Ottawa lacks at least $247 million in unpaid taxes
Sales charges on foreign digital products
OTTAWA • The federal government is losing out on at least $ 247 million in sales taxes on foreign digital products and services every year due to Canada’s outdated tax system that is “unfair” to Canadian businesses.
“For digital products and services, the Canadian sales tax system has placed Canadian businesses at an unfair disadvantage in relation to foreign vendors,” Auditor General Karen Hogan told members of the public accounts committee on Tuesday.
Canada’s new AG was summoned to discuss the results of a spring 2019 audit on Canada’s e-commerce taxation structure that concluded the tax system has “not kept pace” with the rapid growth of online sales.
The result: foreign vendors are not required to charge clients the goods and services (GST) or the harmonized sales tax (HST) nor remit it to the Canada Revenue Agency, contrary to what the vast majority of Canadian businesses have to do.
Instead, courier companies should collect those taxes on any foreign product worth over $20 entering Canada, which the AG found was not happening in many cases.
Furthermore, Hogan’s office concluded that in 2017, Canada had missed out on nearly $ 170 million in uncollected sales tax on digital products from foreign companies, such as streaming giants Netflix and Spotify.
Two years later and with the phenomenal rise in popularity of online services, that number has grown quickly, Hogan told committee members.
“We updated that information and estimated that the amount was approximately $ 247 million in 2019, an increase of almost 50 per cent in two years,” she revealed to MPS.
“The increase in e- commerce creates challenges for assessing and collecting the GST or HST. This is particularly true for physical products and for digital products and services, such as music and videos, that consumers in Canada purchase from foreign vendors.”
The principal auditor behind the 2019 audit, Philippe Le Goff, later said that the $ 247 million estimate was “very conservative” and losses due to unpaid taxes on foreign digital products and services could very well be much higher.
MPS were quick to balk at the updated figure, noting that the amount of foregone taxes on digital services in 2020, with the COVID- 19 pandemic pushing many Canadians to consume more online products, is likely even higher than the 2019 estimate.
“I believe the results of your audit are clear: the government is forgoing colossal revenues because of lax policies by this government,” said Bloc Québécois MP Maxime Blanchette-joncas.
For NDP MP Matthew Green, the 50 per cent increase in lost tax income between 2017 and 2019 was nothing less than “astounding.”
“And this is without the COVID variable that I think will lead to astronomical figures in 2020,” he added.
Her 2019 audit also concluded that the main departments responsible for ensuring all necessary taxes were collected on online purchases from outside of Canada — the CRA and the Canada Border Services Agency — failed to take many concrete steps to do so.
In CRA’S case, she also noted in 2019 that the agency lacked some of the necessary legal powers to better fight “non-compliance with tax laws.”
One year later, that has not changed.
“As of today, the Canada Revenue Agency does not have the legislative authority to require foreign vendors of physical and digital products sold in Canada to register for, collect, and remit the GST or HST,” Hogan noted.
The fact that Canadian tax laws still haven’t been updated to reflect the reality of increased online sales irked MPS from all opposition parties.
“This is disturbing for me to hear, because you’re telling me that this Liberal government has known about this for six years, and yet no action has happened,” NDP MP Matthew Green told the committee witnesses.
During the committee meeting, CRA Commissioner Bob Hamilton told MPS that when the audit was published last year, he thought that the agency was investing the proper amount of resources for the level of risk linked to the e- commerce sector.
But that risk level has risen considerably since the beginning of the pandemic, pushing the CRA to focus more resources on ensuring that sales taxes are collected on foreign products purchased online by Canadians, he added.
“E- commerce has grown rapidly over the last few years and increased more substantially in specific sectors during the pandemic as a result of non- essential businesses being ordered to close,” Hamilton said.
“The agency has developed an action plan to monitor and assess the elevated risks on an ongoing basis,” including a new strategy by December that he says will help CRA better detect and combat tax crimes for GST, HST and income tax.