It’s a whole new day when it comes to how businesses operate and where their income is generated. It wasn’t long ago that almost all business income was generated by brick and mortar stores but today much of the world’s income is generated by e-commerce. So how do taxes apply to your e-commerce business?
The tax game was never fair for small business in Canada but if you think it was bad before, you need to check out the unbelievable rules that apply to e-commerce. So let’s begin.
Canada has a tax called the GST which stands for Goods and Services Tax. It is the equivalent to the VAT or value added tax. It is a 7% tax that applies to all transactions in Canada.
Not only is it important to determine whether the sale was made in Canada, you also need to determine where in Canada the sale was made. If the sale was made in Nova Scotia, New Brunswick, Newfoundland, or Labrador then the HST applies which is the harmonized sales tax. Rather than the 7% the rate for these provinces is 15% because the Federal government also collects the sales tax for these provinces.
If that’s not enough each province has its own set of tax rules for collecting the provincial taxes and each province has a different rate. For example British Columbia charges 7% PST, Ontario charges 8% PST, while Alberta doesn’t have sales tax. As an e-commerce merchant you are responsible for collecting these taxes.
And then there is the tax law relating to goods you ship outside of Canada. In Canada exported goods are classified as a zero rated sale so no GST needs to be collected if your product is being shipped outside of Canada. But you still get the benefit of the input tax credits which is the GST you paid for business purposes. Sounds pretty straight forward and like a winning situation for business right? Wrong!
If you export goods that are not tangible look out. You could run into some serious tax problems. So if you sell what is called intangible personal property you must charge GST. Examples of intangible personal property would include e-books, software that you download, or subscriptions to magazines. So why do you have to collect GST on these types of goods? That’s because according to Revenue Canada these types of goods could actually find themselves used within Canada.
So the theory is you sell your e-book to an American customer who then potentially could bring that item back into Canada. The crazy thing is that if you sell a paperback book to an American it too could potentially land up back in Canada but yet there is no GST applicable.
The good news is there is away around this rather ridiculous ruling and its legal too! On your website and on your product invoice you must explicitly tell your customers that the use of the intangible property is prohibited within Canada. If the product is to be used within Canada then they are subject to the GST.
If you are having goods shipped into Canada they are also subject to GST which due upon delivery even when product is . If you are a Canadian seller with a GST number selling to a Canadian customer but your supplier is in a foreign country you will still be required to pay the GST and then collected it again when you sell the merchandise to your Canadian customer you’ll have to collect it again. The Federal tax man leaves no rock unturned.
If you use a drop shipper it becomes really complicated. Let’s say you sell widgets and your widget supplier is in the USA. Your customer buys from you and your supplier directly drop ships to your customer. Here’s where it gets tricky. Your customer will be charged the GST when the merchandise clears the border, but when you process your invoices from the supplier you will also have to pay the GST unless you are able to supply the appropriate documentation. Most US suppliers won’t break out the GST because it creates too much paper work. This means the government is actually getting paid twice on the same merchandise. Pretty good deal for the government.
Reluctantly we could agree that countries imposing taxes on the sale of merchandise within their own country makes sense. But you have to start wondering how tax hungry governments are when they begin to insist that their citizens pay tax on merchandise that’s coming from other countries.
That’s just what is happening. Since 2003 the European Union has imposed taxes on the goods on merchandise purchased online. So if you live in England and you buy an e-book from a Canadian seller, the Canadian seller is responsible for submitting the tax to the government of England. This is referred to as the online sales tax.
There logic was based on their inability to tax online purchases at the border as it entered the country causing a loss of revenue for the government and a disadvantage to businesses operating within the country who have to collect the VAT.
The tax game is certain to change over the next few years as more and more countries try to deal with the impact online sales have had on their economies and the tax dollars they no longer receive. The European Union was one of the first to show initiative to collect taxes on sales that occur outside the border and the US has been talking about a similar type of tax that would make merchants responsible for collecting taxes for all states they ship to.
The question becomes how much of a burden can small business owners handle while they become the tax collectors for an entire country. Collecting, tracking, reporting taxes can be a time consuming process and a costly process for the business owner. If governments have their way business will be responsible for plenty more tax collecting and reporting in the future.
This article only touches the bare surface of taxes relating to E-commerce business in Canada. If you are involved in e-commerce it is highly recommended that you consult an accountant to get a good understanding of this very complex tax system and how it applies to your e-commerce business.
Deon Melchior is the Editor and Publisher of Article Click. For more FREE articles for your ezine and websites visit ArticleClick.com. Article Click is a free content article directory. This means that as a publisher you may reprint the articles that are included in our site, as long as the article is unedited and the author box is included with it's live hyperlinks.
How Do Taxes Apply To Your E-Commerce Business in Canada?
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