OTTAWA — Online purchases have surged during the pandemic, but the federal government continues to lose out on hundreds of millions of dollars in potential tax revenue because the sales tax system has not adapted to e-commerce.
COVID-19-related restrictions have forced businesses to change their operations and consumers to shift purchasing habits online. Gaps and problems with Canada’s sales tax system have allowed foreign vendors who sell physical and digital goods and services in Canada to skip collecting and remitting the goods and services (GST) and harmonized sales taxes (HST).
Nearly 46.5 million physical low-value packages entered Canada between April and September under the Courier Low Value Shipment Program, according to Canada Border Services Agency (CBSA) statistics obtained by HuffPost Canada.
The figure marks an average 49 per cent increase compared to the same period last year.
Packages valued $3,300 or less are considered to be low-value shipments. The program is intended to give preferential tariff treatment to shipments below the $3,300 value and that originate in a country with which Canada has signed a free-trade agreement.
CBSA President John Ossowski gave an example of a qualifying low-value package to the House of Commons’ public accounts committee last week.
“Cell phone cases, little things that people are buying, and those types of things have increased dramatically in a pure volume metrics stance,” he said.
Anecdotally, he said Amazon has had a “huge impact” on the surge in import of low-value physical items and there are no signs of that trend stopping. “Year over year the volumes are growing tremendously,” he said.
Ossowski said the CBSA is still working on proposals to update its courier program to improve tax collection on packages Canadians buy from foreign vendors.
CBSA spokesperson Mark Stuart told HuffPost Canada that cell phone cases and others small items valued at $20 or less are exempt from duties and taxes.
“Therefore, there is no revenue loss associated with these goods,” he said.
“... when you’re a bricks-and-mortar retailer in Canada, you may be selling the same product but you have no choice but to sell it including sales tax from dollar one.”
The double standard in sales tax collection is hurting Canadian business owners, according to one small business advocate.
“There’s been a clear upsurge in low-value shipments which are likely due to people purchasing online and having come across the border,” said Corinne Pohlmann, senior vice president of national affairs at the Canadian Federation of Independent Business.
A good proportion of those packages coming across the border probably never pay GST, Pohlmann told HuffPost Canada.
She described the situation facing Canadian businesses as “a bit unfair given the fact when you’re a bricks-and-mortar retailer in Canada, you may be selling the same product but you have no choice but to sell it including sales tax from dollar one.”
A federal auditor general report last year concluded the country’s sales tax system is limited and creates unfair competition because foreign e-commerce vendors that sell products and services to Canadians are not subject to the GST and PST like Canadian vendors.
On top of poor data management, the report stated the CBSA “relied on the good faith of courier companies to declare and remit the sales taxes they collected from consumers.”
Indifferent officials added another layer of problems on top of blind trust.
“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,” the report stated.
The CBSA statistics are illustrative of a plight facing Canadian businesses competing with foreign vendors on an unequal playing field exacerbated by Canada’s outdated tax laws.
With regions in Ontario, including Toronto and Peel, adopting tougher COVID-19-related restrictions, it’s a scenario that’s particularly dire this year. Public health advice to reduce in-store browsing to curb potential COVID-19 transmission in crowded spaces has hurt small businesses and has led e-commerce sales to an all-time high.
Problems with outdated sales tax system pre-exist pandemic
Poor management of the CBSA’s low value shipment program was flagged by the auditor general last year for placing Canadian businesses, required to pay GST and PST, at an “unfair disadvantage” to compete with foreign vendors that do not.
The program, “designed for the clearance of express shipments,” failed to collect necessary data to enforce rules requiring courier companies to remit all sales taxes on low-value shipments imported into Canada under the program.
A moratorium was imposed after the release of the auditor general’s damning report, compelling the CBSA to commit to exploring ways to modernize the program to be more effective and responsive to the growth in e-commerce.
Stuart, the CBSA’s spokesperson, told HuffPost Canada the moratorium “is not linked — in any way — to the office of the auditor general’s report on the taxation of e-commerce,” adding, “the timing is coincidental.”
Hundreds of millions lost for Canada’s tax base
Similar to the increase in the number of physical low-value package shipments into Canada, more people are also buying digital goods and services, such as subscriptions to video and music streaming companies, Netflix and Spotify.
Last year’s auditor general report estimated a $169 million loss on the GST in 2017 on foreign digital products and services sold in Canada.
Auditor General Karen Hogan offered an updated figure to the House public accounts committee last week, referencing an almost 50 per cent jump in two years to approximately $247 million in lost tax revenue in 2019.
Watch: Auditor general says Canada lost at least $247 million in 2019 in sales tax revenue. Story continues below video.
“It is important for the Canadian sales tax system to keep pace with e-commerce and adapt to the challenges and opportunities it presents,” Hogan said. “This way, the tax base will be protected, so that governments can fund vital public services such as social programs”
Instead of giving the Canada Revenue Agency legislative powers to compel foreign companies to pay taxes on goods and services sold in Canada, the federal government tabled new legislation earlier this month proposing foreign-based web giants, such as Netflix and Spotify, to meet Canadian content criteria.
That number is expected to increase as online shopping continues to grow, pushing Canadians into an online marketplace with competitively priced digital and physical items from foreign vendors.
When asked Monday about the precarious situation facing many small businesses, Deputy Prime Minister Chrystia Freeland promoted the government’s new $20,000 Canada Emergency Business Account top-up, of which half will be forgivable.
Everyone can support small businesses in their community, Freeland said.
“We can support local small businesses by choosing to patronize the ones next door, maybe by ordering takeout from those restaurants that have had to close their indoor dining.”