By: Allan Madan | Aug 18th, 2013 | Tax, US Tax, Canadian Tax
Cross Border Taxes are often overlooked by online business in the U.S., even when they sell to customers north of the border. However, you can bet that sooner or later, you will encounter The Canada Revenue Agency (CRA).
This article will discuss the common Cross Border Tax issues facing many small to medium sized U.S. online businesses and how to be in compliance with the Canadian tax rules and regulations.
1. Canadian Income Tax
The number one question asked by U.S. businesses is, “Will I be liable for Canadian Income Tax on the sales I make to Canadian customers?” The answer is No, as long as your business does not have a permanent establishment in Canada.
Permanent Establishment means a fixed place of business such as:
- a branch
- an office
- a factory
- a place of management
- agent or employee physically in Canada in certain circumstances
If your business does carry on one or more of the above in Canada, Canadian income tax will be applied on the profit attributed to your Canadian Permanent Establishment.
More frequently however, your business will encounter a situation in which your goods are shipped to one or more distribution centers in Canada before being delivered to the customer. This is a method widely popularized by Amazon. If your business uses such a model, you can breathe a sigh of relief in that the CRA will not view storing your goods in a Canadian distribution centre alone as a fixed place of business.
For more discussion on Permanent Establishment, please see my other article on cross border taxation: Permanent Establishment In Canada http://madanca.com/blog/permanent-establishment-in-canada/
Tax filing responsibility
As stated above, if your business does have a permanent establishment in Canada. Your business’ profit attributed to that Permanent Establishment will be taxed by the CRA at an approximate rate of 26.5% (tax rates vary by provinces). There is an additional 5% tax if your business’ all time Canadian profit exceeds $500,000.
Your company will be required to file a ‘T2 – Canadian “Branch” Corporation Income Tax Return’ within 6 months of the company’s year end. (Note that income taxes owing must be paid within 2 months of your company’s year-end; otherwise interest will start accruing.)
If your business does not have a permanent establishment in Canada but still shipped goods to Canadian customers during the year, then your business will be required to file the following within 6 months of its year end:
- T2 – Treaty Based Corporation Income Tax Return
- T2SCH91 – Information Concerning Claims for Treaty-Based Exemptions http://www.cra-arc.gc.ca/E/pbg/tf/t2sch91/
- T2SCH97 – Additional Information on Non-Resident Corporations in Canada http://www.cra-arc.gc.ca/E/pbg/tf/t2sch97/
I highly advise any businesses to first consult a cross border tax professional before filing these returns as it is an area that is highly audited by the CRA.
2. Canadian Sales Tax & Cross Border Taxes
In Canada, the federal government in addition to each Canadian Province administers sales tax on goods sold in Canada. Useful definitions are as follows:
- Goods and Services Tax (GST) – Sales tax administered by the federal government. Applicable on any goods sold to/in Canada
- Provincial Sales Tax (PST) – Sales tax administered by various provinces
- Quebec Sales Tax (QST) – Sales tax administered by the province of Quebec
- Harmonized Sales Tax (HST) – In many provinces such as Ontario, GST and PST are harmonized into one tax administered by the federal government
- Canadian Customs Tax – 5% tax levied on the vendor when the goods enter Canada
Initially, when your business’ products enter Canada, the Canadian Customs will levy a 5% tax. Then, your business will be required to collect either the GST/PST/PST or the HST from your customers depending on which province your customer is located in.
The 5% Canadian Customs Tax does not represent a real cost to your business as you can use the amount paid as a credit against the Sales Tax you collected from your customer.
Example: Your Company makes a sale to a resident in Toronto, Ontario for $100. When the good enters Canada, Canadian Customs charges $5 tax to your business. The province of Ontario administers HST at 13%. As such, you collect from your customer, $13 in HST on the $100 sale. When filing your Canadian Sales Tax Return, you remit to the CRA $8 ($13-$5).
You are required to collect GST/HST in Canada regardless of whether or not your business has a permanent establishment in Canada with one exception: If your sales to Canada are less than $30,000 per annum, you are not required to register and collect GST/HST. For PST/QST in applicable provinces, sales tax rules and exceptions can vary. For more information on International tax check out our blog on Where can I get International tax advice in Canada
The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.