Canada - Expansion of Taxability Scope for Digital Products

The Canadian Province of British Columbia (B.C.) has clarified the taxation of digital products and services with its 2024/25 Budget and Fiscal Plan (Budget 2024). The BC Provincial Sales Tax Act (PSTA) amendments stand out among the several tax measures announced.

These amendments, in response to a decision by the B.C. Supreme Court, provide a clear definition of software for the Provincial Sales Tax (PST) and specify the effective date of the changes.

In Hootsuite Inc. v. British Columbia (Finance Department), the B.C. The Supreme Court (BCSC) decided that cloud storage, computing, and support services were not taxable. The BCSC distinguished software as a service (SaaS) and infrastructure as a service (IaaS) from taxable "software" under the PSTA.

Approach of the Ministry of Finance

The Ministry of Finance of B.C. issued a formal notice to the Suppliers and Buyers of the Cloud Software and related services as the logical and necessary response after the issuance of the court decision. 

In the Notice, MoF stated that they considered cloud computing services the right to access taxable software programs, a taxable telecommunication service, or both. Additionally, although all support services were not taxable, in cases where the support services included a non-incidental right to use software or a telecommunication service, the support service was considered taxable either in whole or in part.

With this Notice, the MoF announced further steps to introduce legislation to retroactively support how the PST was administered before the court decision.

To reflect Budget 2024 amendments, in February 2024, the MoF revised Provincial Sales Tax (PST) Bulletin 105 on Software and Provincial Sales Tax (PST) Bulletin 107 on Telecommunication Services, clarifying the definition of software and how PST applies to cloud computing products, web hosting, data backup services and to access fees for online databases.

The definition of “software” has been expanded to include IaaS, SaaS, application software, system software, video games, and mobile device apps.

As stated in Budget 2024, these changes became effective in April 2013, meaning they have over a decade of retroactive effect.

Conclusion

While MoF recommends that cloud computing service providers and their customers follow the guidelines provided in Bulletin 105 and Bulletin 107, the effects of these new rules remain to be seen, especially given their retroactive application.

However, businesses should pay attention to these new rules, determine how they may affect them, and consider whether registration for PST purposes for past years may be necessary.

Source: Provincial Sales Tax (PST) Notice, Provincial Sales Tax (PST) Bulletin 105, Provincial Sales Tax (PST) Bulletin 107, Budget and Fiscal Plan 2024