Does sales tax apply to online gaming?
The application of sales tax to digital supplies of goods, services and intangibles has become increasingly complex in recent years, and online gaming activities are no exception. With the addition of new regulatory requirements in the province of Ontario in Canada, navigating your way through this industry can be challenging. If you are in the gaming industry and wondering what is subject to tax, how the tax will be calculated and who is required to collect the tax, you are not alone. In this article, we will unpack the new requirements in Ontario and help you avoid being dealt a bad hand when working through these complexities.
Understanding Ontario's new igaming market
In Canada, only provincial governments can conduct and manage gaming activities—such as betting and games of chance—within their jurisdiction and they have established separate government entities to do so. The only exceptions are certain charitable organisations that are licensed to provide gaming activities within a particular province. Nevertheless, gaming players in Canada can gain access to platforms of offshore gaming operators that have no physical presence in or connections to Canada, other than the location of their players.
In April 2022, after extensive consultations with stakeholders, Ontario rolled out a framework to regulate the way online gaming operators can conduct activities within the province. iGaming Ontario (iGO), a subsidiary of the Alcohol and Gaming Commission of Ontario, was established to conduct and manage the online gaming relationship between the province and online gaming operators.
Under Ontario's framework, iGO is the entity that would make the supply of a gaming service to the players, not the online gaming operators. This means that private gaming operators registered with iGO would provide their services to iGO, while players would place their bets directly on the online gaming operators' websites.
What are the sales tax implications?
The new framework suggests that online gaming operators will receive a percentage of iGO's gross gaming revenue (GGR) as payment for the services the operators provide to iGO. We understand that iGO may become a “prescribed registrant” for Goods and Services Tax / Harmonised Sales Tax (GST/HST), which has the following implications:
- The activities of online gaming operators would be “commercial activities” for GST/HST purposes, which means that if an operator is not otherwise required to be registered for GST/HST purposes under the general framework (i.e., the original GST/HST registration rules, not to be confused with the simplified framework discussed below), it should explore whether it is eligible to voluntarily register to enable it to claim input tax credits to recover GST/HST paid on its inputs. The relevant facts for each entity must be considered on a case-by-case basis to determine each online gaming operator's GST/HST registration obligations and options.
- Online gaming operators would be “distributors,” which means their services to iGO would be deemed not to be supplies. As such, operators would not be required to collect HST on the revenue-share fee they receive from iGO. Instead, iGO would be required to self-assess and remit HST on its purchases of services from online gaming operators.
Gaming operators outside Ontario's framework
Online gaming operators not resident in Canada that operate outside the Ontario framework, but with players resident in Canada, may have an obligation to register for GST/HST under the simplified framework introduced on 1 July 2021 as follows (for prior coverage, see the article in the December 2020 issue of Indirect Tax News):
- In general, nonresident entities not carrying on business in Canada and not registered for GST/HST under the general framework must register for GST/HST under the simplified framework if they supply more than CAD 30,000 of services and intangible property to Canadian consumers in a 12-month period. In this situation, the placing of a bet is considered to be a payment for a service supplied by the gaming operator to the bettor.
- Once registered under the simplified GST/HST framework, nonresident online gaming operators would be required to remit the applicable GST/HST embedded in the bets they receive. However, no input tax credits would be available in respect of pay-outs or other inputs, a condition of simplified framework registration. Uncertainties exist as whether the Canada Revenue Agency (CRA) would allow nonresident gaming operators in this situation to voluntarily register under the GST/HST general framework to be able to claim input tax credits in respect of pay-outs.
- The CRA has indicated it will take a practical approach where affected businesses can demonstrate they took reasonable measures to comply with their obligations under the simplified framework and exercise discretion in administering these measures during a 12-month transition period that ended on 1 July 2022.
- The Quebec tax administration imposed similar obligations on nonresidents supplying services and intangible property to consumers resident in the province in 2019.
We expect that other provinces within Canada are closely watching how Ontario's regulated framework is progressing and the revenue it is generating for provincial coffers. For now, we must wait and see whether other provinces choose to pull up a seat and join the game or whether they will fold and walk away. Meanwhile, online gaming operators, whether resident in Canada or not, should explore the options available to them based on their own unique circumstances.