Alas! In E-commerce Taxland
In e-commerce taxland
If you've ever sent an email to your credit card company asking about your bill, or made a trip to the bank in order to find out how much interest you're paying, you know that taxes can be complicated and confusing.
They're complicated because they often involve trading one currency for another, such as converting US dollars into Canadian dollars. This is why it's important to understand how different rates of exchange work. As well, there are different types of taxes like VAT (value-added tax) and GST (goods and services tax). And there are different ways to calculate taxes depending on whether you're dealing with a good or a service, and whether it's for business or personal spending.
Complicated is one thing. But confusing? The tax code itself can be so confusing that some people won't even try to read the fine print. Instead, they may employ other methods of figuring out how much they owe in taxes. For example, they may count the number of pages on their income tax return, and if that number is divisible by four, assume that it means their taxes have been fully accounted for!
In fact, many people give up trying to understand the ins and outs of taxation altogether. They hire a tax accountant, bookkeeper, or lawyer to do their taxes for them. That's because tax accountants work with the numbers and generally know how to interpret them. Theoretically, they should be able to tell you what your taxes are likely to be.
But in reality, it's a different story: there are hundreds of ways of calculating taxes and the calculations can vary widely depending on the type of tax (goods/services tax vs. goods/services vs. income), the year in question (e.g., 2005 vs. 2010), what kinds of deductions you're taking on your return, whether you're an individual or a business, etcetera. Given all these variables, it's hard to generalize about the likely amount of tax that you'll have to pay.
Until the year 2000, for instance, most Canadians didn't have to pay any GST on goods purchased from the United States. But in a recent year, a single mother of two who had been buying a lot of clothing at Wal-Mart was hit with a $5,000 bill when she crossed the border into Canada with her purchases!
When it comes to figuring out taxes, e-commerce (buying things online) is an area where there are many grey areas that can cause confusion even for people who are otherwise well versed in taxation. Most of the issues surround international sales, because while Canada has signed on to the so-called "ratifying countries" (i.e., eSwatini), it's one of only a few countries in the world that hasn't ratified the vastly more comprehensive European Union (EU) Directive concerning cross-border ecommerce.
Generally, you have two ways of classifying your international sales: either by country or by shipping address. This is important, because it determines the type of tax you'll have to pay. The main tax-deductible expense for most individual Canadians is the Goods and Services Tax, or GST, which applies to goods sold within Canada. However, no GST is payable when you buy from sellers outside Canada or if you sell things within Canada for export only (i.e., where the proceeds are not consumed in Canada).
The way this all works is as follows:
Goods and services tax applies to all retail sales (excluding automobile sales) made by individuals who reside in Canada on behalf of a non-resident seller who lives outside Canada.
The principle of "tax equality" therefore dictates that it is your responsibility as an individual to determine which country you're selling from and how to classify your inventory. After all, it's not as if the rules governing international sales are written down in legislation. As well, it can be very difficult to determine precisely where a sale has taken place.
Unlike many other countries, Canada's GST regime isn't based on a destination–based approach like the U.S.'s. Rather, it's based on the principle of "tax neutrality." This means that no tax is payable if you produce your goods outside and then export them without ever having them sit in Canada for more than 45 days at a time. If you do have them sit in Canada for more than 45 days at a time, you may be liable for GST on those goods.
For purposes of figuring out if your inventory has sat in Canada for more than 45 days, you need to discover when your goods enter Canada. There are three main ways this can happen:
1) The supplier ships directly to you from outside of Canada;
2) You ship directly from abroad to a customer within Canada; or
3) A supplier in Canada ships the goods to you (or your customer).
If your inventory is shipped from abroad, there is generally no tax payable, even if it does transit Canada. As well, no GST is payable on goods that are shipped by a supplier in Canada to you (or your customer) within Canada. Be careful though: the 45-day rule applies only if GST/HST hasn't already been paid. The rule therefore doesn't provide protection against double taxation.
But as noted above, no GST is payable on goods that simply sit in Canada for more than 45 days at a time without being shipped to an individual in Canada or sold within Canada for export only.
Canada does, however, have a specific exemption relating to exports of transitory supplies delivered respectively by sea (whether by vessel or aircraft) or by air for which no tax was charged after July 1 2004. Goods could enter Canada before July 1 2004, but as long as they were exported after that date, no GST would apply.
This means that if you do have inventory sit in Canada for more than 45 days at a time, you may be liable for GST. But there is some good news here: if the shortfall is due to transitory supply deliveries by sea or air (or other foreign transportation), then no GST will be payable on those goods—provided they're exported after July 1 2004.
As well, even though there are rules governing which countries you might sell from (see below), it's important to know that the rules don't apply to all buyers in Canada; rather they only apply to international sellers (i.
Conclusion
To sum this issue up, if you're an international seller, you can generally assume that the goods and services tax (GST) will apply to your sales. However, there are exceptions to this rule: if you have inventory sit in Canada for more than 45 days at a time and it is due to transitory supply deliveries by sea or air (or other foreign transportation), no GST will be payable.
This article was provided by our Canadian law firm Segal McCaul & Associates LLP as a general informational service. This article does not constitute legal advice and should not be relied upon in that respect. If you have any questions about your specific situation please contact our office to discuss your matter in further detail.