Selling Online in Canada – Tax Obligations You Need to Know

Selling Online in Canada – Tax Obligations You Need to Know

Selling Online in Canada – Tax Obligations You Need to Know 1920 1081 Baranov CPA

I. Introduction: Why Sell Online in Canada

Canada is the largest G7 country with a growing population of 37M people. Canada runs a developed market-driven economy. In addition, Canada is the biggest trading partner of the United States, the biggest economy in the world.

Selling online in Canada is the goal of many e-commerce sellers around the globe. The Canadian economy is open and well-adapted to e-commerce businesses. Moreover, Canadian consumers have healthy disposable income levels.

If you are planning to start selling and shipping your products to your Canadian customers, you will need to know your tax consequences.

E-commerce sellers, both from inside and outside of Canada, need to be aware of two types of tax implications when they sell and ship products to Canada: Sales Tax Implications and Income Tax Implications.

The Canadian tax policies are administered by the Canada Revenue Agency (CRA). The agency is enforcing the tax laws and collecting sales and income taxes on behalf of the Canadian government.

II. Canadian Sales Tax Implications for Online E-commerce Sellers

Similar to other countries, Canada imposes sales taxes on products shipped to Canadian consumers. The sales taxes are levied on a federal and provincial level. Canadian sales tax system is a mix of federal and provincial tax jurisdictions.

Some provinces have harmonized their sales taxes with the federal sales taxes (hence the name, HST – Harmonized Sales Taxes).

Some provinces do not impose any additional provincial sales taxes (Alberta).

Other provinces impose additional provincial sales taxes (Manitoba – Retails Sales Tax (RST); Quebec – Quebec Sales Tax (QST); Brtish Columbia and Saskatchewan – Provincial Sales Tax (PST)).

In order to understand what sales taxes to collect, you will need to know the product, place of shipment and place of destination (we go over these details in depth in this article).

In general, an e-commerce company will need to register to collect sales taxes from Canadian buyers if all of these are true:

  • You are deemed to carry on business in Canada
  • You are selling taxable supplies
  • You are not a small business supplier
Let’s go over these principles one by one.

Carrying on Business in Canada

The concept of carrying business in Canada is driven by the case facts of each e-commerce seller. They are no specific rules that define it. In simple terms, if you are undertaking business activity of any kind on Canadian soil for a profit, you are deemed to carry on a business in Canada.

For example, if you use Amazon FBA warehouses or any other 3rd Party Logistic (3PL) then you are carrying on a business in Canada.

If you are using local advertising to solicit your products, you are carrying on a business in Canada.

The threshold, as you can see, is very low.

However, the business activity must be done regularly and continuously. Sporadic shipments of products are not considered regular and continuous business activity.

Selling Taxable Supplies

Most of the goods and services in Canada are considered to be taxable supplies. Exempt supplies do not include any physical products (only specific services provided within Canada). So, e-commerce sellers who sell into Canada online are automatically selling taxable supplies.

Small Business Supplier

A small business supplier is defined as a business with worldwide taxable sales of more than $30,000 CAD in the last or last four (4) consecutive quarters.

If your sales were less than $30,000 CAD in the last or last four (4) consecutive quarters, your registration is optional.

Voluntary Registration

You can choose to register to collect and remit Canadian sales taxes.

The reason why some sellers may choose to register is when they provide zero-rated taxable supplies to Canadian consumers. Those sellers do not have to charge sales taxes on zero-rated supplies like basic groceries, agricultural products, prescription drugs, and certain medical devices.

However, if they register, they will be able to obtain a credit for sales taxes that they paid on Canadian products or services that they used to generate Canadian business income. The sales taxes that you can claim back are called Input Tax Credits (ITC).

For example, an e-commerce seller is selling hearing aids to Canadian customers and is a small business supplier. They are paying Canadian sales taxes of $3,000 for advertising and warehouse services. If they register they will be entitled to a refund from the Canadian government for $3,000 of Input Tax Credits.

Those situations are rare and are usually determined by the type of product and services you sell in Canada.

Business Number

If your e-commerce business is required to register (optionally or mandatorily) you will need to contact the Canada Revenue Agency and request a Business Number. Contact the assigned tax service office for your country to request a business number.

The Business Number will be used for all your communication with the CRA.

Security Deposit Requirements

If you do not have a permanent establishment in Canada, the CRA will request a security deposit when you will be registering for a Business Number if you estimate that you will be selling more than $100,000 annually and your net sales taxes will be more than $3,000.

The amount of the security deposit is 50% of the estimated net sales tax on expected annual sales in the next 12 months.

Most e-commerce business owners will not be required to provide a security deposit since their sales will be below this threshold. But some bigger e-commerce sellers will be subject to that requirement.

Filing Frequency and Due Dates

Your business will be assigned a filing frequency depending on the volume of taxable sales made in Canada.

  • $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
Most e-commerce sellers subject to Canadian sales taxes will be required to file annually.

If you are registered for a business number but have not collected or spent any sales taxes in Canada, you are still expected to file a nil return.

If you don’t file, the Canada Revenue Agency may issue a notional assessment based on what they believe you should have filed for your business. Your business will be liable for that amount until an actual return is filed.

III. Canadian Income Tax Implications for Online E-commerce Sellers

In general, your business is considered to be a resident for Canadian tax purposes if:

  • The corporation was incorporated in Canada.
  • The mind and management of the corporation are in Canada (i.e., directors and shareholders live in Canada).
  • The company has a permanent establishment in Canada (i.e., a fixed place of business).
In addition, if your business earned income from business carried on in Canada (see the explanation above), you will have to file a Canadian income tax return regardless if you are a small business supplier or not.

Canadian Controlled Private Corporations (CCPC) will be subject to a low 14-17% rate on the first $500,000 of income.

The combined federal and provincial tax rates for non-resident companies will vary from 25-31% regardless of the amount of income. However, your net income may be protected by an applicable tax treaty between Canada and your country of residence.

Most tax treaties will absolve companies from paying Canadian taxes if the corporation does not have a permanent establishment (i.e., fixed place of business) in Canada.

Required Tax Returns

If you are a foreign corporation that had carried on a business in Canada, you will be required to file a T2 tax return along with Schedules 91 and 97. If you are claiming a protection under one of the treaties you will need to specify specific sections of the treaty on those schedules.

Non-resident sole proprietorships and partnerships will have to apply for an Individual Tax Number to file their business income. Forms T1 and T2125 will need to be completed and submitted to the CRA by June 15th of every year.

U.S. – Canada Tax Treaty

E-commerce sellers who do business in one of the two countries and do not have a permanent establishment in Canada or in the U.S. are subject to the protection by the U.S. – Canada Tax Treaty.

Canadian e-commerce corporations selling in the U.S. with no permanent establishment will be filing forms 1120-F and 8833. Corporations will need an Employer Identification Number (EIN) from the Internal Revenue Service (IRS) in order to file their returns.

Sole proprietorships and partnerships will be filing forms 1040NR and 8833. These individuals will need an Employer Identification Number and Individual Taxpayer Identification Number (ITIN) in order to be able to file their returns.

On the north side of the border, U.S. e-commerce corporations selling in Canada will be filing forms T2 and Schedules 91 & 97. A corporation will need a Business Number (BN) in order to file their returns with the Canada Revenue Agency (CRA).

Note that LLCs are treated as corporations by the CRA.

U.S. sole proprietorships and partnerships will need to file T1 and T2125 for their income tax returns. In order to be able to file, these individuals will need to obtain an Individual Tax Number (ITN) from the CRA.

Late Filing Penalty

The corporate tax return from non-resident corporations should be filed after six (6) month from the corporation’s fiscal year-end.

Regardless, of the amount of tax owed, a foreign corporation will be subject to late filing penalty if a return is filed late. The maximum penalty is $2,500.

Keeping Books and Records

By law, non-residents are obligated to keep books and records in Canada for six (6) years from the end of the calendar year to which they refer.

IV. Conclusion: Selling Online in Canada

E-commerce business owners who are selling online in other countries are essentially operating a multinational company. The more your company gets involved in the country of destination, the more tax obligations and complexities arise.

What we have gone over here describes basic rules of e-commerce taxation for Canadian and non-Canadian sellers. Your situation may be different, so consult with competent tax professionals of your choice. This article is for general information purposes only.

Our recommendation is to fully understand your business objectives in Canada first. Once you are clear on how, to whom and what you are selling, things will become much clearer from the tax perspective as well.

V. References

https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/rc4027/doing-business-canada-gst-hst-information-non-residents.html

https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/p-051r2/p-051r2-carrying-on-business-canada.html

https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4058/non-residents-income-tax-2016.html

18 Comments
  • Hello,

    First I would like to thank you for all the help! Thanks.

    My question is this:

    I live in Alberta. If I sell a membership to my website to someone in Saskatchewan do I charge PST? Also if I was to sell a membership to someone in the states do I also have to charge the appropriate GST for the state the person is living in?

    I am not sure if the seller charges the taxes based on where they live or if the buyer pays the taxes based on where they live.

    If the answer to the above questions in the first paragraph are “yes” how would I go about filing for each state/province?

    Thanks.

    • As an AB business, you won’t have to charge SK PST on your sales to SK residents (only GST 5% in your case). Canada has destination-based (aka Place of Supply) sales tax system, so the correct rate is determined by the place where the goods/services are received.

      There are different registration requirements for PST in MB, BC, SK, and QC. MB, BC, SK would not require your business to register if you don’t have any physical presence in that province and do not solicit orders directly to customers in those provinces. QC has enacted different requirements this year (you can check my blog post on that below).

      https://baranovcpa.ca/quebec-tax-ecommerce/

      The US state sales tax system is far more complex. You will need to know your obligations state by state based on the volume and number of transactions your sell in each state.

  • Hi Boris. I found your site recently and it has answered many, many questions I could not find the answers elsewhere. Thank you!

    I am a sole proprietor of an online affiliate marketing and e-commerce store. I was taking an online course which instructed us to register our business so we could use the trade name. I now have a registered business with the CRA / Province. However, I am now understanding that I did not need to do that right away. I am definitely not going to have $30,000 in global sales this year.

    I am hoping you can help clear up some confusion:

    1. I just started the business May 15, have $0 sales (have not even started to sell yet), however, I do have various expenses from the setup which I paid US sales tax on. Was I required to file a tax return with CRA on June 15 to show nil income but claim the expenses?

    2. The e-commerce site will sell in the US and Canada (mostly print on demand items /Kindle/digital products to start). The majority of the focus will be on affiliate marketing from US companies, including Amazon.
    My questions for this are …

    a. as a sole proprietor with the registered business number… do I still use the W-8BEN or do I use the W-8BEN-E?
    Or because I will be selling digital products, and via US affiliate companies, would that make the income effectively connected to the conduct of business in the US and I should use the W-8ECI instead?

    b. I do not have an ITIN, so would I put my SIN as the Foreign Tax Identifying Number or my CRA Tax number since I registered the business?

    c. Could you please provide the Article & Paragraph Tax Treaty reference for W-8BEN box 10 for the sole proprietor? The claim percentage would be 0%? I did read your blog on the W-8BEN-E but that reference provided is for a corporation. I have been looking at the Tax Treaty for an hour and I cannot locate the correct Article & Paragraph for the sole proprietor for the W-8BEN form.

    3. As companies, like Amazon, are beginning to collect the sales tax to remit on behalf of the sellers and I will be at least a year if not longer before any of the other sales reach nexus thresholds in the various states, I have been told I do not need to register/file the sales tax in the US until I get close to those thresholds. Is this correct?

    Thank you so much for your help!
    Sandra

    • 1. You will need to file your 2019 sole prop business tax return (including all income & expenses) by June 15, 2020. You can claim legitimate business expenses as tax deduction on form T2125.

      2a. As a sole prop, you will need W-8BEN, when requested by your vendors.

      2b. That would be your SIN

      2c. Sole proprietor is not a separate legal entity. You would be treated as an individual from the tax treaty. The definition of a person in Article III 1 (e) includes both a natural person (individual) and a company.

      3. Generally correct, but you will have to monitor your unit counts for each state as well. For example, if you had more than 200 separate sales to residents of Illinois, you would trigger an economic nexus and be obligated to register and collect.

      Hope that helps Sandra.
      Boris

  • I have an online membership and charge a minimal membership fee to members from around the world. The revenue will be aprox 15K us this year. The majority of my members 20-30 are in the us but have one from Estonia, one from South America, another from Germany etc – none of my members are in Canada. I assume I don’t have to charge GST, and I was planning on claiming the income on my personal taxes, BUT the question is would I have to file in the US too?

    Thank you

    • If you don’t source regular and continuous revenue from the US economy, you don’t have Effectively Connected Income, hence no obligation to register and file.

  • 1- If we are a US company who sells and transmits software over the internet (no physical disc) to a Canadian based customer(business) are we obligated to collect GST on the sale? (assume 500K sales)

    2- Related question- If we pay a consultant who works in Canada are we obligated to collect GST on the payment to them?
    Does this change if they are a corporation? To be clear they are not an employee of our corporation.

    3- From the above do we have a Canadian Income tax filing requirement?

    Thank you

    • 1) The requirement to collect and remit Canadian GST/HST will depend on the level of involvement of your company in Canada. If you are simply forwarding orders then you don’t need to collect. If you are using Canadian warehouses, bank accounts, etc then you would be deemed to Carry On a Business in Canada and would be subject to Canadian income and sales tax laws.

      2) Not sure I understand. The collection requirement is determined by the legal entity (regardless if it is a corporation or a sole proprietorship). If your Canadian contractor is a GST/HST registrant, then s/he should collect GST/HST on top of the invoice amount.

      3) It depends on a lot of criteria. Please refer to this CRA article that discusses the factors that will impact the registration requirements:

      https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/p-051r2/p-051r2-carrying-on-business-canada.html

  • Hello,

    Our company does not sell a product – but an international tour (Peru, Sri Lanka, Costa Rica). My business partner and I are based in Canada and operate our online business (no physical location) from Canada, but we do not sell to the Canadian market. Our customers are mainly based in the US and some in Europe.

    Do we need to collect and remit Canadian sales tax?

    • If you have sold more than $30,000 CAD in the last 4 quarters, then you are obligated to register for a GST/HST account regardless of where you sell your products or services. You will not add sales tax on your out-of-Canada sales (those will be zero-rated supplies). But you still have to register and report your worldwide revenues to the CRA every filing period. You may also be eligible for refunds of GST/HST on your business expenses.

  • Hello Boris,

    So if you register a corporation provincially in Ontario, are you still able to sell to customers in, say British Columbia via an Eccomerce platform like Shopify or Etsy? Or do you require federal registration to do so?

    Also you mention in one article that you don’t need to charge the PST You operate out of an HST participating province. I have read that you are supposed to charge the applicable PST for every province you sell too. Any clarification on this would be great.

    Thanks

    • 1) You can sell to any customers in the world with your provincial corporation.

      2) You don’t need to charge QC/MB/SK/BC PST if you a) don’t operate your business out of PST provinces b) don’t store your inventory in those provinces c) do not directly solicit orders to customers in those provinces.

      Note that Quebec sales tax laws are changing starting from Sep 1, 2019. If you sell more than $30K to QC customers you will be obligated to register and start charging QST regardless of your location in Canada.

      • Solicit directly?

        • directly or indirectly

        • I asked the BC gov about that… my business is in Ontario. Their written response said that directly solicit meant ads or promotions specifically targeting BC residents or businesses. They went on to say sales to persons in BC that were the result of a generalized ad, or from a Web site simply available to anyone, did not require PST remittance to BC finance. The feds of course still expect their 5% if not an exemption good.

          • That is correct. The ads will need to be targeted to BC customers to meet one of the requirements for registering and collecting BC PST.

  • If I want to sell products online in Canada and the annual sales below 30000 CAD, then do i need to make business registration and have business number? My business will have no physical establishment.
    Do I need pay tax?

    • Hi Arnob,

      Thanks for your comment.

      That is correct. You are not required to collect and remit Canadian sales taxes if your worldwide revenues are less than $30,000 CAD.

      Boris