GST/HST & DIRECT SELLING IN CANADA
OPTIONAL RULES AVAILABLE MAY SIMPLIFY COMPLIANCE
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Canada’s Goods and Services Tax (the “GST”) and the Harmonized Sales Tax (the “HST”) for participating provinces can be a source of confusion for those unfamiliar with value-added tax system.
In this Direct Selling Report, we provide an overview of how GST/HST applies to Direct Sellers in Canada, including the optional Alternate Collection Method (the “ACM”) and Network Sellers Method (the “NSM”) – which were introduced by the Department of Finance as a result of lobbying by DSA Canada with the assistance of our firm.
GST 101 for Direct Selling Companies
Direct Sellers in Canada generally operate in one of two ways: (1) Buy-Resale Model - selling their products to an Independent Sales Contractor (“ISC”) for resale to consumers; or (2) Sales Rep Model – selling their products to consumers and paying a commission to the sales representative (“Sales Rep”) who arranged that sale. The key indicator of which model a direct selling company is using is who the consumer buys from.
Under the first model, generally the Direct Seller charges sales tax to the ISC and then, depending on whether or not the ISC is registered or required to be registered for GST/HST, the ISC will either have to charge tax to the consumer (in which case the ISC gets to claim an offsetting Input Tax Credit (“ITC”)), or not charge any tax to the consumer (in which case the ISC does not get to claim an ITC).
In the second model, the Direct Seller charges sales tax to the consumer. The Sales Rep only has to deal with sales tax if they are registered for GST/HST (or required to be registered) in which case they must charge the Direct Seller GST/HST on their commissions (which are a payment received for the service of arranging the sale between the Direct Seller and the consumer).
The ACM – for Buy-Resale Model Direct Sellers
Direct Sellers operating under the Buy-Resale Model may request Canada Revenue Agency (CRA) approval to use the ACM.
When an approval to use the ACM is in effect the Direct Seller charges and collects tax from all its ISCs calculated based on the suggested retail price (“SRP”) of the goods to a consumer, and the ISC generally collects that same amount from the consumer when they sell the goods. ISCs do not have to register for GST/HST and, whether registered or not, do not account for the GST/HST on sales of product or claim any ITCs on their purchases of product.
As an aside several of the provinces with Provincial Sales Taxes (“PST”) have optional programs that mimic the ACM, while others like British Columbia, have a mandatory version of the ACM.
The NSM – for Sales Rep Model Direct Sellers
Direct Sellers operating under the Sales Rep model may request CRA approval to use the NSM.
When an approval to use the NSM is in effect the commissions paid by the Direct Seller to its Sales Reps for arranging sales are not subject to GST/HST. However, the NSM has more complex eligibility requirements, and approval is generally only effective on the first day of the Direct Seller’s next fiscal year, which can sometimes make it more difficult to qualify for and implement the NSM.
rules might help simplify their GST/HST Compliance.
Experienced Counsel can help with this review!
Takeaways
Canadian Direct Sellers should periodically review their Canadian sales tax situation to: (a) determine if they can benefit from the simplified rules in the ACM or NSM; and (b) confirm they still eligible to use the ACM or NSM.
For help with how the GST/HST applies to Direct Sellers, please click here.