Do I Need to Charge GST/HST to Foreign Clients?

Canada imposes two main types of consumption taxes: the Goods and Services Tax (GST) and the Harmonized Sales Tax (HST). These are value-added taxes applied at various stages of production and distribution, ultimately borne by the end consumer. Applying these taxes becomes more intricate when Canadian businesses engage in transactions with clients located outside of Canada.

Understanding GST/HST Registration

Before a Canadian business can charge or collect GST/HST, it must determine if it is required to register with the Canada Revenue Agency (CRA). A business is required to register if its total taxable supplies, including zero-rated supplies, exceed $30,000 in any single calendar quarter or over the last four consecutive calendar quarters. This threshold applies to commercial activities carried out globally.

Taxable supplies encompass most goods and services provided in Canada, including those that are zero-rated. Even though no GST/HST is charged on zero-rated supplies, their value contributes to the $30,000 small supplier threshold calculation. Businesses whose taxable supplies remain below this threshold are considered “small suppliers” and are not required to register.

Businesses that exceed the small supplier threshold must register for a GST/HST account. Failing to register when required can lead to penalties and interest charges on uncollected tax amounts. Voluntary registration is an option for businesses below the threshold, which allows them to claim input tax credits (ITCs) for the GST/HST paid on their business expenses.

Claiming input tax credits enables registered businesses to recover the tax paid on purchases used in their commercial activities, even if their supplies are zero-rated. This reduces the overall cost of doing business. Businesses can register for a GST/HST account through the CRA website, providing details such as their business name, address, and business number.

General Rules for Exported Goods and Services

Most goods and services exported from Canada are considered “zero-rated supplies” for GST/HST purposes. A zero-rated supply means that while the supply is taxable, the GST/HST rate applied is 0%.

For goods, a supply is zero-rated when the Canadian supplier ships the goods directly from Canada to a location outside Canada. This includes instances where goods are sent by mail, courier, or common carrier, or when the recipient takes physical delivery of the goods outside Canada. For example, a Canadian manufacturer selling machinery to a U.S. company and arranging for direct shipment to the United States would zero-rate the sale. A Canadian artisan mailing a craft item to a client in Europe would also zero-rate the sale.

Services qualify as zero-rated when provided to a non-resident of Canada, provided the service is not consumed or performed in Canada. For instance, a Canadian marketing firm providing consulting services to a company based in Asia, with all work conducted remotely from Canada and delivered digitally, would zero-rate their invoice.

There are exceptions where services provided to non-residents are still subject to GST/HST. Services related to real property located in Canada, such as architectural designs for a Canadian building, are taxable even if the client is a non-resident. Services performed for an individual while they are physically present in Canada, like a medical consultation for a tourist, are also subject to GST/HST. Certain services, such as tour packages that include activities within Canada, may also be taxable.

Digital Products and Services Sold Abroad

The application of GST/HST to digital products and services sold to foreign clients follows the established zero-rating rules for services. Canadian businesses supplying intangible digital goods, such as software licenses, online subscriptions, or digital content, to non-residents treat these as zero-rated supplies.

Determining the residency of a digital client can be challenging but is important for correct tax application. Businesses rely on various indicators to establish non-residency, including the client’s billing address, payment information such as the country of origin for a credit card, or the IP address used to access the service. Consistent use of these indicators helps support the zero-rated status of the supply.

Scenarios can complicate the zero-rating of digital supplies. If a digital service provided to a non-resident is consumed or primarily accessed while the non-resident is physically present in Canada, that service may become taxable. For example, a non-resident purchasing an online course from a Canadian provider and completing the course while vacationing in Canada would make the service subject to GST/HST.

Documentation for Zero-Rated Sales

Maintaining thorough and accurate documentation is essential for Canadian businesses making zero-rated sales to foreign clients. This documentation serves as direct evidence to the CRA during an audit that the sales qualified for the 0% GST/HST rate. Without proper records, a business may be held liable for uncollected tax, along with potential penalties and interest.

Businesses should retain clear proof of the client’s non-resident status. This can include the client’s foreign address on invoices, contracts specifying the client’s location outside Canada, or records of international communication. For digital services, evidence like IP address logs or country codes associated with payment methods can support claims of non-residency.

When exporting goods, specific shipping and customs documents are essential. This includes bills of lading, international waybills, customs declarations, and export permits. These documents demonstrate that the goods physically left Canada and were delivered to a foreign destination. Tracking numbers from mail or courier services can also serve as proof of export.

For exported services, documentation should show that the service was performed outside Canada or not consumed within Canada. Contracts outlining the scope of work and the location of the service recipient are valuable. Invoices should explicitly state “zero-rated” or reference the applicable section of the Excise Tax Act that permits the zero-rating. Maintaining organized records for at least six years, as required by the CRA, ensures compliance.