What Business Owners Need to Know about Canadian Tax Requirements
Last year brought significant changes to Canada’s sales tax regulations, primarily to accommodate the “digitalization of the economy.” Modernizing the tax systems originally designed to govern physical sales is a common theme across global markets. In Canada, the results are pertinent to many US-based business owners involved in cross-border sales. As our 2021 Year-End Tax Planning Guide mentioned, the new tax rules are broad enough to capture most industries and businesses. Even if your business was not previously required to pay Canadian GST (Goods and Services Tax) or HST (Harmonized Sales Tax), you may be obligated to do so now if your business operates in one or more of these areas:
- Cross-border sales of digital products and services
- Sales of goods housed in fulfillment warehouses in Canada
- Sales of short-term accommodation via digital platforms
Do US Companies Have to Pay Canadian GST?
The Sales Value Threshold
Certain US-based businesses should register for, collect, and remit Canadian sales tax. US exporters—nonresident vendors and distribution platform operators—generally should pay GST when exporting to Canada if they meet a certain sales value threshold. As of July 2021, any nonresident who sells more than $30,000CAD within the last four calendar quarters (or fewer) is required to collect GST and HST on all business-to-consumer transactions.
What if your business sales fall below that threshold? In that case, you may not be required to collect GST and HST unless you have voluntarily registered for GST and HST purposes. However, as a nonresident, once you’ve registered in Canada, you must collect GST and HST, even if your sales are under the $30,000CAD threshold.
Nonresident vendors sell goods or services directly to consumers (or businesses). They may operate through their own websites, distribution platforms, or fulfillment warehouses. Vendors often use a combination of these elements to sell both physical and digital goods and services.
Nonresident vendors who reach the sales value threshold of $30,000CAD within four calendar quarters should register for GST/HST. Vendors who do not reach that threshold may remain unregistered.
Distribution Platform Operators
The rules are a little different for distribution platform operators (DPOs). DPOs should consider their own sales because they are considered the responsible party for “qualifying supplies” sold on their platform.
Qualifying supplies are goods that are:
- Sold on the distribution platform by third-party vendors who are not registered for GST/HST (whether resident or nonresident), and
- Housed in Canada (in fulfillment warehouses or any other location).
If the sales of qualifying supplies plus the DPOs’ sales to Canadian consumers reach or are expected to reach the $30,000CAD threshold over any four consecutive quarters, the DPO should register. These sales should be reported and remitted by the DPO, not by the unregistered vendor.
B2C Versus B2B Sales
Collecting GST/HST is only required on business-to-consumer transactions. However, the Canadian customer should provide their own GST/HST number in a business-to-business transaction. If a Canadian business customer mistakenly pays tax, after providing a GST/HST number to the nonresident business, the Canadian customer should request a refund from the nonresident vendor directly. It cannot be claimed as a tax paid-in-error rebate and is not eligible as a tax credit.
Types of Sales Tax in Canada
Dealing with sales tax in Canada can be a bit confusing, since each province calculates sales tax according to its own method. Your business must collect sales tax according to the province in which the customer resides.
- What is GST? Canadian GST (Goods and Services Tax) is a national tax that, depending on the province, may show up as a separate tax or as a portion of the HST, which is province-specific. The Canadian GST tax rate is 5%.
- What is HST? Canada’s HST (Harmonized Sales Tax) is a combination of the province-specific sales tax and the national GST. So, in the provinces which use the HST model, you only need to collect this single type of tax. Provinces that use the HST model are Ontario, Nova Scotia, New Brunswick, PEI, Newfoundland, and Labrador.
- What is PST? Provinces that do not use the HST model have their own province-specific sales tax rate. In these provinces, the PST must be collected as well as the GST. British Columbia and Saskatchewan call it PST’ in Manitoba, it’s called the Retail Sales Tax (RST); and in Quebec, it’s the Quebec Sales Tax (QST).
Simplified Registration System
The simplified GST/HST registration system should make the registration process easier. If your business supplies cross-border digital products and services or platform-based short-term accommodation, you should register under the simplified GST/HST. Under certain conditions, you may voluntarily apply to register for standard GST/HST, which allows you to claim input tax credits (ITCs) for GST/HST paid on certain business expenditures. If, however, your business supplies qualifying goods, the standard GST/HST system is required.
Plan of Action for US-based Business Owners
It is advisable to keep track of sales made to Canadian consumers. Remember that the 12-month period is rolling, so if you’ve come close to the threshold and are about to enter a busy season, you may exceed it. If you’re close to that sales amount, or if you’re a DPO with many unregistered vendors using your distribution platform, it’s time to take action.
Consider the cost of compliance as you move forward, particularly if your sales won’t exceed the threshold by a significant amount. Make sure the value of these increasing sales makes sense for your business. Aldrich’s tax advisors can help you sort through the details, evaluate the financial implications, and ensure that your business complies with Canadian tax law.
If you have questions about your international tax compliance, fill out the form below to connect with the author, Nick Uren, JD, MBA.
Meet the Author
Senior Manager, International Tax
Nick Uren, JD, MBA
Nick Uren joined Aldrich CPAs and Advisors in 2022. Nick specializes in international tax and mergers and acquisitions. Before his career at Aldrich, Nick worked for several years at two Big 4 accounting firms and most recently was a leader with Grant Thornton’s Pacific Northwest international tax practice. Nick graduated with his bachelor’s in business... Read more Nick Uren, JD, MBA
- Licensed attorney in Oregon and Washington
- International tax compliance
- Mergers and acquisitions
- Inbound and outbound tax law
- Foreign entity planning and global structuring
- Cross-border IP planning
- Cross-border intercompany transactions