The forecast suggests a significant uptick in organizations transitioning their applications to the Software as a Service (SaaS) model.
According to Gartner, there is an anticipated surge of 23%, equivalent to a $72 billion increase in 2018. SaaS model business owners have many advantages of rapidly scaling their customer base because SaaS services are not just limited to one country. Additionally, SaaS taxable in Canada, including in SAAS taxable in Toronto and British Columbia.
To understand this trend, it’s essential to define the SaaS Tax Canada, we’ve compilled some helpful information to aid your research.
Understanding Sales Tax in Canada
Similar to many modern economies, Canada imposes a federal sales tax known locally as the Goods and Services Tax (GST) at a fixed rate of 5% on businesses selling to its residents. This sales tax Canada applies to various items including tangible personal property like clothing and electronics, as well as professional services such as legal or accounting services.
For instance, if you operate a shoe store in the Northwest Territories and sell a popular brand of sneakers for C$130, the customer’s receipt will display a breakdown showing a C$6.50 GST charge in addition to the C$123.50 product cost. Additionally, SAAS taxable in Canada is subject to GST in applicable scenarios.
Federal Tax Applies To All Regions
Canada comprises ten provinces and three territories, with provinces holding more autonomy compared to territories, which are overseen by the federal government. Among these regions, four charge only the Goods and Services Tax (GST) without additional provincial or territorial taxes:
| Province or Territory | GST | PST | QST | RST | TOTAL |
| Alberta | 5% | N/A | N/A | N/A | 5% |
| Northwest Territories | 5% | N/A | N/A | N/A | 5% |
| Nunavut | 5% | N/A | N/A | N/A | 5% |
| Yukon | 5% | N/A | N/A | N/A | 5% |
Tax Implications on SaaS Model
Over 40 countries have adopted sales taxes on digital goods and services. In Canada, the sales tax system operates under the “place of supply rule.” This rule determines whether the goods and services are supplied to a province that utilizes the Harmonized Sales Tax (HST) or not. In provinces not using HST, the Goods and Services Tax (GST) is applied.
However, if the goods and services are supplied to a country outside Canada, neither GST nor HST is charged. Transactions between provinces can complicate matters under the area of supply rule. For example, if a person in Quebec accesses a SaaS application from a provider in Ontario utilizing Amazon Web Services, determining the tax jurisdiction can be intricate.
If the service is accessed from outside Canada, implying sales by a non-resident Canadian, it is zero-rated, meaning no sales tax is applied. However, if the non-resident operates within Canada, they must register for GST/HST, and the company must charge the applicable tax accordingly.
Additionally, SAAS taxable in Toronto and throughout Canada is subject to SAAS tax Canada regulations, which may include GST or HST depending on the location of the customer and the supplier.
Sales Tax for Small To Medium-Sized SaaS Companies
In 2019, a Canadian report revealed a loss of C$69 million ($51 million) in indirect taxes in 2017 due to the absence of taxation on nonresident digital services. Foreign digital companies were not subject to the same taxes as local businesses, leading to perceived unfairness by Canadian business owners.
Consequently, in 2021, tax rules were amended to include foreign digital companies, such as SaaS businesses. Previously, if you operated an American communications platform and sold to Canadian residents in New Brunswick and Nova Scotia, you wouldn’t have been liable for sales tax.
However, post-2021, a 15% tax would be imposed on each sale, as both provinces are within the harmonized tax system (5% GST + 10% PST). Additionally, you must adhere to the following requirements moving forward:
- When and How To Register For Sales Tax
If your SaaS business serves Canadian customers, you must register for GST/HST along with any applicable regional sales taxes.
For GST/HST registration, you can choose between the simplified or normal method based on your annual revenue.
The simplified method is tailored for small businesses with annual revenues of C$1 million or less, offering simplified rules and reporting requirements. This includes remitting payments quarterly instead of monthly, and potentially using a different currency for payments.
On the other hand, the normal method is for businesses surpassing the C$1 million threshold, involving more detailed reporting and charging procedures. Unlike the simplified method, you can claim Input Tax Credits (ITC) with the normal method, which can alleviate your sales tax burden, particularly beneficial for larger companies looking to offset their costs.
Furthermore, you have the option to voluntarily register for Canadian sales tax before reaching the threshold.
If your business sells to Canadian residents in regions with dual-tax systems, you must separately register for their respective sales taxes. Below are links to the relevant registration portals:
- Saskatchewan: saskatchewan.ca
- British Columbia: etax.gov.bc.ca
- Quebec: revenuquebec.ca
- Manitoba: residents.gov.mb.ca
- Threshold to Pay Sales Tax
SaaS businesses must remit GST or HST in provinces or territories with these taxes if their sales surpass C$30,000 over a 12-month period.
Furthermore, if you sell to Canadian customers in regions with dual-tax systems, you should be aware of specific thresholds and register once you meet them:
- Saskatchewan: No threshold
- British Columbia: C$10,000
- Quebec: C$30,000
- Manitoba: No threshold
Upon exceeding these thresholds, you are required to commence payment of the respective sales tax rates. However, GST payments commence only upon reaching the federal threshold of C$30,000.
For instance, if you sell accounting software to customers in British Columbia, once your sales exceed C$10,000, you must start remitting the provincial sales tax of 7%. As your business expands and surpasses the C$30,000 threshold, you also become liable for GST (5%). Consequently, you will collect sales tax for both, totaling 12% onwards.
- B2B vs. B2C
In Canada, the Goods and Services Tax (GST) and Harmonized Sales Tax (HST) are solely applicable to Business-to-Consumer (B2C) sales. For Business-to-Business (B2B) transactions, such as selling SaaS services to Canadian businesses, there’s no requirement to collect or remit sales taxes.
For instance, if your SaaS company provides project management software and sells a subscription to a Canadian marketing agency (B2B), you won’t collect GST or HST. Instead, under the reverse-charge mechanism, the marketing agency assumes liability for the relevant sales tax. However, it’s crucial to verify that they are properly registered to handle these taxes. Key steps include:
- Clearly communicate their tax responsibility.
- Confirm their registration on the GST/HST registry.
- Note their tax responsibility on your invoices.
Regarding the dual-tax system, regional sales taxes are only applicable in B2C transactions except for British Columbia. In British Columbia, both B2B and B2C transactions are subject to provincial sales tax.
Sales Tax for Multinational SaaS Companies
Following the implementation of new tax laws in 2021, the Canada Tax Agency has mandated a 3% digital sales tax on digital multinational companies. Effective from January 1, 2024, this tax applies to foreign businesses meeting either of the following criteria:
1. Global earnings: If their total earnings from all sources globally exceeded 750 million euros or more in the previous year.
2. Revenue in Canada: If the revenue generated from providing digital services to Canadian online users surpassed C$20 million ($14 million) in the current calendar year.
Suppose you own a business specializing in virtual collaboration tools, and your company has been actively selling services to Canadian customers over the past year. With substantial growth, you realize that your multinational SaaS company now surpasses one of the aforementioned thresholds. Consequently, your business is obligated to include a 3% digital sales tax on all transactions.
Final Thoughts
In Canada, sales tax regulations vary depending on the location of your business and the customer. However, the GST tax applies to businesses that have a physical presence in Canada. Quebec and Saskatchewan are the two provinces that tax digital services so far. SaaS model business owners have many advantages of rapidly scaling their customer base because SaaS services are not just limited to one country. Additionally, SaaS taxable in Canada, including in Toronto and British Columbia.
FAQs
1. Is SaaS taxable in Canada?
Yes, SaaS services are generally subject to sales tax in Canada, including the Goods and Services Tax (GST). However, specific tax regulations may vary by province, so businesses should ensure compliance with local tax laws.
2. Is SaaS subject to sales tax in CA?
Yes, SaaS services are subject to sales tax in Canada. The taxation of SaaS falls under the purview of Canadian tax regulations, including the GST, which applies to businesses providing digital services to Canadian customers.
3. Is software subject to GST in Canada?
Yes, software, including SaaS, is subject to the Goods and Services Tax (GST) in Canada. As a digital service, SaaS falls under the category of taxable goods and services, requiring businesses to comply with GST regulations when providing their services in Canada.
4. Are SaaS services taxable in Canada?
Yes, SaaS services are taxable in Canada. Businesses offering SaaS solutions are required to collect and remit sales tax, such as the GST, on their services in accordance with Canadian tax laws and regulations.
5. Is SaaS taxable in OK?
The tax regulations regarding SaaS services in Oklahoma may differ from those in Canada. It’s advisable for businesses to consult local authorities or tax professionals for precise information on SaaS taxation in Oklahoma, ensuring compliance with state tax laws.