Tax Considerations For E-Commerce Businesses

One thing is clear: the Canadian taxation system is fairly complex. You really need to know more about the tax considerations for E-Commerce Business. 

According to the Taxation of E-Commerce, a report issued in March this year by the Office of the Auditor General of Canada, current legislative obligations concerning the collection of GST/HST on e-commerce sales are intricate and challenging. This report also highlights that the Canadian sales tax system has to learn how to keep pace with e-commerce and quickly adapt to the challenges and opportunities it involves. 

Nowadays, many e-commerce sellers are having a hard time understanding their tax obligations especially when they sell both in Canada and in other countries. When it comes to selling to international customers, online store owners involuntarily fall into the tax jurisdictions of those countries/ states. 

Knowing exactly what the primary tax considerations for your business is crucial for growing your online store successfully and also legally, of course.

We are here to help you break through all the confusion and get to know, once and for all, how to manage your e-commerce taxes. 

Let’s start from the top. 

 

Everything you need to know about e-commerce taxation in Canada

In Canada, businesses – e-commerce businesses included – operate under three main structures: Sole Proprietorship, Partnership, or Corporation. Each of these business structures comes with its advantages and disadvantages:

In Canada, businesses – e-commerce businesses included – operate under three main structures: Sole Proprietorship, Partnership, or Corporation. Each of these business structures comes with its advantages and disadvantages:

• Running your business as a sole proprietorship will limit your tax planning options but also lower your accounting fees, as everything is run under your own name. A sole proprietorship is great for businesses that are just starting off, with just a few personal assets to protect. 

The net revenue that you earn above your business expenses is added to your personal income and taxed at your effective marginal rate.

• A partnership structure will minimize both legal and accounting fees as accounting under this business structure is fairly simple. The only risk involved is that all business partners expose their personal assets to any business liabilities incurred. 

In this case, the net income is divided according to the partner’s investment or percentage outlined in the partnership agreement. Each partner would have to add their part of income to their personal tax return.

• Operating under a corporate structure will increase your accounting fees, however, you will have limited business liability. Also, your e-commerce business will be separate from your personal assets, meaning you won’t put them at risk. 

Usually, small business corporations are taxed at a very low rate on their active business income.

Moreover, as a business operating in Canada, you must collect sales taxes if:

• Your business is located in Canada, is using Canadian warehouses or infrastructure or you have at least some form of physical presence there.
• If your sales exceed CAD 30,000 in the last four quarters.
• If your business sells taxable supplies (most goods and services fall under this category with a few exceptions).
• If you are in the business of providing ride share or food delivery services, no matter what the level of your sales is.

Generally, if you sell goods or provide services in Canada, you are required to collect the sales tax from your customers. Depending on the province or territory in which your business operates, you need to collect either a combination of GST (Goods and Services Tax) and PST (Provincial Sales Tax), GST only or just HST (Harmonized Sales Tax). You can find the tax rates per province/territory here. 

Note: if you sell and deliver taxable goods/services to out-of-province/territory customers, the sales tax you have to collect is the one that applies in your customer’s province or territory.

Also, if you are a small business – with $30,000 or less in total revenue in the last four consecutive calendar quarters or in any single calendar quarter – you don’t have to register for a GST/HST account. However, if your business resides in a province that has a provincial sales tax, you will have to charge, collect and remit PST.

Running your business as a sole proprietorship will limit your tax planning options but also lower your accounting fees, as everything is run under your own name. A sole proprietorship is great for businesses that are just starting off, with just a few personal assets to protect. 

The net revenue that you earn above your business expenses is added to your personal income and taxed at your effective marginal rate.

A partnership structure will minimize both legal and accounting fees as accounting under this business structure is fairly simple. The only risk involved is that all business partners expose their personal assets to any business liabilities incurred.

In this case, the net income is divided according to the partner’s investment or percentage outlined in the partnership agreement. Each partner would have to add their part of income to their personal tax return.

• Operating under a corporate structure will increase your accounting fees, however, you will have limited business liability. Also, your e-commerce business will be separate from your personal assets, meaning you won’t put them at risk. 

 Usually, small business corporations are taxed at a very low rate on their active business income.

Furthermore, as a business operating in Canada, you must collect sales taxes if:

• Your business is located in Canada, is using Canadian warehouses or infrastructure or you have at least some form of physical presence there.
• If your sales exceed CAD 30,000 in the last four quarters.
• If your business sells taxable supplies (most goods and services fall under this category with a few exceptions).

Generally, if you sell goods or provide services in Canada, you are required to collect the sales tax from your customers. Depending on the province or territory in which your business operates, you need to collect either a combination of GST (Goods and Services Tax) and PST (Provincial Sales Tax), GST only or just HST (Harmonized Sales Tax). You can find the tax rates per province/territory here. 

Note: if you sell and deliver taxable goods/services to out-of-province/territory customers, the sales tax you have to collect is the one that applies in your customer’s province or territory.

Also, if you are a small business – with $30,000 or less in total revenue in the last four consecutive calendar quarters or in any single calendar quarter – you don’t have to register for a GST/HST account. However, if your business resides in a province that has a provincial sales tax, you will have to charge, collect and remit PST.

What happens when you sell to international customers?

You don’t need to charge GST, HST or PST if your customer is outside of Canada. However, you will need to charge sales tax based on that customer’s location.

If your customers are from the US: you generally don’t need to charge state sales tax unless you have a physical presence nexus like offices, branches, employees or warehouses based in the US. If you do, you need to charge and remit state sales tax based on your customer’s location. 

Note: After the Wayfair decision, more and more states have been moving toward collecting sales taxes based on the revenue or unit count threshold (economic nexus).

If your customers are from the EU or UK: you may need to charge VAT (Value Added Tax). If you are selling to consumers (B2C), you need to calculate and remit VAT based on the purchaser’s location. For this, you will have to use the MOSS system to remit VAT. If you are selling to businesses (B2B), you do not need to charge and remit VAT, you will just use the “reverse charge mechanism” where you simply put that on the invoice.

Make sure not to confuse income tax with sales tax!

While sales taxes represent the sums you collect, hold, and then remit to the government, income taxes are an expense to your business and are paid on the net income after you deduct business expenses.

Furthermore, if you sell products/services in various jurisdictions, you need to pay attention to where your business is subject to income tax.

Is it time to hire a professional accountant?

If you are a growing business, navigating the complex world of taxes can be extremely difficult. That’s why one of the best investments you can make is hiring a professional accountant. 

We know how hard it can be to manage your own business while having to deal with accounting and bookkeeping tasks at the same time. 

Also, we believe that the key to success lies in focusing on what you’re really good at, on what adds value to your business and leaving the rest in the hands of professionals.

Contact us today and let’s discuss how we can support your business!