Written by Stephen Beard, Managing Director of Plyo Bookkeeping, a Vancouver-based bookkeeping firm.
Running an e-commerce business in Canada can be incredibly rewarding, but it also comes with unique tax responsibilities, primarily involving the Goods and Services Tax (GST), Harmonized Sales Tax (HST), and Provincial Sales Tax (PST). Additionally, if you sell to customers in the United States, you’ll need to understand how to handle taxes across international borders. In this comprehensive guide, we’ll walk you through the essential steps in accounting for GST, HST, and PST as a Canadian eCommerce business, including when selling to the United States.
1. GST and HST Basics
GST
The Goods and Services Tax (GST) is a federal tax that applies to most goods and services in Canada. The standard rate for GST is 5%.
PST
Provincial Sales Tax (PST) is charged by all provinces that are not part of the HST scheme, except Alberta. This tax mainly applies to goods.
HST
The Harmonized Sales Tax (HST) is a combined federal and provincial tax. HST rates vary by province, with rates ranging from 13% to 15%. Some provinces, like Alberta, use only the GST.
2. GST/HST Registration
As an eCommerce business in Canada, you must determine whether you need to register for GST and HST. If your annual worldwide sales exceed CAD 30,000, you are required to register. However, voluntarily registering even if your sales are below this threshold can be advantageous, as it allows you to claim input tax credits (ITCs) on eligible business expenses. The registration threshold for PST depends on the individual province, and you can find more details in this blog post.
3. Collecting GST/HST and PST
When selling to Canadian customers, you must collect GST/HST and PST based on the customer’s location. The HST and PST rates vary by province, so ensure you charge the correct rate.
4. Input Tax Credits (ITCs)
As a registered business, you can claim ITCs to recover the GST/HST you paid on eligible business expenses. This reduces your overall tax liability. Keep meticulous records of your expenses to take full advantage of this benefit. Under current CRA guidance, you do not technically require a receipt or invoice for amounts under $100, though we would argue that it’s best practice to collect receipts and invoices for all ITCs.
5. Selling to the United States
When selling to the United States, you generally do not charge GST/HST on the sale itself. However, you should be aware of a few important considerations:
Export Sales
Sales to the United States are typically considered “zero-rated” for GST/HST purposes. This means you charge 0% GST/HST, but you can still claim ITCs on related expenses.
Import Duties and Taxes
The U.S. imposes import duties and taxes on goods imported into the country. Your customers may be responsible for paying these fees, so it’s essential to communicate this clearly on your eCommerce platform.
Sales Tax in the United States
The U.S. has a complex sales tax system, which varies by state and locality. If you have a substantial presence or “nexus” in a particular U.S. state, you may be required to collect and remit sales tax. For Canadian eCommerce companies, a key factor will be whether or not they use a third-party fulfillment company for distributing their goods. Doing so may create a nexus in a state, which would require US sales tax to be charged and collected. It’s advisable to consult with a tax professional or use sales tax automation software to ensure compliance.
6. Record Keeping
Maintaining accurate records is crucial for GST and HST compliance. Keep records of all sales, expenses, and tax-related documents for at least six years, as this is the statute of limitations for audits.
7. Filing GST/HST Returns
You are required to file GST and HST returns on a regular schedule, typically monthly, quarterly, or annually. The frequency of your filings can change during a year, particularly if you experience significant revenue growth. It’s important to check your year-to-date taxable sales regularly, to ensure you meet the filing deadlines to avoid penalties.
8. Seek Professional Advice
Navigating Canadian and international tax regulations can be complex. Consider working with an accountant or tax professional who specializes in eCommerce and cross-border transactions to ensure compliance and optimize your tax strategy.
Conclusion
Understanding and accounting for GST and HST as a Canadian eCommerce business is essential for legal compliance and financial success. When selling to the United States, it’s crucial to be aware of the specific tax implications of cross-border commerce. With proper planning, record keeping, and professional guidance, you can navigate these tax complexities efficiently, allowing your eCommerce business to thrive both domestically and internationally.