Canadian Tax Compliance for E-commerce Startups
What is e-commerce
Electronic commerce or e-commerce in the modern lexicon refers to the buying and selling of goods and services over the Internet. The CRA defines e-commerce more comprehensively beyond just purchasing goods and services electronically. It includes retail transactions by telephone, fax, ATMs, credit cards, debit cards, television shopping, secure private computer networks, the delivery of government services and businesses handled over the Internet.
It can be categorized as:
E-commerce is quickly gaining a foothold in Canada with the growing adoption of digital technology. The country’s expansive geography also suits the e-commerce model, allowing companies to service large swathes without maintaining a physical presence. This increased presence inevitably leads to the question, do e-commerce platforms have tax obligations in Canada?
The article will attempt to answer the question with relevant details and explore the e-commerce model in Canada.
The numbers
The growth of e-commerce in recent years is closely linked with the physical limitations imposed by the COVID-19 pandemic measures. The restriction on mobility made e-commerce retail the new avenue for purchases, pushing sales to a record high of USD 3.82 billion in December 2020 at the height of the pandemic lockdowns.
Retail e-commerce sales continued to boom in the following years, composing 6.2% of all total retail sales in 2022, up from 3.9% in 2019.
According to an International Trade Administration report, Canada had over 27 million e-commerce users or 75% of the population in 2022. The numbers reflect the pace at which Canadians are taking to electronic commerce, with expectations for the percentages to inflate to 77.6% by 2025.
Do E-commerce Startups pay taxes in Canada?
Yes, E-commerce Startups are taxed the same way as traditional businesses. According to the CRA, all tax laws that apply to traditional businesses also apply to business conducted over the Internet.
A Startup that earns income from one or more web pages or websites must report the web addresses and the income earned.
The reporting requirements may differ based on your business structure.
Corporations
A corporation implies a separate legal entity with its own corporate income tax obligations separate from the owner’s personal income tax. An e-commerce startup under this model must file a Schedule 88, Internet Business Activities, along with the Corporation income tax return (T2).
Partnerships
A partnership includes two or more entities or partners in business. Individual partners are taxed at their personal income tax rates. Currently, Internet Income earned from one or more webpages by partners is not reported separately.
Self-employed individuals
If you operate an e-commerce web page or websites, you must fill in the Internet Business Activities section of the following forms in the T1 income tax package:
Registering for GST/HST
E-commerce startups are obligated to register for the GST/HST if the business is involved in the supply of tangible or intangible property and services in Canada and their revenues exceed $30,000 per year. The startup will have to charge and collect GST/HST on all taxable supplies of property and service in Canada.
GST/HST rate to charge
The rate of tax to be charged is based on the place of supply. Suppose your business supplies are sent to a participating province; an HST that applies to the province is charged. If the supply is made to a non-participating province, a GST of 5% is applied.
Supplying an intangible personal property or service can be relieved of tax under export provisions if they are made in Canada to a non-resident person.
Input Tax credits
Canadian tax laws allow tax credits and deductions for e-commerce businesses like:
The Input tax credit is a tax provision that allows businesses to recover GST/HST paid on eligible purchases and expenses related to a Startup’s commercial activities. You can claim an ITC by reporting it in line 108 for electronic filing or line 106 for a paper GST/HST return.
Some expenses for which you can claim Input tax credits are:
Conclusion
Navigating Canadian tax laws for e-commerce startups requires careful attention to various factors, including GST/HST registration, place of supply rules, income tax obligations and record-keeping practices.
The sheer number of things to consider can sometimes prove overwhelming; thus, it is often sensible to use the help of professional tax accounting and consulting services to understand your tax obligations.
With a proactive approach to tax compliance, e-commerce startups can confidently operate within the Canadian market while maximizing their financial efficiency.
?? What steps do you believe e-commerce startups should take to ensure they are compliant with GST/HST registration requirements in Canada?