Ecommerce Tax Guide for Canada
Selling products in Online Marketplaces has become very popular in recent years as sellers need less capital and can reach customers worldwide. The Canadian economy is well-adapted to e-commerce sales and is ranked the tenth largest markets for eCommerce, making it the goal of many sellers around the globe. Ecommerce sellers is facing a major issue in understanding their tax obligations when they sell both in Canada and in other countries. Business owners need to follow the tax jurisdictions of those countries if they decide to sell to international customers.
However, sellers need to be aware of two types of tax implications when marketplace participants sell or ship products to Canada: 1) Sales tax; and 2) Income tax from activity in Canada.
Sales Tax implications for 3P Sellers on Amazon.com
Depending on the province in which taxable goods are delivered to (location of the customer), the seller needs to collect the federal GST & HST at a rate that applies to the province varying between 5% and 15%. There are rules which provide that all Canadian retailers making sales in Canada, either through a physical location or over the internet, are required to be registered for GST/HST unless they are considered a small supplier. In addition, the Quebec Sales tax (QST) system is very similar to the GST/HST. Although the rules are generally harmonized with the GST/HST, you should note that it is a separate and distinct system governed by separate legislation and it is administered by Revenue Québec. As such, unlike the rules that apply to the participating provinces, if your business is registered for GST/HST, it is not automatically registered for QST. So, every individual, partnership, or corporation that makes a taxable supply in Quebec is required to be registered for QST as well.
As of July 1, 2021, the Government of Canada announced new obligations for digital economy businesses including digital platform operators such as Amazon, Etsy, Shopify etc. See earlier article on GST & HST Tax for digital services and goods.
Government expects that affected business and platform operators to comply with their obligations to register, collect and remit the GST/HST as set out under the new rules and legislative provisions to ensure that the GST/HST applies effectively and fairly to e-commerce transactions. But, even if you are not required to register, charge, and collect GST/HST, your customer may have to begin paying GST/HST to a digital platform operator on your supplies if they are facilitated through a digital platform. Some digital platforms such as Amazon include GST/HST in the monthly/ annual report while for some other platforms, it is required to get a detailed report and calculate the real amount collected for GST/HST.
Most of the online marketplace platforms can simply use the procedures for charging sales taxes. For instance, Amazon, Etsy and Shopify allow to manage the tax rates once the marketplace owner has confirmed that he/she is responsible for charging taxes. Most small business owners in Canada are not required to collect GST/HST if the sales are less than $30,000 threshold. If the sales in marketplace for the specific business has been more than the $30,000 in the past four quarters, the business must register for a GST/HST account, collect taxes on sales, and remit those taxes to the CRA.
Income tax implications
On the opposite of sale taxes which collect, hold and remit taxes to the government, income taxes are known as an expense to the business paid on the net income after deduction all allowable business expenses.
As discussed in our earlier blogs (https://www.pkfantares.com/carrying-on-business-in-canada/) a business is considered to be a resident for Canadian tax purposes if:
- The corporation is incorporated in Canada,
- The management of the corporation is in Canada
- The company has a permanent establishment in Canada
Businesses earning income from business carried on in Canada, will have to file a Canadian income tax return regardless of the size of business. The combined federal and provincial tax rates for non-resident companies ranges between 23%-31%, regardless of the amount of income. However, the net income may be protected by an applicable tax treaty between Canada and the businesses country of residence. Foreign Corporation carrying a business in Canada and will be required to file a T2 tax return (corporate return) along with Schedule 91 and 97. While, non-resident sole proprietorships and partnerships will have to apply for an individual tax number to file their business income using the forms T1 and T2125.
Accounting for e-commerce business
Bookkeeping and accounting are two main determinants of long-term success for all the business in general. In addition, the unclear tax laws and significant growth opportunities make bookkeeping and accounting to be vital in running the online business. Ecommerce needs to be treated as a separate business and to create a separate revenue projection, funding as well as inventory. Generally, e-commerce business owners face a challenge in:
- a) setting up the accounting system;
- b) dealing with taxation;
- c) working capital management;
- d) inventory management;
- e) tax complications with different tax rates, international duties & taxes; and
- f) shipping.
Sales tax rules are complex for an e-commerce business because the tax that you should charge is based on where your goods are consumed not where you ship from. Not all the provinces have the same sales tax, Alberta has GST, Ontario and Atlantic provinces have different HST rates and four other provinces has PST. Depending on the platform businesses using, there is a sales tax integration that will help customer to pay the correct amount of sales tax. Generally, ecommerce website platforms such as Shopify have apps that automatically calculate, charge and track tax amounts. Tax software helps e-commerce businesses streamline the process of calculating taxes by eliminating the need for owners to keep up with countless sales lax laws and rates that are constantly changing. Furthermore, these software assists business with filing returns, preparing for audits as well as managing payments. There are many taxes software options, but the most popular is Avalara as one of the top ecommerce tax compliance software which helps to manage customers worldwide.
Furthermore, it is required from the e-commerce business owners that shipment from overseas must ensure compliance with international regulations as well as notify the customers for the duties and taxes applicable to their order.
What the sellers need to know about international shipping:
- Rules and Regulations governing the shipment of your products across borders
- Basic understanding of how international duties and taxes work
- Manage and automate forms of shipping to various nations
- Navigate declaration and the customs process
- Comply with special regulatory requirements
Traditional accounting methods no longer work for ecommerce businesses, cloud-based accounting software is the glue that holds everything together from inventory management to sales tax compliance. Your accounting solution will help you to figure out the current level of financial health and profitability of the business. The business owner can utilize software like QuickBooks online, Xero and/or Wave to maintain essential features such as entering bills, reconciling bank transactions, and handling multiple currencies. Also, they can integrate perfectly with several universal apps used by e-commerce business owners.
When the owner already has so many challenges, a professional accountant can help to properly track the books in order and make sure you are compliant with tax laws. Also, it will help you to maintain accurate accounting records which is not just good practice, but it helps protect your business, and leads to higher growth.
This article provides general information about the rules of e-commerce taxation for Canadian and non-resident sellers. The situation may be different for each seller depending on the product they sell or different circumstances, so consult with competent tax professionals to navigate you through tax compliance challenges for your business.