Bits, Bytes, and Taxes: VAT and the Digital Economy in Canada

The digital economy is expanding access to global markets and changing the way Canadians access content, order taxis, find accommodations and shop for goods. It has also made it possible to purchase digital goods and services over the Internet directly from suppliers located outside Canada just as easily as from domestic vendors. While this is useful for consumers, it complicates tax collection and raises competitive pressures for both domestic and foreign businesses. In particular, providers of digital products and services, ranging from e-books and online games to streaming services such as Netflix and Spotify, are not obligated to collect and remit sales tax if they are not “carrying on business” in Canada. Instead, the consumers of the service are responsible for determining and paying the associated GST/HST, though in practice they rarely do. This creates two major problems: Canadian businesses are being put at a disadvantage relative to their foreign competitors who are not paying GST/HST and governments are missing out on significant amounts of tax revenue. To address both problems, Ottawa should amend the Excise Tax Act to apply to businesses that supply digital goods and services for consumption within Canada regardless of where the company is located, in compliance with International VAT/GST Guidelines. There are many countries already employing policies that balance both coverage of the digital economy and the reporting requirements they impose on foreign businesses. Canada can learn from these policies and implement changes that work with our existing excise tax regulations. Delaying policy changes only prolongs the disadvantages that Canadian businesses face within their own borders and leaves tax revenue on the table at the expense of the Canadian economy.