Speaking with a few Canadian game developers recently, we found something strange going on with their payments from Microsoft. For the last couple of months, developers started receiving inconsistent payments for their Xbox One Store sales, where the amounts being deposited didn’t match the payment reports that Microsoft provided. Turns out the issue was related to sales tax on the Microsoft payments.
A Microsoft tax rep confirmed that they recently changed the way they make payments. Generally, Microsoft doesn’t pay sales tax on the royalty payments they make to developers, unless developers manually request it. Starting February 2018, they’ve implemented a system change that makes it easier for devs to get sales tax on their payments. However, they defaulted to paying HST on all payments to every single developer in Canada. That’s why you may have seen payment amounts that didn’t match your reports, or additional payments for seemingly arbitrary amounts.
Should I Be Charging Sales Tax on These Payments?
Since Microsoft is registered for sales tax in Canada, you may have to collect sales tax if your corporation is also registered. Take a look at our Guide to Sales Tax in Canada article to find out if you should register for sales tax.
Consider the transaction between your company and Microsoft, and let’s assume you’re both registered for sales taxes in Canada. Microsoft is paying you royalties in exchange for the product that you’ve provided them to sell. Since this transaction is between two GST/HST registrants, you need to collect and remit sales tax on it.
This is no different from a situation where you perform some consulting work for a Canadian corporation. You’d collect sales tax when invoicing them, just like you would for any other sale. The thing that may throw off a few people here is you’re not actually ‘invoicing’ Microsoft – instead they’re just sending you a payment.
Most developers we’ve spoken to have voiced their frustration at the game publishers. They’ve clearly done a very poor job of informing the developers that:
- despite being foreign companies, they are registered for sales tax in Canada, and
- there is a way for you to collect sales taxes on the payments you receive
On the bright side, this new system at Microsoft allegedly makes it much easier to collect HST on your payments.
Who’s Responsible for Sales Tax?
The responsibility to collect/remit sales taxes on revenue is on the seller. Because that can be confusing in this situation, let’s rephrase that as the person receiving the money. In this case, that would be you – the developer.
Keep in mind – whether or not you have to collect sales taxes on your transactions does not depend on whether Microsoft or Sony charges sales tax in their respective online stores to the final consumer. That is between the company and the CRA, and it’s a completely separate transaction. The only thing you need to worry about is whether you’re collecting sales tax on your royalty payments.
Since Microsoft sells to consumers all across Canada, the applicable rate is the highest HST rate of all the provinces – 15%. That means you’ll be receiving 15% HST on your payments.
The CRA has asked some game developers to collect HST on their royalty payments going back a few years. Unfortunately in this case CRA is well within their rights to demand this. You may need to ask Microsoft and Sony to pay HST on past payments.
If you’d like to get more information or have a specific question about your situation, send us a message on the chat window to your right, give us a shout, or just book a time and we’ll call you – no obligation. We’d be happy to help!