Canada Business Taxation. Business Taxation in Canada
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Canadian Business Taxation (Page 3)
DISCLAIMER The information provided here is of a general nature and may not apply to any specific or particular situation. It is not to be considered as a legal advice nor presumed to be indefinitely up to date.
4. Taxation in the Technology Context
Software and Sales Tax
Provincial sales tax is levied on the sale of items of tangible personal property. Since some argument may exist the a software is not a tangible personal property, Ontario amended its Retail Sales Tax Act to cover computer programs as a good and made them subject to provincial sales tax. Off the shelf software is subject of the sale tax regardless whether software is delivered on a CD ROM, diskette, tape, or by electronic transmission. On the other hand, custom software designed and developed to meet the specific requirements of the purchaser is considered to be a service rather than a good and is not taxable. Custom software does not need to be developed “from scratch?and modifications to existing programs will also qualify for tax exempt status, provided the price of the modification is greater than the price of the pre written program. The federal government also makes a distinction between off the shelf software and all other software, to levy the federal GST. Under the current policy of the Canada Customs and Revenue Agency (CCRA), off the shelf software sold under a shrinkwrap licence is a tangible personal property. If a Canadian purchaser obtains such software from outside of Canada, he is acting as an importer and has to pay the GST at the time of importation. All other software is falling under definition of custom software, and deemed to be supplied to the purchaser's premises in Canada regardless of how and where it was actually delivered. E Commerce and Sales Tax Under Canadian tax law, foreign companies “carrying on business?in Canada are subject to Canadian federal income tax on all business income earned in Canada. A foreign business is a subject to Canadian income tax if it "solicits orders or offers anything for sale in Canada through an agent or servant." Thus, a foreign e commerce business could be found liable for Canadian taxation if it simply solicits goods or services to Canadian consumers via a website. The threshold for establishing a nexus to justify income taxation under Canada's domestic laws is very low. Non resident e commerce businesses could be subject to Canadian tax liability on any offer or solicitation of products into Canada. The tax threshold for source taxation changes substantially when the foreign e commerce business is a resident of a country that has entered into a bilateral tax treaty with Canada. E commerce income taxation in Canada depends on the characterization of income from the sale or transfer of certain intangible goods and services. The sale of computer software over the Internet to a Canadian purchaser generates revenue that may be treated as either a royalty or as a business income.If computer software revenue were found to be a royalty payment to a foreign vendor, CCRA would levy a tax on the gross amount of royalty. In such cases, the vendor's country of residence (residence country) levies further tax on the royalty payment in accordance with its domestic tax rules, but provides a credit to the resident vendor for foreign taxes paid. On the other hand, where computer software revenue is found to be a business income, CCRA’s treatment of such income would be different. If the recipient of the income is resident in a country that has a tax treaty with Canada, the source country will only be allowed to tax the business income if the foreign software vendor has a permanent establishment within Canada.