AG estimates millions lost due to lacking e-commerce tax regime
OTTAWA – The federal government has failed to keep up with the pace of the changing digital marketplace and as a result has likely lost out in millions of tax revenue, according to Canada’s auditor general.
Canadian businesses have been placed at an unfair disadvantage compared to foreign e-commerce businesses as a result of the lacking regime, the audit from interim auditor general Sylvian Picard found.
This means Canadians who buy local are sometimes paying more than they would if they were to purchase from foreign businesses that are not required to charge Canadian sales tax.
The report focused on whether the sales tax system for e-commerce treated all vendors equally when it comes to GST and HST, and found that in 2017 Canada lost an estimated $169 million in GST on foreign digital products and services sold in Canada.
With more and more Canadians shopping online, both for physical products and digital products and services, such as ride-sharing or video-streaming services, the report notes that the current tax system is not fully capturing the sales taxes owed.
During a media availability about the report, experts from the auditor general’s office said that they couldn’t specify which e-commerce companies may be among those improperly reporting sales tax, citing confidentiality.
This audit looked at the roles the Canada Revenue Agency, Canada Border Services Agency, and Finance Canada play in ensuring compliance, collecting sales tax on cross-border shipments and implementing relevant tax policies, respectively.
It found that Finance Canada was on top of the impacts of e-commerce and was aware of the impacts to Canadian companies and consequences of not taxing foreign digital products and services, such as unfair competition and lacking incentive to set up shop in Canada.
However, the CRA is lacking the legislative authority needed if it wants to collect these taxes fairly, or obtain third-party information to detect or deter future cases of non-compliance. For example, the audit found that the CRA is not doing much to ensure that e-commerce vendors, such as short-term accommodation-sharing companies are collecting and remitting sales taxes when required.
"In one case, the Canada Revenue Agency had to get a federal court order and needed two years to require a payment processing company to disclose information about business account holders that received or sent a payment through their accounts,” the report states.
The CRA has flagged digital commerce as one of the top three risks as part of its 2018-19 corporate risk profile, though the auditor general’s office found that little has been done since to manage that risk. Responding to the AG’s findings, the CRA notes that it expects the e-commerce sector to continue to grow and will be developing a focused compliance strategy to better detect and address the gaps in GHT/HST compliance.
Similarly, the auditor general is recommending that CBSA step up its monitoring of the low-value courier shipment program, to make sure that the appropriate sales taxes are declared and remitted by the courier companies when small packages are delivered to Canadians. For example, the number of small courier-shipments, such as an online order for an item $20 or less from a U.S. store, have increased by 4 million between 2016 and 2018 and the CBSA did not examine this increase.
CBSA said that it intends to refine its e-commerce strategy before the end of the year, and will be seeking the authority and funding from the federal government to better regulate its shipment data.
"E-commerce is expanding rapidly. The Canadian sales tax system must keep pace with e-commerce and adapt to the challenges and opportunities it presents. The tax base must be protected so governments can fund vital public services, such as social programs,” the report states.
In a joint statement responding to the report, National Revenue Minister Diane Lebouthillier and Ralph Goodale, who is the minister responsible for the CBSA, said they welcome the findings and recognize that “online shopping is now a mainstay for Canadians, as well as Canadian businesses of all sizes,” and as such are taking steps within both the CBSA and CRA to reflect the changing landscape.