Retail Sales Tax On Cloud Computing Services

In its 2025 budget, the Manitoba government announced significant changes to the province's Retail Sales Tax (RST). Starting January 1, 2026, RST will be expanded to many cloud computing services, such as software subscriptions, data storage and remote computer processing.

This is a significant policy shift aimed at modernizing the province's tax framework, ensuring it adapts to trends in the technology sector and digital service consumption. The change also aligns Manitoba's position on the application of RST to cloud computing services with other provinces, including Ontario and British Columbia, that have already implemented similar legislation, as well as with the Federal Government's position on the taxation of cloud computing services, which levies Goods and Services Tax (GST) on cloud computing services.

For businesses operating in or selling to Manitoba, this expansion has financial and administrative implications. Businesses impacted should understand the scope of these tax changes and take steps now to prepare. The Manitoba government has also published a bulletin (the Bulletin) providing guidance on the application of RST to computer software and online services.

What's changing under the new RST rules?

Previously, RST applied primarily to prewritten software and software delivered to a Manitoba user's device. Manitoba's new rules extend RST to cloud-based services, including:

• Software as a Service (SaaS): Applications accessed over the internet, such as office suites, design tools and customer relationship management software
• Platform as a Service (PaaS): Development platforms that allow users to build applications in the cloud
• Infrastructure as a Service (IaaS): Remote computing power, storage and networking infrastructure that are provided on demand

Video game subscriptions, cloud storage services and website hosting are included within the scope of the changes. Domain name registration and standalone website design remain exempt if purchased separately from the hosting services.

This expansion will align Manitoba with other jurisdictions that already tax cloud-based digital services.

Who is affected by the change?

The updated RST rules will impact a broad array of businesses and organizations:

• Manitoba businesses that subscribe to cloud-based software for internal use, including small businesses, professional service firms and large enterprises
• Software vendors and service providers — whether located in Manitoba or not — that sell or license digital products to Manitoba-based users
• IT consultants and vendors that offer bundled cloud and support services
• Multinational companies that manage province-wide or national software deployments that include Manitoba users

The RST also applies when cloud services are purchased for use on a device "ordinarily situated in Manitoba." For example, mobile phones are presumed to be in the province if they have a Manitoba area code.

How to determine use in Manitoba

Because software and cloud services are often used in more than one jurisdiction, the Bulletin provides that proration of RST based on only Manitoba usage will be allowed. For instance, if a subscription is used by 10 employees, and only four are based in Manitoba, the RST applies to 40% of the total subscription cost. The ability to pay RST on a proportional basis aligns with guidance set by other provinces charging RST on intangible software, such as B.C.

Businesses and vendors should develop a process to determine user locations. This may require keeping records on user locations to justify the proration if audited.

Custom software remains exempt

Despite the expanded tax base, custom software continues to be exempt from RST.

The Bulletin defines custom software as software that was developed solely to meet the requirements of a specific client and not offered to or used by other customers.

For example, if a software developer writes code from scratch or substantially modifies prewritten software exclusively for one business — and those changes are more expensive than the original product — the resulting custom software would likely be exempt.

All modifications should be carefully documented. If the cost of the modifications exceeds the cost of the prewritten software, or if the final product is at least twice the price of the original unmodified software, the exemption applies. However, this applies only to the portion of the invoice covering the modification.

Transitional rules and prepayments

Manitoba has carved out a prepayment exception to ease the transition into the incoming tax changes. Services paid for before January 1, 2026, are not taxable — even if the subscription period extends beyond that date. As an example, an annual cloud storage plan paid in full in December 2025 would not incur RST even if it covers all of 2026.

This transition offers a short-term planning opportunity for those affected. Businesses can review their current subscription terms or planned purchases to explore prepayment options and temporarily reduce their tax obligations.

New vendor requirements

Both resident and non-resident vendors will also be required to collect and remit RST on taxable digital services sold to customers based in Manitoba. For non-resident vendors, this may require registering for a Manitoba RST account, particularly if they have customers with devices and/or operations in the province.

Vendors who have not previously charged Manitoba RST should:

• Review customer addresses and device locations to determine whether RST is applicable
• Update any invoicing systems to apply the correct tax rates
• Ensure contracts and agreements account for RST, including outlining the responsibilities for tax collection and remittance

The Bulletin provides that these rules apply no matter where the vendor is physically located — if the service is used in Manitoba, it may be taxable.

How bundled services are treated

The Bulletin outlines that RST will apply to any bundled invoice that includes taxable and exempt components, unless exempt services are separately described and priced. Examples of this include:

• Bundling software access with technical support
• Packaging consulting services with a cloud subscription
• Offering training or onboarding with a platform licence

To keep exemptions for services like training or help desk support, vendors should clearly indicate these line items on invoices. If not, the entire invoice could be subject to RST.

Impact on technology budgets and procurement

Impacted organizations can expect a possible increase in costs due to these changes. Businesses can plan ahead by:

• Reviewing software budgets for 2026
• Assessing vendor contracts to determine if RST will be applied
• Looking for contract revisions or renegotiations, particularly for multi-year deals
• Evaluating bundling strategies, ensuring services are unbundled where possible

These changes may also affect competitive pricing for vendors, especially those competing with firms based in non-taxing jurisdictions.

What about resale and sublicensing?

If a business acquires software with the intention to resell or sublicense, the Bulletin provides that it may be able to defer RST, if it registers and collects tax on the eventual sale. Vendors must be careful about characterizing sales as "for resale" if they are providing access as opposed to ownership.

Future tax treatment and ongoing obligations

If software is customized extensively and meets the criteria for exemption, the Bulletin suggests that it would be treated as custom software for all future purposes. This means further modifications, support agreements and licence renewals are generally exempt from RST, provided they are related to the original customer.

However, if custom or customized software is later sold or licensed to a third party, it loses its exempt status and becomes taxable.

Key takeaways for businesses

With the 2026 implementation date coming, businesses should be preparing to manage these changes. Recommended actions include:

• Start planning now. The changes take effect in less than a year. Businesses should review contracts, vendor relationships and budgets to anticipate cost impacts.
• Audit your software subscriptions. Determine which services will now be subject to RST and evaluate whether prepayments are possible before January 1, 2026.
• Clarify if vendors are registered to collect RST, or if self-assessment is needed.
• Review invoices and contracts. Ensure exempt services are separately stated and that proper documentation exists to support tax treatment.
• Consult advisers. This is a complex area, especially for organizations using customized software or operating across multiple provinces.

Looking ahead

The expansion of RST to cloud computing services reflects a shift in how governments are responding to the growing digital economy. As digital services continue to dominate business operations, provincial tax authorities are moving to increase revenue from services that were previously untaxed.

Manitoba's new rules bring the province in line with other provinces across Canada — but they also raise practical issues about compliance, documentation and cost management for businesses, organizations and users.