Canadian Tax Essentials For Foreign E-Commerce Businesses

Canada stands as the 9th largest e-commerce market, poised to reach a remarkable revenue of $55 billion by 2023. This dynamic market promises substantial growth, with an anticipated compound annual growth rate of 10.6%, potentially surging to a market volume of $83 billion by 2027. However, foreign e-commerce businesses entering the Canadian market must grapple with tax regulations, distinct from those they’re accustomed to. The intricate Canadian indirect tax landscape presents substantial challenges for non-resident e-commerce sellers catering to Canadian consumers. To navigate this complexity effectively, it’s essential to understand the nuances of the Canadian tax system, characterized by a combination of federal and provincial taxes.

Canadian indirect tax system

At the national level, the Goods and Services Tax (GST) is applicable across the entire country. Additionally, six provinces – New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario, and Prince Edward Island – have harmonized their provincial sales taxes with the GST, creating the Harmonized Sales Tax (HST), which functions in much the same way as the GST. Three provinces, namely British Columbia, Manitoba, and Saskatchewan, maintain their distinct provincial sales taxes, often referred to as PST. It’s worth noting that Manitoba labels its tax as the Retail Sales Tax (RST). PST and RST apply independently of the federal GST, mirroring the concept of sales and use taxes in the United States. Typically, they pertain to tangible personal property (TPP), specific services and software. Unlike a Value Added Tax (VAT) system, they don’t allow for the recovery of taxes through input tax credits, deductions, or refunds. However, certain point-of-sale exemptions may apply, such as for sales intended for resale or manufacturing purposes. Quebec stands as the sole province with its own VAT system, known as the Quebec Sales Tax (QST). The QST is levied in addition to the GST for transactions conducted within Quebec. Four provinces – Alberta, Northwest Territories, Nunavut, and Yukon – do not impose any provincial sales tax.

Similar to many VAT systems worldwide, the Canadian GST system treats the sale of goods and the importation of goods as distinct taxable events. Consequently, VAT may be levied separately on both these transactions. However, businesses can often recover import VAT, effectively mitigating the potential for double taxation.

When to collect tax on e-commerce sales in Canada?

Under the general GST/HST regime, foreign businesses that supply goods in Canada but lack a permanent establishment within the country aren’t obligated to register for GST/HST, unless they meet the “carrying on business in Canada” (COB) test, as defined in the Canada Revenue Agency’s GST/HST Policy Statement P-051R2.

In July 2021, Canada introduced new GST/HST e-commerce measures for foreign sellers not considered to be carrying on business in Canada under the COB test. These sellers may be required to register for GST/HST under the general regime if, within a 12-month period, they supply goods to Canadian consumers for more than CAD 30,000, provided the goods aren’t shipped from outside Canada. The registration obligation arises only when the transaction is fulfilled from an inventory located within Canada. Furthermore, once a foreign seller is registered under the general regime, it must collect GST/HST on supplies to both registered and non-registered customers. The distinction between business-to-consumer (B2C) and business-to-business (B2B) sales applies only when assessing registration requirements, not taxability. In retrospect, since foreign sellers with Canadian inventories often met the COB test, the new measures for non-resident suppliers of goods haven’t introduced substantial changes.

If foreign sellers aren’t required to register for GST/HST, they can remain unregistered for GST/HST while supplying goods to Canadian customers. In such cases, no GST/HST applies to the transaction, but import tax may be levied upon crossing the Canadian border.

When to collect import taxes?

Goods crossing the Canadian border are generally subject to import GST calculated based on the Canadian dollar value of the goods, which includes duty and excise tax. The Canada Border Services Agency (CBSA) is responsible for collecting this import GST at the time of importation, along with duty and excise tax.

Import tax regulations distinguish between “commercial goods” and “goods for personal use”, often referred to as “casual goods”. Commercial imports are subject to a 5% import GST, regardless of the province of destination, unless the goods qualify for the de minimis exemption. For “casual goods”, CBSA collects both GST and provincial import taxes, except for goods falling under the de minimis exemption. However, separate provincial taxes (PST/RST/QST) are only collected at the border when goods are shipped to provinces that levy such taxes and clear customs there. Meanwhile, HST is levied on “casual goods” shipped to an address within a participating province, regardless of the customs clearance location.

Goods shipped to Canada by courier with a value of CA$20 or less are exempt from import taxes (this is referred to as the de minimis exemption). This exemption, however, does not apply to excisable goods (e.g., beer, tobacco, and wine), books, newspapers, magazines, periodicals, and similar publications if the seller was required to register for the GST/HST but failed to do so, or goods purchased from a retailer in Canada and then mailed or transported directly to the purchaser from outside Canada. The United States-Mexico-Canada Agreement introduced a CA$40 threshold for goods imported by courier from the United States or Mexico, increasing it from the standard CA$20.

Tax compliance considerations

Foreign suppliers have several choices for handling import taxes for Canadian customers. They can request customers to reimburse these taxes to the freight service provider who has paid them upon importation or they can pre-collect import taxes during the online checkout process. The latter option enhances the consumer experience by collecting the sales price and all taxes in one go at checkout, but it carries certain risks.

Firstly, foreign sellers who collect import taxes during the checkout process must unambiguously specify that this amount does not constitute a tax obligation related to the transaction but rather serves as a preliminary payment to account for taxes due upon crossing the border. In other words, foreign sellers should not merely list GST/HST on an invoice line when pre-collecting import GST. If they did so, the erroneously charged tax would need to be remitted to the tax administration, and import taxes would also have to be paid at the border. Secondly, foreign e-commerce sellers should not pre-collect import taxes when the de minimis exemptions apply. Hence, configuring the seller’s tax engine to correctly exclude low-value goods from the tax calculation is crucial. Thirdly, given that separate provincial taxes are collected at the border by the CBSA for goods cleared in specific provinces, it’s essential for sellers to coordinate with their freight service providers and have a clear understanding of where goods will clear customs in advance. Failing to do so could leave the seller stuck with pre-collected sales taxes that the freight service provider will not be able to remit to the CBSA.

Conclusion

For foreign e-commerce sellers venturing into Canada, a comprehensive grasp of the country’s indirect tax system is paramount. While there’s no general requirement for foreign suppliers of tangible goods, who neither have an establishment nor engage in carrying on business in Canada, to register for and collect GST/HST on sales to Canadian consumers, an obligation to register may arise for those who dispatch goods from a fulfillment center within Canada. Canada continues to rely on importers to accurately report import taxes for goods sent to Canadian consumers, with the CBSA overseeing this process. Depending on terms and conditions, foreign e-commerce sellers may either make their customers responsible for import tax payments or assume this responsibility themselves by pre-collecting import taxes at checkout.

The opinions expressed in this article are those of the author and do not necessarily reflect the views of any organizations with which the author is affiliated.