Do I need to charge Canadian sales tax on online sales?

November 02, 2018


Internet sales have grown significantly over the past several years, largely because many businesses operate online stores and can deliver goods right to the door of their customers. While some retailers sell goods both online and in-store, others operate solely online. No matter what type of retail business you operate, you need to understand your Canadian sales tax obligations.

This article focuses on sales made in Canada. However, all Canadian retailers selling goods online in the U.S. need to consider the U.S. Supreme Court decision in South Dakota v. Wayfair, released in June 2018. The Wayfair decision will likely expand Canadian companies’ obligation to register for, collect and remit sales tax, and file sales tax returns, in the U.S.

What is the GST/HST?

The federal Goods and Services Tax/Harmonized Sales Tax (GST/HST) applies to most goods and services supplied in Canada. GST and HST are the same value-added tax, with GST referring to tax at a 5% rate in so-called non-harmonized jurisdictions, and HST referring to tax at higher so-called harmonized tax rates, currently at 13% (for sales to Ontario) and 15% (for sales to Nova Scotia, New Brunswick, Prince Edward Island, and Newfoundland and Labrador).

Businesses resident in Canada with annual sales on an associated basis of $30,000 or less are generally not required to register for GST/HST. Canadian-based retailers with sales of more than $30,000 including associated entities are required to register and charge the GST/HST where applicable. Rules for registering for provincial sales tax in British Columbia, Saskatchewan and Manitoba vary by province.

Businesses not resident in Canada are not required to register for GST/HST if they are not carrying on business in Canada. However, if a non-resident of Canada making taxable supplies to customers in Canada were found to be carrying on business in Canada, it would be required to register and collect applicable GST/HST on its sales. The facts of each situation must be considered on their own merits when determining whether a business not resident in Canada is carrying on business in Canada.

Selling online between provinces

The rules to determine a business’s obligations to collect GST/HST on goods and services in Canada apply to both online and in-store sales. The general rule is that a GST/HST-registered online retailer who has a physical presence in one province and sells taxable goods to consumers in other provinces is required to charge the GST/HST based on where the goods are delivered. For example, a company based in Ontario selling taxable clothing online to a consumer in Nova Scotia is required to collect HST at the Nova Scotia rate of 15%.

Online service providers also collect tax based on the location of their customer. For example, even if an internet business that provides services over the internet maintains a physical location in a particular province, it is generally required to charge the rate that applies in the province in which the purchaser is located. This means that a service provider located in Ontario providing general services to a consumer in Newfoundland and Labrador is required to collect HST at the Newfoundland and Labrador rate of 15%.

Québec Sales Tax

The operation of the Québec Sales Tax (QST) system is similar to GST/HST. Although the rules are generally harmonized with the GST/HST, the system is separate and distinct, is governed by separate legislation and is administered by Revenu Québec with separate determination for registration obligations.

Non-residents of Québec

Currently, every person (defined for sales tax purposes to include a corporation, individual, partnership or trust) that makes a taxable supply in Québec in the course of a commercial activity carried on in Québec is required to be registered for QST, except where:

  • the person is a small supplier;
  • the only activity is making sales of real property other than in the course of a business; or
  • the person is not a resident of Québec and does not carry on business in Québec.

Because the concept of “carrying on business in Québec” is not defined in the legislation, one must rely on administrative guidelines for assistance. Keep in mind that each situation must be determined on a case-by-case basis to take the specific facts into account.

As an example, consider a scenario where a GST/HST-registered online retailer is incorporated in Ontario with no place of business, no employees or agents, no bank accounts and no inventory in Québec. The retailer sells taxable goods only to other businesses and not to individual consumers located in Québec. In this case, as a non-resident of Québec that is not carrying on business in Quebec, the online retailer would not need to register for QST. This means that only GST at a rate of 5% would apply. (The impact that new rules beginning in 2019 have on this situation is discussed below).

Québec also has rules that require residents of Canada not resident in Quebec to register for QST if they solicit orders in Québec for the sale of taxable goods to be delivered in Québec to individual consumers. In this case, an online retailer would be required to register for QST. For example, consider an online retailer incorporated in Manitoba with more than $30,000 of annual taxable sales that solicits sales from individual consumers in Québec of taxable hair product. The products are delivered to customers in Québec. In this example, the Manitoba retailer would be required to register for QST, and the vendor would be required to collect GST at a rate of 5% and QST at a rate of 9.975%.

2019 changes for non-residents of Québec

The Quebec government has broadened QST registration requirements for non-residents of Quebec. In 2019, Québec will implement a specified registration system requiring non-residents of Quebec to register and collect QST on their sales of digitized goods and services directly to persons in Québec not registered for QST. This will take effect on January 1, 2019 for non-residents of Canada that are not registered for GST/HST.

On September 1, 2019, the registration and collection requirements will be extended to include residents of Canada that are not resident in Québec, and to non-residents of Canada that are registered for GST/HST. They will be required to register and collect QST not only on sales of digitized goods and services sold directly to persons in Québec who are not registered for QST, but also on sales of tangible property to such customers.

If a supplier that is not resident in Quebec sells taxable digitized goods or services through a digital platform, the obligation to collect QST will be shifted from the non-resident supplier to the operator of the platform.

These broadened requirements to register to charge and collect QST from Québec residents not registered for QST apply only if a business has more than $30,000 of these types of sales to individual consumers in Québec annually.

Under this system, non-resident businesses will not be able to claim input tax refunds (ITRs) to recover QST paid on their business expenses. However, the registration system will be simplified to ease compliance for non-resident businesses. For example, all registration and filings will be available online on the Revenu Québec website, which will also have the ability to accept payment in Canadian dollars, U.S. dollars and Euros. The new rules will have a significant impact on many Canadian and foreign businesses that sell online to customers in Québec. It is important for online retailers with customers in Québec to determine if they must register for the specified QST regime, and set up their systems to collect and remit the tax.

British Columbia PST

BC PST applies at a rate of 7% on goods, software and certain services that are purchased or used in the province. Online retailers are required to register to charge and collect PST if they carry on a business through an establishment in BC and make taxable sales in BC. Businesses located in Canada but outside BC need to register if they meet all of the following conditions:

  • sell taxable goods to customers in BC;
  • solicit orders for sale to purchasers in BC by advertising (specifically targeted for the BC market) or other means;
  • accept purchase orders (including over the internet) for taxable goods from customers located in BC; and
  • deliver goods into BC, whether physically or electronically, or through a third-party courier.

Small sellers are not required to register for PST in BC provided certain conditions are met. Generally, a small seller is defined to be a person who is located in BC but does not make retail sales in an established business location and has $10,000 or less in retail sales per year.

Manitoba PST

Manitoba levies PST at a rate of 8%. In cases where an online retailer has a fixed place of business (i.e., a head office) in Manitoba, the retailer is required to register to collect PST if it makes taxable sales in Manitoba. Manitoba also has a small supplier threshold and its rules are similar to those of BC.

A business located outside Manitoba may also be required to register for PST if it has online sales of taxable goods and all of the following conditions are met:

  • the goods are acquired to be used in Manitoba (and not for resale);
  • the vendor delivers the goods into Manitoba;
  • the vendor solicits orders for the sale of goods in Manitoba by advertising or by any other means. This would include solicitation by email targeted towards Manitoba customers; and
  • the vendor accepts purchase orders that originate in Manitoba.

Saskatchewan PST

Saskatchewan levies PST at a rate of 6%. Similar to BC and Manitoba, Saskatchewan requires vendors operating businesses in Saskatchewan to register for PST if they are making taxable sales in Saskatchewan. Saskatchewan also has a “small trader” exception. To qualify as a small trader, the goods for sale in Saskatchewan must be produced and sold from an individual’s residence, and PST must be paid by the seller on all supplies purchased (in addition to not exceeding a $10,000 annual sales threshold).

Non-resident vendors making online sales of goods must register for Saskatchewan PST if they meet all of the following conditions:

  • the goods are acquired for use or consumption in Saskatchewan;
  • the vendor causes the property to be delivered in Saskatchewan;
  • the vendor solicits orders in Saskatchewan through advertising or any other means; and
  • the vendor accepts purchase orders that originate in Saskatchewan.

Making sense of our sales tax patchwork

GST/HST was intended to be a national sales tax system that applies uniformly across the country. That is clearly not the case today. Despite the government’s best intentions, businesses with customers in Canada face a variety of rates and rules based on jurisdiction. For online retailers who easily sell across provincial borders, this tax patchwork makes it even more important to remain up-to-date on sales tax changes across the country.

Contact your local BDO office today to see how we can help you stay compliant with sales tax requirements for your online sales

The information in this publication is current as of October 12, 2018.

This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.

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