On June 12, 2018, Québec’s Bill No. 150 received Royal Assent, allowing for sweeping changes in the treatment of Québec Sales Tax (QST) for supplies made by non-resident suppliers with no significant presence in Québec. These changes will be achieved through the use of a “specified registration system” (the “new system”), which was initially announced in the 2018 provincial budget. The first phase of the new system will be implemented on January 1, 2019.
Background
For some time, the Québec government has been focusing on tax evasion and the underground economy. As part of this focus, the province has determined that, each year, roughly $686 million in missed tax revenue results from international tax losses. Furthermore, it has been estimated that, in 2017, tax losses attributed to e-commerce totalled $270 million. This represents the single largest component of the estimated international tax losses. Of the $270 million, $227 million is the result of e-commerce transactions between international businesses and Québec citizens and $43 million is due to e-commerce sales made to Québec consumers by Canadian businesses located outside Québec.
Given that the QST legislation requires consumers to self-assess the QST whenever they make e-commerce purchases where the supplier does not collect the tax, it is clear, based on the estimated tax losses, that the Québec government does not have confidence in its current approach. As a result, new measures were introduced to help combat the loss of tax revenues where taxable supplies are made by vendors with no significant presence in Québec.
Mandatory registration for non-resident suppliers
The legislation passed amends an Act respecting the Québec Sales Tax (“QSTA”) to require certain non-resident suppliers of intangible personal property, services or goods to be registered under the new system. Registered organizations will not be entitled to any input tax refunds (ITRs) for QST paid, but will be required to collect and remit QST on taxable supplies made in Québec to certain consumers.
Intangible personal property and services
Suppliers of intangible personal property and services in Québec, which do not have a physical or significant presence in the province, will be required to register with Revenu Québec under the new system if the consideration for all taxable supplies made to persons in Québec, who may reasonably be considered consumers, exceeds a threshold of $30,000 over the preceding 12-month period.
In addition, digital property and service distribution platforms which enable taxable supplies of intangible personal property and services by non-residents will be required to register under the new system if such supplies are made to consumers in Québec and the value of the consideration for those supplies is in excess of $30,000 in the 12-month preceding period. Digital platforms would include any online platform that enables the transmission of taxable supplies of intangible personal property or services (i.e., a movie streaming service) to specified Québec consumers. Where a digital platform only supplies a transmission service itself, access to a payment system, or advertising services (i.e., by providing links to a non-resident supplier’s website), it will not be subject to the specified registration requirements. The new rules only apply to digital platforms that control key elements of the target transactions with non-resident suppliers, such as billing and delivery terms.
Non-resident suppliers located in Canada
Non-resident suppliers located in Canada registered for GST/HST that make taxable supplies of goods in Québec to persons reasonably considered to be consumers will also be required to register under the new system, where the value of the consideration for taxable supplies over the preceding 12-month period exceeds $30,000. Non-residents of Québec located outside of Canada that only make taxable supplies of physical goods, and are not required to register under the current QST rules, will not be affected by these new rules. Any applicable QST related to sales by these non-residents is collected by the Canada Border Services Agency once the goods cross the international border.
Specified supplier and Québec consumer
Where a supplier is registered under the new system, it will be known as a specified supplier and would be required to collect QST on any taxable supply made in Québec to a specified Québec consumer. As noted above, a specified supplier charging QST under the new system will not be entitled to claim ITRs on any QST incurred as part of their operations in Québec. The QSTA defines a specified Québec consumer as a person who is not registered for the QST and whose usual place of residence is located in Québec. Specified suppliers will be required to validate a consumer’s residency using two pieces of information that can reasonably support it, including, but not limited to, the consumer’s billing address, home or business address, the IP address of the device used by the recipient at the time of entering an agreement, banking information, and SIM card related information.
Rebate of tax paid
Under these new rules, a specified supplier will have to clearly indicate that the tax collected on an invoice is QST; however, specified Québec consumers will not be entitled to any ITRs on the tax paid. Any QST charged in error under the new system and paid by a specified Québec consumer should be rebated by the non-resident supplier. Where the supplier does not rebate the tax paid in error, the specified Québec consumer may apply for a rebate directly from Revenu Québec. Note that a QST registrant that pays QST in error to a non-resident registered under the new system is not eligible for this rebate (nor an ITR), and may only request a refund directly from the specified supplier.
Specified Québec consumers may also apply for a rebate directly from Revenu Québec in order to recover the tax where incorporeal movable property or services are invoiced with QST, but the use of these supplies is in a participating province, provided that the HST has been self-assessed. This rebate, however, will not be available to listed financial institutions, or selected listed financial institutions.
Effective date and other considerations
These measures will take effect on January 1, 2019, for non-resident suppliers located outside of Canada, and on September 1, 2019, for non-resident suppliers located within Canada. A non-resident supplier that may be subject to the new system can elect to register for QST under the general rules, where it otherwise satisfies the optional registration requirements. In such cases, the non-resident will also be required to register for GST/HST, if it has not already done so.
In addition, where a specified Québec consumer provides false information to avoid paying QST, they may be subject to a new penalty, which will be calculated as the greater of $100 and 50% of the QST payable on the transaction.
Potential complications
This legislation is not without some inherent risks and obstacles. First, non-residents will have to focus considerable attention on finding a cost-efficient way of identifying sales made to Québec consumers. Without this information, they will not be in a position to determine when they have exceeded the taxable sales threshold that would require them to register under the new system and, where they are registered, identify qualifying taxable sales made to specified Québec consumers. Non-residents will also face a greater administrative burden where they become registered under the new system in the form of collecting and remitting the tax, filing returns, undergoing an audit, and potentially navigating the appeal process where they don’t agree with an audit’s outcome. Additionally, specified suppliers will be required to obtain and maintain evidence concerning a customer’s residency, which may also prove burdensome.
Québec will have an entirely different set of challenges, including managing the compliance aspects of this legislation. This will be tricky, since most targets of the new rules will be located outside of Canada and enforcing compliance on persons with no presence in Québec without an ability to use the Canadian legal system to settle disputes may be an uphill battle. It has been suggested that this challenge may be addressed through the use of social media campaigns, where the province could identify non-residents not complying with the new requirements. Québec may also have difficulty identifying non-resident suppliers that are making supplies to consumers. Even where a non-resident can be identified, there may be difficulties when it comes to enforcement.
It is also possible that ITRs will be claimed by existing QST registrants where tax is charged in error by specified suppliers under the new system. This situation could easily create an exposure for a taxpayer making ITR claims. Where a QST registrant purchases a taxable supply, a non-resident registered under the new system should not charge the purchaser QST, and if the supplier charges the tax in error, it appears that the purchaser will be required to obtain a rebate from the supplier to prevent the tax from being an additional cost of the purchase. It will be interesting to see if Revenu Québec auditors will aggressively pursue this issue, and if ITRs claimed in error will be denied. Perhaps, the provisions requiring Revenu Québec auditors to audit to net tax will protect the ITR claims in this situation.
Another issue pertains to employee reimbursements. Employee expense reports could become a nightmare in respect of determining ITR eligibility, since some QST may be paid to suppliers registered under the new system.
Complexity and confusion often accompany substantial legislative change. We look forward to seeing how Revenu Québec addresses these concerns in the months leading up to implementation of the specified registration system.
More Information
Further information on Québec’s specified registration system can be found on the province’s website at: Quebec Non-resident Registration System
If you have any questions about how these QST changes might impact your organization, or to find out how Ryan’s QST specialists can be of assistance, please call the Ryan TaxDirectTM line at 1-800-667-1600.