I. Introduction: Selling from the U.S. to Canada
In this article, we would like to go over the Canadian sales tax obligations for sellers who are selling from the U.S. to Canada. Canada has a growing population of 37M and is the biggest U.S. trading partner. Expanding north of the 49th meridian is on the list of a lot of successful online sellers in the U.S.
Canadian consumers are ripe for e-commerce with 80% of Canadians reporting shopping online in the last year with the average spend of $101 CAD.
Since Canada has a vast territory with a relatively low population, the Canadian federal government has more taxation and executive powers compared to the U.S. federal government.
So, in Canada, both federal and provincial governments are imposing sales taxes on their customers. To make the matter a bit tricky, some provinces have merged their provincial sales taxes with the federal sales taxes (hence the name Harmonized Sales Tax, or HST, below).
In this article, we will discuss when and what taxes you should charge when selling from the U.S. to Canada.
First, let’s go over some quick definitions:
- GST = Goods and Services Tax – 5% sales tax charged by the federal government of Canada
- HST = Harmonized Sales Tax – 13-15% combined provincial and federal sales tax rate
- QST = Quebec Sales Tax – 9.975% provincial sales tax charged by the government of Quebec
- RST = Retail Sales Tax – 8% provincial sales tax charged by the government of Manitoba
- PST = Provincial Sales Tax – 6-7% provincial sales tax charged by the governments of British Columbia and Saskatchewan
- CRA = Canada Revenue Agency – the organization responsible for enforcement of Canadian tax laws
II. Canadian Sales Tax Obligations for U.S. E-commerce Sellers
So, now let’s understand when and what Canadian sales tax you should charge on your Canadian sales.
You are obligated to charge your Canadian customers GST/HST sales tax when all of these are true:
- You carry on business in Canada
- You sell taxable supplies
- You are not a small business supplier
I would like to go over these important concepts to make them clearer.
Carry on business in Canada
Generally, your company is deemed to carry on business in Canada if it sells products to customers in Canada and is using Canadian-based resources to do so (e.g., warehouses, bank accounts, advertising, fulfilment). Whether your e-commerce business carries on a business in Canada is a question of facts.
The threshold to meet that test is very low.
If you ship products to Canadian customers from the U.S. without solicitation and don’t use any warehouse and bank accounts, then you are not carrying on a business in Canada.
However, if you ship through Amazon FBA, use any 3rd party logistics, Canadian bank accounts or use any local advertising, then you are considered to carry on a business in Canada and should register for a GST/HST account.
It is worth noting that the business activity of selling goods to Canada must be done regularly and continuously. Sporadic shipments to customers do not constitute regular and continuous business activity.
Selling of Taxable Supplies
Most goods and services sold by e-commerce sellers are considered to be taxable supplies by the Canada Revenue Agency. There are only a few types of local services that are directly exempt from GST/HST (e.g., toll roads, medical services, some medical devices, financial services).
So, this test is met by the majority of the online sellers who sell in Canada.
Small Business Supplier
You are considered to be a small business supplier if your sales in the last or last four (4) consecutive quarters exceeded $30,000 CAD.
If your sales were lower than $30,000, then you are not obligated to register. However, you can elect to register and collect sales taxes voluntarily.
So, when are you obligated to charge federal sales taxes on your orders from the U.S. to Canada?
To sum it up, if your e-commerce business is not a small business supplier AND does carry on business in Canada, then you are obligated to register for a federal GST/HST sales tax account.
Business Number Requirement
You will need to register for a Business Number (BN) with the Canada Revenue Agency. Your GST/HST account will be attached to your business number and will look like this:
123456789RT0001
Note that GST/HST is registered under one account. The province of customer’s residence will dictate what sales tax rate to charge for your product.
There is a manual application that needs to be filled out (Form RC1) and submitted to the Tax Service Office (TSO) assigned to your country or region. Here is the list of TSOs servicing sales tax inquiries and Business Number applications for most countries.
Note that once you open a Business Number and a GST/HST account, you will be obligated to file your sales tax returns every year by the assigned due date. The due date and frequency of filing will depend on the expected Canadian sales volume:
- $1,5M or less: Annual – return due three (3) months after the end of fiscal year-end
- $1.5M – $6M: Quarterly – return due by the end of next month
- $6M and over: Monthly – return due by the end of next month
If you registered but not collected any sales taxes, you are required to file a nil return. Otherwise, the CRA may issue a notional assessment on your business (that is the Agency will assess you based on what they think you owe).
Security Deposit Requirement
The Canada Revenue Agency (CRA) may require to provide a security deposit at the time of registration. This is done to ensure that the foreign e-commerce company does not disappear off the face of the Earth when there is time to file and remit Canadian sales taxes.
The CRA will request a security deposit if:
- You do not have a permanent establishment (i.e., physical presence) in Canada
- You estimate your annual sales in Canada to be more than $100,000
- Your net sales taxes will be more than $3,000
The amount of the security deposit is 50% of the estimated net sales taxes in the next twelve (12) months.
We have created this Google Sheet to summarize Canadian Sales Tax requirements:
Canadian Sales Tax Grid For E-commerce Sellers
Note: you will need a Google account to access this document.
III. Canadian Provincial Sales Taxes for U.S. E-commerce Sellers
On top of GST/HST, these four provinces impose additional provincial sales taxes on in addition to GST rates:
You are obligated to charge your customers in those provinces if one of these is true:
- Solicit to potential customers in that province (e.g., targeted FB ads, mail, focused PPC advertising)
- Hold inventory in warehouses or 3rd party logistics/prep centres (e.g., Amazon FBA)
If you determine that you are obligated to start charging your customers provincial sales in those provinces, you will need to register for a sales tax account with each of the provinces (by clicking the name of the provinces in the above list).
Each province will have different filing and registration requirements. Please consult their business information portals for the up-to-date information.
IV. Frequently Asked Questions by the U.S. E-commerce Sellers in Canada
What accounting software do you recommend to track Canadian sales taxes?
We recommend our e-commerce clients to track Canadian sales taxes using Quickbooks Online or Xero. Both of these support multiple sales tax rates as well as multi-currency transactions.
Does the U.S.-Canada Tax Treaty apply to sales taxes?
No. The U.S.-Canada Tax Treaty does not apply to sales taxes on either side of the border. It was designed to define taxation of certain incomes between the two countries (e.g., active business income, dividends, royalties) on the federal level. The treaty does not address any of sales tax obligations.
The treaty also does not address any provincial or state sales and income obligations.
What about my company’s obligations for income tax returns in Canada?
In addition to collecting and filing GST/HST and provincial sales tax returns, the Canada Revenue Agency (CRA) will expect your company to file corporate tax returns.
We discuss non-resident e-commerce sellers sales tax obligations in this article.
How long should I keep my records as an e-commerce seller in Canada?
You are obligated to keep your sales records for six (6) years after the end of the taxation year.
Do principles in this article apply to Amazon Sellers?
Yes. We discuss sales and income tax implication for Amazon Sellers in this detailed article.
What is your pricing?
Our current prices can be found on our pricing page. You can contact us here for any additional information.
V. References
https://www.canadapost.ca/web/assets/pdf/blogs/canada-post-growing-e-commerce-in-canada-2016_en.pdf
