Canadian Sales Tax
Michael J. Fleming is the founder and president of Sales Tax and More, a full-service consulting and solutions firm with a passion for state tax. He is one of the country's leading authorities on sales tax issues such as consulting and research, registrations, returns, nexus, drop-shipping, eCommerce, and service providers.
Michael is a renowned writer and speaker, and he regularly presents on webinars. He is also the host of the Sales Tax and More Podcast, where he shares his wisdom and learnings with his audience in order to help them navigate the tricky world of taxes.
In this episode…
Is Canadian sales tax something that U.S. sellers need to worry about? The answer, like so many other answers when it comes to sales tax, is it depends. That’s why Michael J. Fleming of Sales Tax and More is here to break down everything you need to know about sales tax in Canada.
In Canada, there are two levels of tax: federal-level taxes and local-level taxes. And, unlike the U.S., Canada has almost no tax exemptions, except for a certificate that can be used with indigenous peoples. Additionally, the term "nexus" is not used in Canada when referring to sales tax—instead, they say "carrying on business." So how does this apply to you and your business?
In this week's episode of Sales Tax and More, co-hosts Michael J. Fleming and Ellie Moffat discuss the collection and remittance of sales tax in Canada. Michael explains the major differences between taxation in the U.S. and Canada, and when it is appropriate for U.S. sellers to register in the country. Stay tuned.
Here’s a glimpse of what you’ll learn:
Should U.S. sellers be worried about Canadian sales tax?
The major differences between sales tax in the U.S. and Canada
How to register for taxes in the different Canadian provinces
Michael J. Fleming talks about the widely misunderstood small seller exemption of $30,000
Michael explains the Canadian term "carrying on business" in reference to nexus
Does Canada pursue sellers for non-collection of sales tax?
Sales Tax and More’s resources for Canadian sales tax
Resources Mentioned in This Episode
Ellie Moffat's email: emoffat@salestaxandmore.com
Connect with Michael
Sponsor for This Episode
Sales Tax and More assists companies and their trusted advisors like CPAs with sales tax needs. They offer consulting and research, registrations, returns, and so much more. Over the years they have assisted thousands of sellers both foreign and domestic with their tax issues in the United States and in Canada.
To learn more about their services, visit https://www.salestaxandmore.com/.
Make sure to register and join the Sales Tax and More Webinar to get access to complex materials on tax in an easy-to-understand format.
Episode Transcript - Audio Version
[0:10] Intro: Welcome to Sales Tax and More, your go-to resource for all things state tax-related. Now here is your host, Michael Fleming.
[0:26] Mike: Hi Mike Fleming here, founder of Sales Tax and More and today's co-host of the Sales Tax and More Podcast, where we talk about everyone's favorite topic, which is of course sales tax. Today my co-host Ellie Moffat will be interviewing me about Canadian sales taxes. But before we begin, let me introduce Ellie to you.
[0:47] Ellie: Hi, everyone. Really great to be here. I am very excited about this topic today. But first, I want to do a quick introduction for Sales Tax and More. Sales Tax and More is a full-service consulting and solutions firm. We have a really great team here of experienced tax professionals who are very dedicated to fulfilling your state tax and related need and so we do a lot of sales tax return sales, tax registrations, consultations, research, and like your name states more, we will give you plenty of ways to reach out to us. If you have questions about our services, please don't hesitate to reach out and ask. We will get those questions answered right away for you. So, Mike, I know many of our listeners are selling into Canada. Is Canadian sales tax something that US sellers need to worry about?
[1:34] Mike: Great question Ellie in one that we hear quite often. And the answer is so often as it is when it comes to sales tax, it depends.
[1:42] Ellie: Our favorite answer.
[1:44] Mike: Yeah, our favorite answer. It depends on your specific facts and circumstances. If you have nexus in Canada, and by the way, Canada does not use the term nexus they use the “term carrying on business”. If you're carrying on business in Canada, then yes, you are required to get registered, collect and remit the taxes. But unlike the US, there's also an economic reason why you may want to get registered in Canada. The primary tax there is a value-added tax. It's called the GST or goods and services tax. And if you're selling into Canada, you're the importer of record. There's a type of this goods and services tax that you're paying, as you cross the border, even if you're not registered, you know, some people are paying it without even realizing it, because whoever's doing their shipping or you know, clearing customs for them is paying it and then they're invoicing you for it or your client for it. So this is 5%. And that's a hard cost. Now, the only way or the best way to get that back is to do a voluntary registration. And once you are voluntarily registered or, you know, once you've registered at all, it doesn't matter if you do it voluntarily or if you're required to do it, but you get to take credit for any tax paid in the normal course of business. So that 5%, which was a hard cost is now reimbursable. When you collect tax from your customers, you're going to pay yourself back for any tax you paid in the normal course of business that's called an input tax credit. Or in Quebec, it's called an input tax refund, ITR, and ITC. So, in the US, you know, compliance is mostly a cost that we're required to do and you know, it's cheaper to be compliant than it is to have a state come after you but in Canada, there could be a reason that we want to go out registered voluntarily, it could actually save us this 5%. So if you're carrying on business in Canada, that's what you know, basically, if you have nexus in Canada, you should be thinking about getting registered. And if you are the importer of record, if you're paying that cross-border tax, this GST as you clear customs, then you should think about registering also.
[4:27] Ellie: So, Mike, I know you touched a little bit on the differences here, but I really want to highlight what are some of the major differences between the US and Canada?
[4:37] Mike: Okay, well, the biggest one is that there are two levels of tax you have a tax at the federal level, which is the goods and services tax or GST and it is a value-added tax. And what that simply means is that taxes are paid at every step of the supply chain. So, you know there are virtually no exemptions. I mean, even if you're selling to someone who's a reseller, they pay the tax. Now the way that they avoid double taxation in Canada is by allowing these input tax credits. So remember we said whenever you get registered, you are allowed to take credit and pay yourself back for any tax you have paid in the normal course of business, any value-added tax that you've paid in the normal course of business. So that's one thing. They also have local-level taxes at the province level and the provinces are the equivalent of US states. So some of the provinces are going to be value-added taxes, and some of the provinces are going to be actual sales taxes. But the big difference there is you've got this federal-level tax. Once you've registered for it, it's got to be collected on every sale no matter where it goes. You know, there are a couple of zero-rated goods. And you know, I'm not going to get too deep into that we don't have too much time. But we do have webinars that get into this a little bit deeper. So I encourage you to check those out. We just want to stay in the big picture here. So as we mentioned, virtually no exemptions whatsoever. Unlike the US The only one instance where you might use a certificate and that's with indigenous peoples’ hands the way that you prevent double taxation is this input tax credits. You may have to because there are two levels of tax you may have to have two separate taxes stated on an invoice because you know, one is going to revenue Canada which is the IRS Canadian equivalent, and the other is going to the local jurisdiction.
[7:07] Ellie: Okay, Mike, thank you for going over those for us. And does every province have a local tax then?
[7:15] Mike: No, they do not. There are actually 10 provinces in Canada and three territories, so a lot less than the United States. And once you register for the goods and services tax, that's the federal level tax. You're automatically registered in five provinces for what's called the HST or harmonized sales tax. And the reason it's called harmonized is because five provinces have said we want to make life really, really easy for everyone selling into our provinces. So we're going to make our tax the same as the GST we're going to harmonize it with the GST we're going to let revenue Canada collect, we're gonna let revenue Canada automatically register you. And when you file your return with revenue Canada, you just lump all the tax together and pay it to revenue Canada and they'll make sure we get our money. So it really is fairly easy. So you've got the five HST provinces, which are going to be Ontario Prince Edward Island, Newfoundland, and Labrador and Nova Scotia, and New Brunswick. So those are your five HST. Then you're going to have British Columbia, which actually has a sales tax and it's called the provincial sales tax or PST, Saskatchewan another province has the provincial sales tax or PST. Manitoba has a retail sales tax or RST and British Columbia, Manitoba, Saskatchewan, those are all, regular sales tax is pretty similar to the US sales taxes. Then we've got Quebec and Quebec is the Quebec sales tax or QST. And it also is a value-added tax. And it's pretty much identical to the, to the HST and to the GST, except instead of some of the terminology is a little bit different, but it functions to save instead of having an input tax credit or ITC. They have input tax refunds or ITR. But for the most part, the Quebec sales taxes are the same as the GST and HST. Alberta does not have any local tax, they are rich in oil money and they didn't feel that they needed a local tax, and the three provinces don't have local taxes, so it's just the GST and Alberta in the local provinces. So if you want to get registered everywhere, there's a maximum of five registrations that you can do. That's the GST HST. That's one registration. The BCPST, the Saskatchewan PST, the Manitoba RST, and the Quebec QST.
[10:30] Ellie: Thank you so much, Mike. Okay, so I hear a lot about a small seller exemption of $30,000. Can you tell me a little bit or can you tell everyone to tell us all a little bit more about this?
[10:42] Mike: Yeah, we again, this is something we hear quite often in two things. Number one, you've got to remember that it may be a benefit for you to get registered, even if you don't have to, but this small seller exemption is widely misunderstood, it's really for Canadian sellers. It's not for foreign sellers. I mean, it could apply. But when you look at that it says $30,000 of worldwide sales. So if you're in Canada, maybe you have less than $30,000 in sales. But if you're in the US, your US sales count, if you're in any country, and before beginning to sell in Canada, most of the people I've ever talked to have much larger sales in the US than when they're starting out in Canada. So that $30,000 exemption is worldwide sales. So generally, it will not apply. It's for small Canadian sellers, for the most part.
[11:49] Ellie: All right. Okay. You mentioned carrying on business to be a Canadian equivalent of nexus. Can you explain that? Can you share a little bit more about that?
[12:00] Mike: Yeah, absolutely. Let me pull up an actual list here of exemptions. I mean examples of these factors. I don't want to misquote. But there are 12 factors that Canada puts out. And not any one of these factors is going to create nexus or make you be carrying on business in Canada. You know, the thing about Canada, if you thought the US was great in that they didn't really tell you what creates nexus or not. When you see Canada, you are going to say, Wow, the US is black and white, because we know that some items, you know, just having one activity in a state can create nexus but in Canada, it's so different. You have to analyze all of these factors. And you can have two companies With the same exact fact pattern and one company you know, they all have the same factors. And one company is one industry the other companies in the other industry and one has nexus and one does not. So Canada is pretty gray. Now some of the factors, the place where agents or employees of the nonresident are located so if you have people in Canada then it's generally going to be a good sense of you have a nexus there because you're going to be delivering the place of delivery is going to be in Canada. If the place of payments in Canada is the place where purchases are made or assets are acquired, the place from which transactions are solicited, the location of assets or an inventory of goods to place where business contracts are made, and the location of a bank or a merchant account. The place where the nonresident’s name and video are listed in a directory. So if you are in a telephone book, you know virtual or, you know physical, the location of a branch or office, a place where the services are performed and the place of manufacture or production. So those are all the different factors we have to look at. Let's use Amazon as a quick example. You know, if we look at Amazon and the FBA program, number one, you've got inventory in Canada. Number two, the place of delivery is generally going to be in Canada, the place from which transactions are solicited is in Canada. The merchant account is going to be through Amazon that's in Canada so you can see, you know, these start to stack up, and the more factors you have, the more likely it is that you're going to have nexus or be deemed to be carrying on business inside of Canada and by the way, the Amazon Canadian program if you're an FBA seller is creating nexus you are carrying on business if you're using the FBA program inside of Canada.
[15:20] Ellie: All right. Thank you so much, Mike. Okay, so does Canada pursue sellers for non-collection? Is it something that everyone needs to worry about?
[15:30] Mike: Yes, absolutely. This is a big question now. Canada is nowhere near as aggressive as some of the states and the provinces the same way. But they do pursue you if you know that they do audit companies and you know, the rates in Canada are a lot higher than the rates in the US I mean, we're looking at anywhere between in most of them now Alberta may only be 5%. But in the other provinces, it is 13-15%. So that's a big number. You don't want to be paying that out of your own pocket. So yes, Canada does pursue sellers from non-collection. And we hear that revenue Canada and Amazon are in talks and that we may see a lot more crackdown on Amazon sellers by the Canadian government.
[16:31] Ellie: Okay, and, Mike, thank you so much for going over this stuff today for us. Do you have any closing comments, anything we can leave our listeners with?
[16:42] Mike: Yeah, as I mentioned earlier, we've got a webinar. It's an hour-long webinar and also provides for CPE credit where we go into this in a little bit more detail. We also can help you determine if you are carrying on business in Canada if you need registration. We can help with registrations if you need returns filed, we can help with Canadian returns. So we have a lot of services around Canada that can really help you out if you need them. We also have educational materials. And my final comments are to remember if you have a requirement to register in Canada, you should be getting registered but also check and see if you're paying this cross-border tax if you know if you're selling through Amazon, you know you get a requirement. But if you're selling through your own website or through different channels and you’re paying this tax as you're clearing customs, then you'll want to go ahead and voluntarily register to collect the tax. Now if you're not carrying on business, and you're not paying business, excuse me, you're not paying any tax clearing customs No reason to register. Don't worry about it.
[18:02] Ellie: Thank you again, Mike. And, I want to reiterate that we get great feedback on that Canadian sales tax webinar as well. So if you want to, if you want a little bit more on this really encourage you to go to that. And if you have sales tax needs, just want to put out there again that we offer many solutions and services, you can reach out to me directly, emoffatt@salestaxandmore.com. That's emoffat@salestaxandmore.com all spelled out or visit our website, www.salestaxandmore.com. In addition to our services, like we were saying before, we have other webinars as well. All of them have CPE credit and a lot of resources on our website that are paid and free as well. So thank you everyone, and hope you join us for our next podcast and have a great afternoon.
[19:00] Mike: Thank you everyone and hope to see you or hope you join us on our next episode of the Sales Tax and More podcast. Bye Bye.
[19:11] Outro: Thanks for listening. Be sure to click subscribe and check out all of the resources we have out on the web.