U.S. sales tax is confusing enough. What if you begin selling into a foreign country? You’ve heard it before that US sales & use tax laws are some of the most confusing, but how are things done with our neighbor to the north? Especially for the northern states, having customers or clients in Canada can happen easily, but do the same rules apply? Is it easier to understand?
The tax rates
Collectively, jurisdictions in Canada do impose less diverse sales tax obligations than U.S. states and their local jurisdictions and of course there are fewer Canadian provinces than there are U.S. states. But this doesn’t mean that if you sell into Canada your obligations are simple.
Canada applies a Goods and Services Tax (GST), which in some provinces combines with a Provincial Sales Tax (PST) to produce a Harmonized Sales Tax (HST). The HST applies in New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario and Prince Edward Island. The GST solely applies in Alberta, Northwest Territories, Nunavut and Yukon. The provinces that levy a PST in addition to the GST are British Columbia, Manitoba, Quebec (in Quebex it is actually a QST) and Saskatchewan.
GST/HST is registered under one account, and the province of a customer’s residence dictates what sales tax rate to charge.
Nexus north of the border
Generally, your company is deemed to “carry on” business in Canada if it sells products to customers in Canada AND is using Canadian-based resources to do so, including local advertising and/or warehouses. Sporadic shipments to customers do not constitute regular and continuous business activity, but most of the goods and services in Canada are considered taxable supplies.
Online businesses selling into Canada, excluding the small supplier exception, will register with the Canada Revenue Agency for a GST/HST account, just as they have to register with U.S. tax jurisdictions in which they have nexus.
A “small supplier” does not have a registration requirement. This term refers to a business whose revenue from worldwide taxable supplies was equal to or less than $30,000 ($50,000 for public service bodies) in a calendar quarter and over the last four consecutive calendar quarters. A small supplier may choose to register voluntarily, and you may have to file a Canadian income tax return if you are a small supplier..
Companies that exceed a $30,000 sales threshold in a single calendar quarter are no longer a small supplier and must register to collect and remit GST/HST. The effective date of registration is no later than the day of the supply that made you exceed $30,000. Companies that exceed the $30,000 threshold over the previous four (or fewer) consecutive calendar quarters (but not in a single calendar quarter) are also no longer small suppliers.
Check with the Canada Revenue Agency for more complete information.
If your company meets the above requirements you will need to register for a Business Number (BN) with the Revenue Agency. A manual application can be submitted online, by mail, by fax or by telephone to the Tax Service Office assigned to your country or region.
Once you open a BN and a GST/HST account, you must file your tax returns by the assigned due date. The date and frequency of filing depends on your expected Canadian taxable sales: for $1.5M or less, annual with the return due three months after the end of fiscal year-end; for $1.5 to $6M, quarterly with the return due by the end of the next month; and for $6M-plus, monthly with the return due by the end of the next month. If you registered but collected no sales taxes, you must file a nil return.
The Revenue Agency may also require a security deposit. If your company doesn’t have a permanent establishment in Canada, the Canada Revenue Agency may request a security deposit when you register for a BN if you have taxable sales, leases or other supplies that total more than $100,000 and your net taxes will be more than $3,000. (Latest information has the deposit at half of the estimated net sales tax on expected annual sales in the next 12 months.)
Here are some more facts about Canadian sales tax for U.S. sellers if you would like to learn more - 6 Things to Know About Sales Tax in Canada
Sales tax non-compliance across borders can add significant risk to your business. We can help you comply. Contact us to learn about the latest developments in sales-tax nexus and what they mean to you and your company.