turn a pain point into a touch point to connect with your Quebec-based clients.
Most importantly, consider Quebec’s move a portent of things to come. We fully expect other jurisdictions to eventually follow suit and tax digital products and services in a similar way as governments continue their drive to find and collect new sources of revenue. Now is the time to put provincial sales tax contingency plans in place for when, not if, other provinces follow Quebec’s taxation lead.
Armando Iannuzzi, Partner
Contact us now for more information on Quebec’s QST changes or to speak with a member of our team.