Canada to join in sales tax holiday fun

Sales tax holidays have long been a compliance burden for retailers doing business in the United States. If the Canadian Senate approves a proposed sales tax holiday, retailers doing business in Canada will face similar compliance challenges starting December 14, 2024.

The Government of Canada announced a proposed “tax break for all Canadians” on November 21, 2024. To put more money into the pockets of Canadians, it explained, the government would be introducing legislation to provide for a two-month goods and services tax (GST)/harmonized sales tax (HST) break for groceries and holiday essentials. 

C-78, the Tax Break for All Canadians Act, was introduced in the House of Commons on November 27, 2024. The House approved the tax relief measure the following day in a 176-151 vote. As of this writing (December 11), the bill is still making its way through the Senate.

The clock is ticking. If the sales tax holiday is enacted, and if it takes effect December 14, 2024, retailers will have to scramble to be sales tax compliant. 

Fortunately, the Government of Canada has already provided some guidance for retailers.

A wide variety of transactions will qualify for the tax break if the Government of Canada enacts the sales tax holiday. 

Qualifying items include:

• Food
  • Prepared foods including salads, sandwiches, and pre-made meals
  • Snacks including baked goods, candy, and chips
  • (Many basic groceries are already tax-free)
• Beverages 
  • Non-alcoholic drinks such as carbonated beverages, juices, smoothies, coffee, and tea
  • Beer and malt beverages
  • Cider, wine, and sake that are 22.9% alcohol by volume (ABV) or less
  • Spirit coolers and premixed alcoholic beverages that are 7% ABV or less
• Restaurant food and beverages
• Children’s clothing and footwear
• Children’s diapers
• Children’s car seats
• Children’s toys
• Jigsaw puzzles (for all ages)
• Video game consoles, controllers, and physical video games
• Physical books
• Printed newspapers
• Christmas trees, Hanukkah bushes, and similar decorative trees

To be eligible for the tax relief, qualifying items must be both:

• Paid for in full between December 14, 2024, and February 15, 2025; and
• Delivered or made available to the buyer between December 14, 2024, and February 15, 2025

While most sales tax holidays in the U.S. apply only to business-to-consumer (B2C) sales, Canada’s proposed sales tax holiday will apply to qualifying transactions throughout the supply chain, including sales to manufacturers and wholesalers (B2B sales).

Items that don’t qualify for the tax break include:

• Alcoholic spirits and liqueurs
• Cannabis products 
• Dietary supplements
• Pet food
• Qualifying food and beverages when sold from a vending machine
• Adult clothing and footwear, even if purchased for a child
• Adult diapers, even if purchased for a child
• Children’s diapers provided as part of a diaper service
• Costumes and make-up
• Jewelry
• Specialized clothing and footwear (e.g., bowling shoes, ski boots, wetsuits)
• Collectibles not intended for play or learning, such as collectible dolls or hockey cards
• Toys and model sets marketed for adults
• Downloadable or online-only games
• Certain gaming accessories such as chairs or headsets
• Ebooks
• Downloadable audio books and electronic audio books
• DVDs, CD-ROMs, and Blu-ray disks with textual or visual information
• Address books, agendas, calendars, diaries, and similar items for writing on
• Holiday decorations that aren’t an actual tree, including Christmas tree decorations
• Poinsettia plants

Restaurants and delivery platforms will need to be particularly careful when updating their systems. The zero rate will apply to certain delivery charges but not to others.

When a restaurant or other eating establishment bills a customer directly for delivery of a prepared meal, the delivery service qualifies for the zero rate.

However, when a meal is ordered through a third-party delivery platform, the delivery is considered a separate transaction. Thus:

• Charges for the prepared meal are exempt
• Charges for delivery by a third party remain taxable

Transactions that include both qualifying and nonqualifying items pose a similar compliance challenge for retailers. 

For example, if a customer orders exempt prepared food along with a taxable whiskey, the seller must not apply GST/HST to the prepared food charge but must collect the applicable GST/HST on the whiskey.

The tax relief measure only applies to the GST and the HST, which is a combined provincial and federal tax. It won’t apply to standalone provincial sales taxes (PST) or to the Quebec sales tax (QST) unless provincial governments opt to adopt a provincial sales tax holiday.

HST is used in the provinces of New Brunswick, Nova Scotia, Ontario, Prince Edward Island, and Newfoundland and Labrador. Therefore, all eligible sales will be fully tax exempt in these provinces.

The following provinces levy a GST and a PST instead of an HST:

• British Columbia
• Manitoba
• Quebec (GST and QST)
• Saskatchewan

See a list of Canadian GST, PST, and QST rates.

Canada’s proposed sales tax holiday is set to run December 14, 2024, to February 15, 2025. It’s expected to save Canadians (or cost the government) approximately $1.6 billion CAD. The compliance cost to businesses is yet to be determined.

Businesses will be responsible for not charging GST/HST on qualifying goods and services in the event the proposed sales tax holiday is enacted. A temporary zero rate will apply, and per the Government of Canada, “zero-rated means that no GST/HST is charged when the supply is made because the tax rate is 0%.”

This may sound straightforward, but ensuring sales systems apply the zero rate to all qualifying transactions — and to qualifying transactions alone — will take time. And time is limited.

According to a survey of U.S. retailers conducted by Censuswide (on behalf of Avalara) in August 2024, last-minute sales tax holidays are a significant pain point for retailers. An astonishing 73% of the retailers surveyed reported difficulties in complying with sudden changes. 

Many of the surveyed retailers also incur additional costs as a result of sales tax holidays:

• 58% spend at least $10,000 annually on team, operational, and system processes to prepare for sales tax holidays

• 57% hire temporary staff to handle the increased demand and compliance rush

• 53% pay current employees overtime

The survey focused on U.S. sales tax holidays. However, the takeaways will almost certainly apply to Canada’s proposed sales tax holiday too. 

We’ll update this blog post as soon as we learn that Canada’s sales tax holiday is a go (or not).

Avalara cannot deploy the sales tax holiday to AvaTax until the bill passes, but we have created a custom rule template that customers can use as a stopgap. Contact your customer representative for more details.