In 2016, U.S. exports into Canada totaled a whopping $320.1 billion. It is no question that Canada is a clear opportunity for U.S. based businesses/sellers to expand their market and increase their sales volumes. However, with this opportunity of increased exports comes the question of whether U.S. sellers have a responsibility to register for Canadian Sales Tax (GST/HST). The question of registration becomes very relevant even if not required by legislation.
Canada has a very different sales tax system to the U.S. The Canadian system is a Value Added Tax system, which levies sales taxes on every transaction, as opposed to the Sales and Use system in place in the United States.
Understanding these differences is critical to maintaining cross-border compliance and avoiding some harsh fines and penalties for U.S. businesses/sellers. It is also important to consider and quantify any Canadian sales tax obligations to avoid the risk of draining cashflow and eroding your bottom line.
So, how can your U.S. business keep tax compliant when selling in Canada? Brian Litvin of Litvin Muir, a leading Canadian Sales Tax Practice, shares his top tips on sales tax in Canada for US businesses.
1) Understand the different Canadian sales taxes.
There are three distinct Canadian sales taxes/categories of sales tax:
- GST – Goods and Services Tax
- HST – Harmonized Sales Tax
- PST – Provincial Sales Tax
GST (Goods and Services Tax) - GST is a federally levied tax, and is applicable to all provinces and territories across Canada. The current GST rate is 5%. Certain limited products are exempt from GST. GST is charged at 0% (zero-rated) on certain transactions and administered by the Canadian Revenue Agency (CRA).
HST (Harmonized Sales Tax) - In certain provinces, HST is levied. HST comprises of the federal GST and a provincial tax component. HST is administered by the CRA and, other than for very few specific provisions, it is treated exactly the same as GST. HST rates vary between 13% and 15%.
PST (Provincial Sales Tax) - The provinces of British Columbia, Manitoba, Quebec and Saskatchewan levy a Provincial Sales Tax over and above the federally levied GST. QST, the Quebec provincial sales tax, is treated as a value-added tax. All other provincial taxes are charged as a consumption tax. The Provincial Sales Tax rates range from 6% to 9.975%.
2) Determine if your business requires registering for GST purposes.
Per the Canadian Excise Tax Act, every person who carries on business in Canada, whether a resident or not, other than a small supplier, must register for GST purposes.
The two criteria to consider to determine the obligation are:
- “Carrying on business” – the definition of “business” for the purposes of the Act is very broad and includes activities that are considered “not for profit”.
- “In Canada” – non-residents are often considered to be carrying on business in Canada, even without having a Canadian permanent establishment. There are multiple predetermined factors that the CRA evaluates to determine whether a non-resident is carrying on business in Canada. The nature of the business, the frequency of transactions and all relevant facts are considered when determining if business is being carried on in Canada.
Registrants are obliged to charge GST/HST tax on sales in Canada. The taxes billed, net of GST/HST paid on costs incurred in Canada must be remitted to the taxing authorities. This is done on a periodic basis, together with required GST returns. The return submission frequency can be monthly, quarterly or annually, depending on sales volume in Canada.
In most cases, a small supplier is not required to register to collect GST/HST. A small supplier is defined as one whose worldwide taxable supplies (including zero-rated supplies) in the previous four quarters does not exceed $30,000 ($50,000 for public service bodies - colleges, non-profit organizations, charities, hospitals).
Circumstances often arise where it is beneficial for non-residents to voluntarily register for GST, even if not obliged to do so, to facilitate the recovery of GST/HST incurred in costs in Canada.
3) Consult a knowledgeable professional.
It is highly advisable to consult with a knowledgeable professional that specializes in Canadian Indirect Taxes, to help determine if you need to register for, collect and remit Canadian Sales Tax. This will save you from headaches down the road including unpleasant audits, unnecessary penalties, and interest.
4) Automate tax management.
Once you have consulted a professional and established the necessary information to collect and bill GST/HST for your business, look into software that will automatically calculate taxes for you based on the rules you have entered into the system. Fortunately, there’s been a great advancement in sales tax software over the years. Tax software companies such as Avalara, which integrates with Blue Link ERP, not only automates the process of calculating, reporting, remitting and filing sales and use tax but also minimizes human intervention and helps reduce the risk of over or underpayment.
Please note: This blog is for informational purposes only. Be advised that sales tax rules and laws are subject to change at any time. For specific sales tax advice regarding your business, contact a sales tax expert.
Brian Litvin, CPA CA, of Litvin Muir specializes in Canadian Sales Taxes – (GST/HST/QST/PST), and International VAT. He has consulted with companies on the Forbes 100 list, multinationals and national entities, many of which are household names. His expertise includes minimizing GST/HST/VAT costs and streamlining processes. You can contact Brian directly at firstname.lastname@example.org or send inquiries to email@example.com.