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Business Tax Implications for Retailers in Canada Selling Online Globally

By Devin Partida

As the COVID-19 pandemic worsened in Canada and worldwide, virus-curbing restrictions meant that merchants and shoppers alike had to get more acquainted with e-commerce. For example, the year-on-year growth spanned from 175% to 625% for Canadian online sales from March to May 2020.

The internet’s reach meant that retailers often sold products to customers that would never shop at a company’s stores in-person, often due to geographical distance. What does that remote selling mean for business taxes this year?

James Peterson, a tax professional with a private practice in southwestern Ontario, who is currently serving as chairperson of the Association of Tax & Accounting Professionals, has some valuable expertise to share.

E-commerce May Go Beyond Browser-Based Sales

First, merchants that pay taxes in Canada must be aware that e-commerce doesn’t only relate to sales occurring via web browsers. Instead, Peterson clarified, “…The federal government defines e-commerce as the delivery of information, products, services or payments by telephone, computer, or other automated media.”

He continued, “Vendors that do not have a website might find themselves subject to the rules around e-commerce, especially when it comes to collecting and remitting sales tax.” In short, Canadian residents must report worldwide sales from e-commerce when filing their tax returns.

However, the situation differs in other countries. Merchants that sell online in the United States must pay applicable sales taxes concerning transactions across state lines. However, each state has different rules about which businesses must collect and pay those taxes.

Merchants in the European Union have new rules for value-added taxes for goods sold via the internet. More specifically, there is a €10,000 threshold for so-called distance sales. Cross-border business-to-consumer transactions up to that amount follow the VAT rules of the supplier’s member state. However, sales exceeding that limit abide by the VAT rules in the recipient’s member state.

Reporting Rules Apply

Most businesspeople know they must follow specific procedures when reporting their income for tax purposes. Otherwise, they could make an error that might make an audit more likely to happen.

Peterson explained, “While all existing tax laws apply to business conducted over the internet, if you earn income from one or more websites, you need to list your five highest-grossing sites and report the total percent of your overall revenue made up by internet sales.”

Online revenue doesn’t stop at website sales. “The definition of a website would encompass a traditional webpage as well as any online platform that is accessed via a computer or a smartphone,” Peterson said. Moreover, Canadian business owners would detail such income on T1 or T2 tax forms, depending on their company structures.

In the United States, what constitutes business income is not necessarily straightforward. For example, a person who paints as a hobby could sell work on eBay and not count that transaction as a business sale. However, U.S. tax authorities determined a hobby turning a profit for three out of five years becomes a business and must file taxes to reflect that change.

However, Americans who used their recent extra time at home due to COVID-19 restrictions to sell used items they no longer want shouldn’t worry about business tax impacts in those cases. Generally, if people use items then sell them for less than the purchase price, they don’t owe taxes on the goods.

How Does the Goods and Services Tax/Harmonized Sales Tax Apply to Remote Sales Targeting Canadians?

Canada has a regime called the Goods and Services Tax/Harmonized Sales Tax (GST/HST). Merchants registered for it must follow the associated rules whether they sell something online or in-person.

“If you are registered for GST/HST, you must collect it on any transactions within Canada, whether the sale is made in-person or over the internet. The requirement to collect GST/HST extends beyond Canadian residents. Non-resident vendors that sell in Canada via [the] phone or internet might be required to register for GST/HST depending on their circumstances,” Peterson noted.

Indeed, as of July 1, 2021, vendors operating outside of Canada with sales exceeding $30,000 CAD to Canadian consumers annually must abide by a simplified GST/HST framework.

The specifics most relevant to the topic at hand are that GST/HST applies to:

  • Foreign-based digital businesses selling digital products or cross-border services to Canadians.
  • Transactions associated with foreign companies selling goods originating from fulfillment warehouses in Canada and distributed to consumers in the country.

Getting Tax Guidance Can Bring Peace of Mind

The specifics here cover some general topics that many business owners will find helpful as they get their tax paperwork in order this year. It may prove valuable for the foreseeable future, too, especially with consumers often concluding that buying things online is a convenient solution.

Devin Partida is a writer and blogger, as well as the Editor-in-Chief of ReHack.com

However, anyone who needs further guidance would likely find it worthwhile to get input from a tax expert familiar with their individual situations. Then, people will have the highest likelihood of filing without issues and ensuring they enter the correct information on the relevant forms.

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