Taxation of E-Commerce
Opening Statement to the Standing Committee on Public Accounts
Taxation of E-Commerce
(Report 3—2019 Spring Reports of the Auditor General of Canada)
17 November 2020
Karen Hogan, Chartered Professional AccountantCPA, Chartered AccountantCA
Auditor General of Canada
Madam Chair, thank you for this opportunity to discuss our report on the taxation of e-commerce, which was tabled in Parliament on May 7, 2019. Joining me today are Philippe Le Goff, who was the principal responsible for the audit, and Mathieu Lequain, who led the audit team.
As we see every day during this pandemic, the retail landscape in Canada is changing, and e-commerce is expanding rapidly. More people are making purchases online. The increase in e-commerce creates challenges for assessing and collecting the goods and services tax, or GST, and the harmonized sales tax, or HST. This is particularly true for physical products and for digital products and services—such as music and videos—that consumers in Canada purchase from foreign vendors.
It is important for the Canadian sales tax system to keep pace with e‑commerce and adapt to the challenges and opportunities it presents. This way, the tax base will be protected so that governments can fund vital public services, such as social programs. The Government of Canada must ensure that everyone who should remit sales taxes does so and that the taxes are collected fairly and effectively.
This audit focused on whether the Canada Revenue Agency, the Canada Border Services Agency, and the Department of Finance Canada ensured that the sales tax system for e-commerce was neutral and that the sales tax base was protected.
We found that the Canadian sales tax system did not keep pace with the rapidly evolving digital marketplace. We estimated that Canada had foregone $169 million in sales tax revenues on digital products in 2017. In preparation for this hearing, we updated that information and estimated that the amount was approximately $247 million in 2019, an increase of almost 50% in 2 years. For digital products and services, the Canadian sales tax system has placed Canadian businesses at an unfair disadvantage in relation to foreign vendors.
The Department of Finance Canada’s analysis of the sales tax system for e-commerce has shown that there is a risk that the current system could discourage foreign businesses from settling in Canada and encourage Canadian businesses to move their operations to other countries.
The Canada Revenue Agency and the Canada Border Services Agency have a role to play in ensuring that all taxes are collected and remitted to the government. We found that the agencies had not done enough work to make sure that this was happening.
As of today, the Canada Revenue Agency does not have the legislative authority to require foreign vendors of physical and digital products sold in Canada to register for, collect, and remit the GST or HST. In our audit, we found that the agency lacked the authority to implement compliance practices that have been effective in other jurisdictions, such as simplified registration. We also found that the agency had undertaken limited compliance activities to determine if vendors had registered for the GST or HST.
We also looked at how the Canada Border Services Agency managed the collection of taxes on low-value shipments imported through courier companies. We found that the agency could not validate the sales taxes received on these shipments. Its systems and processes were outdated, and it relied on couriers to remit taxes owing. It also did little work in response to warning signs, such as an unexplained increase in the volume of shipments valued under $20—and therefore not subject to tax—or audits showing the undervaluation of a significant number of shipments sent by courier.
We made 2 recommendations to the Canada Revenue Agency and 1 to the Canada Border Services Agency. Both agencies agreed with the recommendations. We were pleased to see that the Canada Border Services Agency included specific timelines in its response. The committee may wish to ask both agencies what progress they have made since our audit.
Madam Chair, this concludes my opening remarks. We would be pleased to answer any questions the committee may have. Thank you.