Is SaaS (Software as a Service) Taxable in Canada?

August 10, 2021 | Written by: Sohail Afzal

Software as a Service

It has been predicted that many of the organizations would shift their apps to the SaaS model. Gartner estimated a spike of 23%, which means an increase of $72billion in the year 2018

Firstly, we have to look at the definition of a SaaS model.

SaaS model is one in which software is hosted in one of the countries but can be accessed by customers worldwide when they purchase the subscription. The applications built on a SaaS model can be accessed from anywhere through the centrally hosted platform.

Tax Implications on SaaS model

More than 40 countries have implemented the sales tax on digital goods and services. The sales tax in Canada is based on the “the place supply rule.” This rule is to identify if the supplier has supplied the goods and services to a particular province, a province that uses the HST. In provinces other than the ones which use HST, GST is charged from them. When the goods and services are supplied to a country other than Canada, then the GST and HST are not charged. When the transactions take place from province to province, then the area of supply rule becomes complicated. For instance, there could be a person who is physically located in Quebec, but he wants to access the SaaS application from a provider based in Ontario and using Amazon Web Services.

When the SaaS service is used from a country other than Canada, which means when the sales are coming from a non-resident Canadian, there would be zero-rating. When the services are zero-rated, there is no sales tax on them. However, if the non-resident is operating from Canada, they have to register the GST/HST, and the company has to charge the applicable GST/HST.

The Digital Tax Laws in Canada?

The recent update regarding the tax on a digital product, which includes the SaaS model, is that Canada would implement a tax policy across the country to sell digital goods and services that non-resident vendors are selling.

If you are a non-resident vendor, and you think that you will make C$30,000 in B2C sales in one year, you have to register, collect, and remit the GST/HST.

The digital tax law is not very simplified because there is no single law that is accepted across the board. Two factors decide if your digital business is going to be taxed or not.

1- The location of your business

2- The province where your customer lives.

Conclusion

There is not one single rule of digital tax which could be applied all over Canada. The tax depends 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.

Sohail Afzal CPA Toronto

Sohail Afzal, CPA, CMA, MBA

Sohail Afzal, (CPA, CMA, MBA) is the founder & CEO of GTA Accounting Professional Corporation. He is a highly experienced Chartered Professional Accountant and businessman himself and understands the challenges that many businesses face when it comes to cash flow management. As an experienced business consultant & tax advisor, he is helping companies grow by providing the technical, financial, and contractual information necessary for strategic decision-making.

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