Complete guide to paying taxes for an e-commerce business

Running an online business may come with a lot of challenges. But paying taxes should not be a challenge that you need to be worries about. Find out all that you need to know about paying taxes for an e-commerce business in this chapter.

Do e-commerce businesses pay taxes in Canada?

This is one of the most commonly asked questions, so, let’s address this. Yes, e-commerce businesses operating in Canada are generally required to pay taxes, including federal and provincial taxes, depending on their business structure, size, and specific circumstances. Here are some key considerations regarding taxes for e-commerce businesses in Canada –

• Goods and Services Tax (GST) / Harmonized Sales Tax (HST): E-commerce companies usually need to register for Goods and Services Tax (GST) / Harmonized Sales Tax (HST) in Canada when their annual global taxable sales surpass $30,000 CAD. GST is applicable in most provinces, while HST is applied in others. These taxes are collected by businesses on behalf of the government and remitted to the Canada Revenue Agency (CRA). The GST/HST rates vary by province.
• Provincial Sales Tax (PST): Some provinces in Canada have a separate PST, which may apply to certain goods and services, including those sold online. It's essential to determine whether PST is applicable in your specific province and industry.
• Income Tax: E-commerce businesses are subject to federal and provincial income taxes on their profits. The income tax rate varies based on the business structure (sole proprietorship, partnership, corporation) and the amount of income earned.
• Customs Duties and Import Taxes: If your e-commerce business involves importing goods into Canada, you may be subject to customs duties and import taxes. These taxes are levied on the value of imported goods and vary depending on the type of product and its country of origin.
• Provincial Taxes: In addition to federal taxes, each province in Canada may have its own tax regulations and requirements, including corporate income taxes, payroll taxes, and other business-related taxes. The rules can differ from one province to another.
• Sales Tax Collection: E-commerce businesses are responsible for collecting and remitting the appropriate sales tax (GST/HST) on sales to Canadian customers. This involves registering for a GST/HST account, calculating and collecting the tax at the point of sale, and reporting and remitting it to the CRA.
• Record Keeping: E-commerce businesses are required to maintain accurate financial records, including sales records, expense receipts, and tax-related documents, to substantiate their tax filings.

It's crucial for e-commerce businesses operating in Canada to understand and comply with the tax laws and regulations that apply to their specific circumstances.

Do I need to register my e-commerce business in Canada?

Business registration is an essential step, but the choice of business structure is a decision you have the flexibility to make. When it comes to e-commerce businesses, they typically fall into one of three primary categories –

• Sole Proprietorship: In this situation, you independently oversee your business, and it operates without formal incorporation.
• Partnership: A partnership entails two or more self-employed individuals collaboratively managing the business.
• Incorporation: Through incorporation, your business transforms into a separate legal entity referred to as a corporation.

Your chosen business structure carries significant consequences, impacting factors like your tax treatment, legal responsibilities, and the particular tax forms you'll need to fill out during tax season.

Each of these setups has its advantages and disadvantages. If you find yourself in the initial planning stages of your online business venture and are uncertain about which business structure aligns best with your objectives, you can take help from a professional.

Different types of taxes for e-commerce business in Canada

As previously noted, there are various taxes that can impact your eCommerce business in Canada. Let's delve deeper into the primary tax categories you might be required to address –

1. Income Tax

Income tax is levied on the taxable income of both businesses and individuals. The applicable tax rates differ according to the province or territory in which your business operates. Detailed information regarding the Income Tax Act and the specific tax rates for each province and territory can be found on the official Government of Canada website.

2. GST/HST

The Goods and Services Tax (GST) is a federal tax levied on the sale of most goods and services within Canada. If you are a registered GST collector, you are required to collect GST on all transactions involving taxable goods and services conducted within Canada. Additionally, depending on your specific province or territory, you may also be mandated to collect the Harmonized Sales Tax (HST). The HST combines the GST with the provincial sales tax (PST) and is implemented in provinces that have streamlined their tax system with the federal GST. For comprehensive details regarding the GST/HST and the registration process, please consult the Government of Canada website.

3. Import and Export Duties

If your business involves the sale of products imported into Canada, it may necessitate the payment of import duties. Import duties are computed as a percentage of the value of the imported goods and are contingent on the type of product being imported. You can access additional information regarding import duties and instructions on their calculation by visiting the Government of Canada website.

4. Sales Tax (PST, HST, or QST)

The majority of Canadian provinces impose a provincial sales tax (PST) on the sale of goods and services. When registered for PST, you are obligated to apply PST to all taxable transactions for goods and services conducted within the province. Three provinces, namely New Brunswick, Newfoundland and Labrador, and Nova Scotia, have harmonized their tax systems with the federal GST. If your business operates in one of these provinces, you will levy the Harmonized Sales Tax (HST) instead of GST and PST. The HST merges the GST with the provincial sales tax. Quebec has its distinct sales tax known as the Quebec Sales Tax (QST). If your business is situated in Quebec, you will apply QST in lieu of GST. Detailed information on PST, HST, and QST, including tax rates for each province, can be accessed through the Government of Canada website.

5. Corporate Income Tax

If your eCommerce business is incorporated, you will be obligated to remit corporate income tax on the taxable income of your business. The federal corporate income tax rate stands at 15%, with provincial corporate income tax rates varying based on your business's location. Additional insights on corporate income tax, including provincial tax rates, can be found on the Government of Canada website.

6. Payroll Tax

Should you employ personnel, it becomes necessary to deduct payroll deductions from their paychecks and remit these deductions to the government. These deductions encompass income tax, Employment Insurance (EI) premiums, and Canada Pension Plan (CPP) contributions. As an employer, you are also responsible for making EI and CPP contributions on behalf of your employees. For comprehensive guidance on payroll deductions and remittance procedures, please refer to the Government of Canada website.

Tax Reporting for E-Commerce Business Activities: A Step-by-Step Guide

If your online business constitutes your primary source of income, your tax liability will be based on your net income, which is calculated by subtracting your business expenses from your total income. This taxation approach mirrors that of self-employed individuals.

However, if you have additional income sources or a full-time job, the Canada Revenue Agency (CRA) will require you to report your online business's gross income as a percentage of your overall gross income.

• Pro Tip: If you are engaged in activities like selling on external platforms such as Amazon or generating income from paid content on platforms like YouTube, you should receive an income statement from these online enterprises. This statement can be used when filing your tax return.

Sales tax may be collected and remitted on your behalf in installments. Nonetheless, you are still responsible for completing and submitting your sales tax return and ensuring any outstanding balances are paid promptly.

Remember that if the income generated by your online business elevates you to a higher tax bracket, any earnings surpassing the limit of your initial tax bracket will be liable to taxation at an increased rate.

What if my sales are in Canada as well as internationally?

The Canada Revenue Agency (CRA) mandates that you must meet your income tax responsibilities for your online earnings, regardless of where your customers are located. As per the CRA's viewpoint, the key differentiation between Canadian and international customers is that international customers are exempt from sales tax.

Should I be charging sales tax?

If your business generates an annual income surpassing $30,000, regardless of its profitability, you must charge sales tax to your Canadian customers based on the tax rate applicable in the province to which you are delivering your products (consult the chart below).

For instance, let's consider the case of Sarah, an e-commerce entrepreneur operating from Alberta, specializing in selling fitness equipment to customers all over Canada. Today, she finalized a sale worth $200 to a customer residing in British Columbia. In this scenario, Sarah is obliged to apply an additional 5% in GST ($10.00) and 7% in PST ($14.00), resulting in a total transaction amount of $224.00 for her customer in British Columbia. Following this transaction, Sarah should report $200 as her sales revenue and $24.00 as the total sales tax collected on her upcoming sales tax return, according to the tax rates for the year 2023.

If you're uncertain about surpassing the $30,000 threshold or wish to proactively establish a GST/HST number to facilitate proper recordkeeping, it's advisable to acquaint yourself with the details of registering for, collecting, and reporting GST/HST.

Provincial sales tax rates

As you might be aware that sales tax varies for every province in Canada. Here’s the complete list for your reference –

What expenses can I claim for my e-commerce business?

Tax deductions are powerful tools for small business proprietors, particularly in the realm of e-commerce. As an e-commerce business, you can claim many of the same deductions as conventional physical stores. Hence, it is prudent to maintain thorough records of all your expenses, no matter how inconsequential they may appear. The cumulative value of each receipt has the potential to result in significant deductions, possibly even lowering your overall tax liability.

Capital Cost Allowance (CCA) –

In contrast to typical expenses that can be fully deducted in one go, the cost of substantial business assets, such as office furniture or computer equipment, needs to be claimed gradually over time. For example, office furniture is depreciated at a rate of 20% of its value annually, while machinery and equipment are depreciated at a rate of 30%.