If you’re planning to sell products online and ship to Canadian customers, you need to know your sales tax obligations.
The growing interest and use of Marketplace technologies by businesses has only intensified with the COVID-19 pandemic, which has kept most people at home. Even though small businesses have shut their doors during the lockdowns, many have seen sales continue thanks to their digital transformation strategies.
Online Shopping Is Surging
Online shopping set a record last year in Canada. Statistics Canada’s estimates that retail e-commerce sales more than doubled from February to May of 2020, with a 110.8 per cent increase compared with May 2019. In fact, all 11 retail subsectors with e-commerce sales saw those sales increase.
COVID-19 has changed how StatsCan collects and assesses data, as the pandemic will have a lasting impact on the retail trade sector. Statistics Canada said it will continue to update the e-commerce data to assess the long-term changes after the pandemic. “Small businesses are increasingly turning to e-commerce platforms, and are using these platforms in innovative ways,” the report said.
Selling Online Between Provinces
What are your tax obligations if you sell to customers across Canada? Do you charge what your province does or the tax of the province where the customer lives? The CRA’s Place of Supply rules dictates which tax a business should collect. When a customer purchases one of your products online, you charge the taxes of the province where the product ends up. Always charge the rate of tax for the province or territory where the product will be supplied to the customer. For example, if an indigenous artist in British Columbia sells a stone carving to a customer in Ontario and has it delivered to the customer in Ontario, the place of supply is Ontario and the artist charges 13% HST on the sale.
Canadian Sales Taxes
The federal Goods and Services Tax/Harmonized Sales Tax (GST/HST) applies to most goods and services supplied in Canada. So, how much do you charge?
5% GST: Alberta, Northwest Territories, Nunavut, and Yukon
11% GST + PST: Saskatchewan (5% + 6%)
12% GST + PST: British Columbia (5% + 7%), Manitoba (5% + 7%)
13% HST: Ontario
15% HST: New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario, and Prince Edward Island
14.974% QST: Quebec (5% + 9.975%)
Sales to the United States
If you mail your products outside of Canada you do not need to charge GST, HST or PST. If you are selling into the United States, your customers will probably pay sales and import taxes so you should be covered. You do not need to charge state sales tax unless you have a Sales Tax Nexus. Nexus refers to whether or not you have a presence in a particular tax area. In the past, most states would require a business to collect sales taxes on sales to customers only if they had a physical presence there. With the 2018 case South Dakota vs. Wayfair, the U.S. Supreme Court decided that the definition of an ‘economic’ sales tax nexus, where you could be considered to have a presence in a state if you sell any products or services there. States can now impose sales taxes on out-of-state sellers who are selling to their residents. Each state has their own set of rules concerning sales tax and economic nexus, but don’t worry as the threshold for most states is $100,000 in sales or 200 transactions. See Avalara’s state by state guide to economic nexus laws for more information.
If you’re new to selling online, check to see if your chosen platform can simplify the procedures for charging sales taxes. For example, Shopify allows you to automatically manage the tax rates you charge to your customers once you’ve confirmed where you’re responsible for charging taxes. When a customer fills in an address, the platform automatically applies the correct sales tax.
Another option that’s ideal for creative entrepreneurs is Etsy, a creative marketplace where millions of shoppers worldwide spend billions each year purchasing directly from sellers. Canadian sellers can specify a tax rate by province or state, if they need to charge tax. After adding the tax rates, new listings they create have the tax rate applied by default.
Most small business owners in Canada are not required to collect GST/HST if they are considered a “small supplier”, whose sales are less than $30,000 CAD threshold. If your revenue has been more than $30,000 in the past twelve months, you must register for a GST/HST account. Then you need to collect taxes on your sales, and remit those taxes to the Canada Revenue Agency. The registration process can be completed on the Business Registration Online (BRO) Program. In order to complete the application, you will need your Social Insurance Number, your business’ name and address, and information about your business. Learn more details about registering at Do I Have to Charge GST/HST?
There are some situations where opting into the GST/HST program, before you are required to, is a smart decision. If your early sales revenue indicates large growth, you should consider setting up your GST/HST account early. It’s also a great idea to get organized with proper bookkeeping from the beginning.
National Patchwork of Tax Rates
Back in 1991 when Brian Mulroney’s federal government introduced the controversial Goods and Services Tax, it was intended to be a national sales tax system that applied across the country. That is obviously not the case today, with our patchwork of GST, HST, PST combinations. Canadian businesses with online customers across the country (and beyond) must contend with a variety of rates and rules based on the province or territory. It’s important to keep up-to-date on sales tax changes across the country.
Keep in mind that your e-commerce platform will not be remitting your taxes for you. You will be required to submit a GST/HST return monthly, quarterly, or annually. It’s your responsibility to check with an accountant, as well as your provincial and federal tax agencies to make sure that you charge your customers the correct sales tax rates, and to make sure you file and remit your taxes correctly.