GST/HST on International Transactions: What Canadian Businesses Need to Know

As global trade becomes more accessible, many Canadian businesses engage in international transactions, whether it's selling products and services abroad or importing goods from other countries. However, navigating the Goods and Services Tax (GST) and Harmonized Sales Tax (HST) rules on international transactions can be complex. This article will guide Canadian businesses on how GST/HST applies to international dealings, helping them stay compliant and avoid costly mistakes.

1. Exporting Goods and Services: Zero-Rated GST/HST

When a Canadian business sells goods or services to a customer outside of Canada, these transactions are typically classified as "zero-rated" under GST/HST rules. This means that while the business is required to charge GST/HST at a rate of 0%, they can still claim Input Tax Credits (ITCs) for the GST/HST paid on related expenses.

Key Points to Remember:

• Zero-rated transactions apply to most tangible goods exported from Canada, such as machinery, electronics, or raw materials.
• Certain services provided to non-residents are also zero-rated. Examples include consulting, legal, and accounting services, provided that the service is delivered outside Canada.

2. Importing Goods into Canada: Paying GST/HST on Imports

Canadian businesses that import goods from abroad must pay GST/HST at the time of importation. The tax is typically calculated on the total cost of the goods, including any duties and shipping fees.

How It Works:

• GST is levied at the federal rate of 5%, and HST applies in provinces that harmonize their sales tax (rates differ by province).
• Businesses can usually recover the GST/HST paid on imports as an Input Tax Credit (ITC) on their GST/HST return, provided they are registered for GST/HST.

Practical Tip:

Ensure that you keep detailed records of all imports, including invoices, proof of payment, and customs documentation, to properly claim ITCs.

3. Cross-Border Digital Products and Services

The digital economy has added new layers of complexity to international GST/HST rules. Businesses that provide digital products (such as software, streaming services, or online courses) or services (like cloud-based solutions or online consulting) to Canadian customers from outside the country may also be required to charge GST/HST.

Recent Changes:

• In July 2021, new rules came into effect requiring non-resident vendors and digital platform operators that sell digital products or services to Canadian consumers to register for, collect, and remit GST/HST on their sales.
• Canadian businesses purchasing digital products or services from non-resident suppliers may have to self-assess and remit GST/HST on these transactions.

4. GST/HST on Services Rendered Outside Canada

If a Canadian business provides services outside of Canada, GST/HST may not apply, depending on the nature of the service. For example:

• Services related to real property located outside Canada (such as property management or repair services) are not subject to GST/HST.
• Services related to goods situated outside Canada at the time of the service are also exempt from GST/HST.

Important Exception:

Services that are directly linked to property or goods within Canada, even if the buyer is non-resident, may still be subject to GST/HST.

5. Simplified GST/HST Registration for Foreign Businesses

Non-resident businesses selling goods or services to Canadian consumers can now benefit from a simplified GST/HST registration process. This allows foreign companies to register without having to establish a physical presence in Canada, streamlining compliance for global businesses engaging with Canadian customers.

6. Handling Drop-Shipping: When to Charge GST/HST

Drop-shipping, where a business arranges for goods to be shipped directly from a supplier to a customer, adds another layer of GST/HST complexity. If the drop-shipping arrangement involves international suppliers and Canadian customers, the business may need to charge GST/HST even though the goods never physically pass through Canada.

Example:

A Canadian business facilitating a sale between a foreign supplier and a Canadian buyer may still be responsible for collecting GST/HST on the transaction.

Conclusion: Staying Compliant with GST/HST on International Transactions

Navigating GST/HST for international transactions can be challenging, but it's crucial for Canadian businesses to stay compliant to avoid penalties. Understanding whether your business needs to charge, collect, or remit GST/HST depends on the nature of the transaction and the parties involved.

Key Takeaways:

• Exports are often zero-rated, but ensure you meet the criteria.
• GST/HST is payable on imports, and businesses can claim ITCs.
• Non-resident digital suppliers must comply with new GST/HST rules for Canadian sales.
• Services provided outside Canada may be exempt, but it depends on the specific service.

By staying informed about GST/HST obligations and maintaining proper records, businesses can ensure smooth operations both domestically and internationally. If you are unsure about how GST/HST applies to your international transactions, consulting with an accounting expert can help ensure compliance.