Charging Sales Tax to Canadian Customers

Sales tax can be quite confusing but its important to understand how it works. In this article, we discuss whether you need to charge sales tax in Canada as an eCommerce seller. We also outline how the tax collection varies based on which province you are shipping to.

By Team SHIPHYPE Updated September 7, 2022 Published August 7, 2020
Canada

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Disclaimer: This is just an opinion from ShipHype and should not be taken as tax advice. Please speak to a qualified accountant for further clarification as they will have up-to-date and accurate information.

Taxes are an important component for anyone selling goods or services online. It is helpful to understand how they work and it’s vital to ensure you’re collecting taxes where you are obligated by law.

What is Sales Tax?


Sales tax is a tax levied by the government on the sale of most goods and services. When a business or individual purchases an item in person or online, the seller is obligated to collect sales tax. This tax does not add to the profit of that business but instead is simply collected for the government. Sales tax is just one of the many ways the government collects tax from it’s residents and visitors.

Sales tax can be charged by the Country, the individual State/Province, Counties, Cities, all of the above or none of the above (it all just depends on where the recipient lives).

Keep in mind that this is completely different from income tax or other kinds of taxes.

Sales Tax: How it Works?


The amount is usually a percentage on top of the selling price of the item/service. Let’s say you go to Starbucks and purchase a coffee for 5 dollars in an area where there is a 10% sales tax.

In this case, Starbucks would charge you $5.50 Total ($5 Gross + $0.50 Tax).

Whether a person is a local resident or a visitor from a different country, the business has to charge tax either way if they are physically coming to the point of sale to do the transaction. There are certain instances where sales tax is exempt or reduced such as for Indigenous People & those who have served in the military.

At the end of the tax period, the seller who collected this tax will have to remit it to the government(s).They can not keep this amount for themselves and that would be considered illegal.

Does Sales Tax apply to eCommerce?


Yes, sales tax does apply to eCommerce sales as well. It’s a little bit tricky compared to Brick & Mortar where everyone is charged the same tax rate.

Since customers are not actually present at the point of sale and products are being shipped to them, the rate which customers are charged varies. It gets even trickier sometimes because the billing and shipping address can be in different provinces/states and sellers often don’t know which tax rate to charge.

Short Answer = Tax rate to be charged is always based on the address of the recipient.

Anyhow, once you’ve determined that tax applies to your customers, it is your responsibility to collect it and to ensure that you collect the correct amount.

Do I need to collect Sales Tax in Canada?


The good news is that for most sellers, you are only required to charge sales tax to buyers within your country. There may be certain regions even within your country where you may not need to charge tax.

By law, if you have a “sales nexus”, you are required to charge tax in Canada. A “sales nexus” is a status given to a business that has “significant operations” in a different country. Although there is a lot of gray area as to what significant operations means and who falls under that, the rule of thumb is that if you have a physical presence in that country, you have a sales nexus there.

Some other examples of what counts as a Sales Nexus:

  1. Physical Location
  2. Employee
  3. Owns Property There

Whether you need to collect sales tax in Canada or not ultimately comes down to where your business is registered. If you are not a Canadian company and do not have a physical presence in Canada, you do not have to charge sales tax.

If your business is located in Canada, you would need to collect sales tax.

If your business is located outside of Canada, you do not need to collect sales tax.

As a Canadian Business

If you are a Canadian business, you are required to collect sales tax if your sales exceed $30,000 CAD in a single calendar quarter (3 months). Before this, you are not required to register for a GST/HST number.

Once you’ve exceeded sales of $30,000 in a quarter, you are obligated to register for a GST/HST number. Once you’ve registered, you are now required to collect tax on all following periods after as well.

As a US/Non-Canadian Business

If your business is registered outside of Canada, you do not have to charge sales tax in Canada.

In fact, if you are shipping internationally to other countries, you don’t need to worry about collecting tax for any of them. This makes life easy for businesses and in fact makes a lot of sense too. Most online businesses sell to multiple countries and there are way too many cities/districts/regions in the world for an online seller to keep track of whom to charge tax to and how much.

Imagine if you had to charge tax to every customer you shipped to, that would just be an accounting nightmare.

Why don’t I need to charge tax?


The short answer is because you do not have a Tax ID registered in Canada. The tax you collect from customers. Is this a loophole for buying things from different countries? Yes, and no.

Yes, because of what I explained above.

No, because international customers will still have to pay tax in the form of Duties/Taxes.

Duties/Tariffs


Although you are not required to charge sales taxes to your Canadian customers, they will most likely have to pay some sort of duties/tariffs when purchasing online.

Duties are a type of tax that the importer of an item (receiver) is charged when the goods are coming from a different country. Even if the goods were not manufactured in that country, the government will charge tax. Duties/Tariffs are one of the biggest money makers for governments across the world.

You might be thinking, well isn’t that a loop-hole for customers to purchase items outside of their home country to avoid paying taxes? Yes, kind of but not really. When consumers purchase items from abroad, they are charged import fees aka duties aka tariffs. The amount is charged to the buyer and is also a percentage of the sales price. Unlike the sales tax, tariff percentages vary based on the category of the item.

Examples of Duties Collected

  1. Cell Phone Cases imported to Canada = 8% Duty
  2. Men’s Clothing imported to Canada = 18% Duty (ouch)

Some exemptions for Tariffs

  1. Goods that are worth less than $20
  2. Gifts from family members or friends who live abroad worth less than $60.

Btw, GST (5%) is also charged on top of the tariffs.

Check out this calculator HERE.

Yes, it sucks for buyers but the government needs their cut and they’ll make sure they get it.

Now, check out the next section which is actually a decent loophole that can save your customers some money and make the purchasing process easier.

Do I need to charge sales tax if I’m using a Fulfillment Center in Canada?


If you are using a fulfillment center, you don’t need to charge tax. Even though the fulfillment center is shipping your products from Canada to customers in Canada, they are using their warehouse and not yours.

If you had an employee of your own shipping products from your office or warehouse in Canada, you would then need to collect sales tax.

This can be extremely beneficial because your customers will get to save on paying duties on delivery. Paying duties can be pretty annoying for customers and that’s why there is now a whole trend around DDP (Delivery Duty Paid) shipping.

How much tax do I need to charge?


Once you are sure that your situation creates a sales nexus and requires you to collect tax, it’s important to ensure that you are collecting the correct amount.

Keep in mind that the tax rate differs based on which province your goods are being shipped to:

Charge 5% GST in the following provinces:

  1. Alberta
  2. British Columbia
  3. Manitoba
  4. Northwest Territories
  5. Nunavut
  6. Quebec
  7. Saskatchewan
  8. Yukon

Charge 13% HST in the following provinces:

  1. Ontario

Charge 15% HST in the following provinces:

  1. New Brunswick
  2. Newfoundland and Labrador
  3. Nova Scotia
  4. Prince Edward Island

Check out the following table to see tax rated directly from Revenue Canada's website:

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