Essential Tax Tips for Canadian Ecommerce Businesses!
Did you know that shipping your product to Canadian and other destinations can trigger a sales tax obligation in that jurisdiction?
If you run an ecommerce business, it’s crucial to learn a little about sales tax requirements – or - to hire an accountant who can help you navigate the complexities. (Guildstreet are ecommerce experts!)
Here are sales tax tips for ecommerce businesses in Canada focusing on sales tax for shipments.
Understanding Sales Tax in Canada
Sales tax in Canada can be broadly categorized into three types: the Goods and Services Tax (GST), the Harmonized Sales Tax (HST), and the Provincial Sales Tax (PST).
Goods and Services Tax (GST): 5% sales tax applicable across Canada.
Harmonized Sales Tax (HST): A combination of GST and PST, applicable in Ontario (13%), New Brunswick, Newfoundland and Labrador, Nova Scotia, and Prince Edward Island (all 15%).
Provincial Sales Tax (PST): A tax levied by British Columbia (7%), Saskatchewan (6%), Manitoba (7%), and Quebec (9.975%), which are all separate from the GST.
GST/HST is straight forward – you calculate both GST and HST and then remit both to the Federal Government.
Registration Requirements
First things first: if you run any business in Canada, including an ecommerce business, you need to figure out if you are required to register for GST/HST. Is your gross revenue more than $30,000 calculated over four consecutive calendar quarters (12 months)? Then you must register for GST with the CRA. This is true whether your business is incorporated or not.
Voluntary registration is possible if your revenue is below this threshold – and registration is truly beneficial if you need to claim input tax credits (ITCs) on business expenses.
Each Provincial Sales Tax jurisdiction has its own benchmark for small suppliers: If your gross sales is more than $10,000 for BC, Saskatchewan and Manitoba, or $30,000 for Quebec you must register and remit sales tax in each of those jurisdictions.
Collecting Sales Tax
When selling products online, it’s important to collect the appropriate sales tax based on the destination of the shipment. This shipment destination is what the CRA calls “source of supply.” As you read above, the tax rates and registration requirements differ depending on the province or territory where your customers are located.
Now, you might also be providing online services (another form of ecommerce) that are provided to customers in other provinces, but not shipped. Then the source of supply – the sales tax calculation location – is the place where your business does the work. For example, your Ontario office will charge 13% and your Alberta office will charge 5%.
There is another wrinkle – if you are invoicing your client for an event that takes place in another province, then the sales tax that you charge is the tax applicable to the province where the event took place.
Input Tax Credits (ITCs)
Registered businesses can claim Input Tax Credits (ITCs) to recover the GST/HST that you paid out on business expenses. ITCs can reduce the overall sales tax burden.
You must keep detailed records of all business expenses, including receipts and invoices, to support your ITC claims for tax filing. Yes, the CRA will ask for backup for larger expenditures. Also, Travel, Meals and Entertainment and Mileage expenses are all often reviewed.
Filing and Remitting Sales Tax
Regular filing and remittance of the sales taxes that you collected are mandatory. Review the frequency of filing for the sales which attract GST/HST and the filing requirements in each PST jurisdiction. Very often, the filing frequency is driven by your total annual revenue.
Ensure timely filing and remittance to avoid penalties and interest charges. Many ecommerce platforms offer integrations with accounting software to streamline this process. Be careful and be aware – the integrations are not always perfect. So be sure to review your sales data in your ecommerce platforms for each filing period and make sure that the totals match the amounts in your accounting software.
You can arrange with some ecommerce platforms to have them handle GST on behave of your business - some platforms will also handle PST. This is yet another set of arrangements to understand! There can be many variables for each platform.
This was a thumbnail sketch of the rules for business and shipments within Canada – the sales tax picture can be even more complicated if you are shipping to the US or Europe.
Dealing with International Sales
For ecommerce businesses that ship internationally, it’s truly important to be aware of the tax rules in the destination country. While GST/HST and PST are not charged on goods shipped outside Canada, the customer can be liable for customs duties, import taxes, state sales tax, or VAT (value added tax) in their country. Transparent communication about potential additional charges helps in maintaining customer satisfaction.
Keeping Accurate Records
Maintaining meticulous records – yes, we do mean copies of every receipt, invoice and payment - is essential for compliance and to support claims for ITCs. Records should include sales invoices, purchase receipts, and correspondence related to sales tax.
Electronic record-keeping is particularly useful for ecommerce businesses, ensuring that all necessary information is readily accessible – at your fingertips – ready for that inevitable CRA review.
Seeking Professional Advice
Since sales tax regulations are complex and subject to change, we do recommend hiring an accountant who specializes in ecommerce, to monitor and file your sales tax, and to provide valuable insights to ensure that your business is compliant.
An ecommerce specialist accountant can also help optimize your tax strategy and assist with any audits or queries from tax authorities.
If you are handling your own sales tax registration and filings, be sure to read, read, read! There is useful information on each jurisdiction’s website, and on the sales platforms’ websites.
Managing the cash flow
Paying sales tax (and income tax) is a requirement. We recommend setting up a separate savings account at your business bank where you can transfer the percentage of sales tax that you will need to pay (and also the percentage of income tax that you will need to pay) every time that you get paid. Doing this regularly means that you have a cash reserve at the end of each filing period.
For example, your client pays you $1000 which includes 13% HST (Ontario). When you receive the payment, transfer 13% for sales tax and 12.2% (Ontario small business income tax rate) into your savings account as soon as you receive the payment. This adds up to 25.5% or $243 to transfer into savings for that one invoice. It takes a little discipline to remember to transfer the cash every time, however never having to worry about being able to pay your tax bills is golden.
Conclusion
Picking through the sales tax requirements for ecommerce shipments in Canada requires a thorough understanding of GST, HST, and PST regulations. Ensuring compliance involves registering for the appropriate taxes, accurately collecting and remitting sales tax, and keeping detailed records.
With the right knowledge and professional guidance, e-commerce businesses can effectively manage their tax obligations and focus on growth and customer satisfaction.
Need more information? Contact Guildstreet at info@guildstreet.ca We are ecommerce experts!