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In March of this year, the Office of the Auditor General of Canada issued a series of reports, including Taxation of E-Commerce. That report looks at the results of an audit of the Canada Border Services Agency—on which this article will focus—the Canada Revenue Agency and the Department of Finance Canada intended to ensure that the sales tax system for e-commerce is neutral (“treats all vendors equally with regard to the GST/HST”) and that the GST/HST tax base (“everything that is taxable”) is protected.
As the report notes, current legislative obligations related to the collection of GST/HST on e-commerce sales are complex and challenging. The ever-increasing volume of e-commerce shipments both exacerbates the challenges and increases the need for effective tax management. “The Canadian sales tax system must keep pace with e-commerce and adapt to the challenges and opportunities it presents,” says the report. Further, “the Government of Canada must ensure that everyone who should remit sales taxes does so and that the taxes are collected fairly and effectively.”
Current legislative obligations for the GST/HST in Canada are complex for vendors and consumers
Source: Reports of the Auditor General of Canada to the Parliament of Canada, Report 3 – Taxation of E-Commerce, Spring 2019.
While the audit examined several types of e-commerce products—digital products and services purchased online, supplies purchased online that are part of the sharing economy, and physical products imported into Canada after being purchased online—it is the physical products purchased online by Canadian consumers from foreign vendors that we are addressing in this article.
Overall, the audit found that the Canadian sales tax system is not keeping up with the advancing digital marketplace; the federal government is not assessing and collecting all applicable sales taxes on e-commerce transactions. This, according to the report, is putting “Canadian businesses at an unfair disadvantage in relation to foreign vendors” and may be encouraging “domestic vendors to move their operations abroad.”
The audit also uncovered that the CBSA “was aware that some courier companies were likely not remitting all sales taxes on low-value shipments into Canada” and that it did not act to correct this problem. “The Agency relied on the good faith of courier companies to declare and remit the sales taxes they collected from consumers. Even though the Agency had indications that courier companies did not declare the full taxes owing to the government, officials did nothing to resolve the issue.”
Under the Courier Low Value Shipment Program (applicable to products valued between $20.01 and $2,500.00), the importer or broker is responsible for assessing and collecting the sales taxes owing, and remitting the funds to the CBSA. However, because the CBSA was inadequately managing the program data, according to the report—collecting only consolidated summary information about sales taxes paid—it could not “automatically trace, compare, and validate information to confirm the sales taxes owed and to ensure the courier companies remitted the sales taxes to the government.”
The auditors found, as well, that, although the CBSA had determined back in 2009 that it needed an automated system to handle the Courier Low Value Shipment Program requirements, it had not implemented such a system.
Even after conducting compliance exercises between 2014 and 2018 to randomly sample shipments in the program that revealed a high number of undervalued shipments, the CBSA took no action to remedy the problem. A large increase in the number of declared non-taxable shipments (i.e., valued at $20 or less) from 2016-17 to 2017-18 was not analyzed to determine if the increase was valid or fraudulent.
The final major issue discovered through the audit relates to the collection of provincial sales taxes by the CBSA. The agency was found to be unable to track and validate provincial sales taxes remitted by courier companies or to collect the PST for courier shipments destined for a province with the PST but imported through a province with the HST.
The report recommends that, “as soon as possible, the Canada Border Services Agency should review the Courier Low Value Shipment Program to improve the validation and collection of the GST, the HST, and the PST.”
The CBSA agreed with this assessment and to a review of processes within the Courier Low Value Shipment Program to improve the validation of taxes collected. Among its other commitments, the agency agreed to finalize its e-commerce strategy this year and a business plan with implementation timelines before the end of the 2019–20 fiscal year; seek authority and funding to regulate shipment data in advance and develop a reconciliation process by December 2019; renew its focus on compliance activities; and examine options to further automate the program.
In May, shortly after the Auditor General’s report was issued, the CBSA hosted a facilitated stakeholder-engagement workshop with participants from key industry associations, including CIFFA, major e-commerce players Amazon and Walmart, logistics and freight service providers, Canada Post, FedEx and UPS.
Asked “How might we facilitate trade as we keep up with the pace of e-commerce, while ensuring proper revenue collection, and the safety of Canadians?” the group focused on developing tactical ideas for the future. Three teams each generated a range of ideas, some of the most impactful of which were deemed to be:
- The development of CBSA’s system capability for data analytics and data traceability
- A single integrated CBSA solution
- The use of AI to expedite the process
- A trusted trader/recipient program
- Clarity on the regulatory framework for liability and penalties
- A paperless process, removal of manual steps
- A warehouse fulfillment program
- One set of requirements for all modes
Based on information gathered at the workshop, CBSA planned to immediately start to write a business case for a concept to expedite, simplify and secure e-commerce, using AI, preclearance and trusted traders; meet with the Department of Finance about funding; organize a meeting of the BCCC to talk about policy development; and identify risks and risk profiles.
The CBSA has also been involved in the drafting this year of the World Customs Organization’s Framework of Standards on Cross-Border E-Commerce, which establishes global guidelines for cross-border e-commerce.
Another initiative that will impact this area is being addressed through Bill C-100, “An Act to implement the Agreement between Canada, the United States of America and the United Mexican States.” The agreement proposes increasing the de minimus threshold from $20 to $40, raising the LVS threshold from $2,500 to $3,300, and improving the clearance option to include all modes of transit, not just the courier program.
Activity on many fronts has the CBSA now focused on streamlining processes, investing in infrastructure, undertaking proof of concept projects, seeking new authority through legislative and regulatory changes, and reviewing data and release requirements.
A concerted effort, involving key stakeholders, is under way to improve the efficiency and tax-revenue collection of Canada’s e-commerce market. Watch for updates in CIFFA’s daily eBulletins.