Tax
Sales And Income Tax Guide For eCommerce Companies in Canada
Ali Ladha, CPA, CA / June 16, 2023
Sales And Income Tax Guide For eCommerce Companies in Canada
The influence of eCommerce over the last few years has been a sight to see. Many new companies and entrepreneurs started eCommerce businesses during the pandemic and are still going strong.
However, even though eCommerce is widely perceived as a relatively “new” category of doing business, it is still subject to tax regulations.
These tax laws and details are often complex and hard to navigate. This blog post will simplify the vital points and guidelines concerning two essential taxes – sales taxes and income taxes, applicable in Canada.
Difference Between Sales Tax and Income Tax
Sales tax is the tax imposed on sales an individual or company makes from selling goods or products. The seller typically collects the sales tax from the buyer.
This means that if there is a 5% sales tax on a product that costs $50,000, the seller will charge $52,500 (the base price of $50,000 plus 5% of that price as sales tax). This payment is then remitted to the government by the seller, who acts as a tax collector on behalf of the government in the sale.
This system is termed ”indirect taxing” as the actual payer is the customer, but he/she fulfills the taxpaying obligation through the mediation of the seller.
On the other hand, income tax is the tax levied on the income generated by persons or corporations engaged in a commercial activity. This levy is imposed on a portion of the total income called ”taxable income.”
Taxable income is the income that can be taxed. Taxable income varies based on the province of the concerned person or organization, as various jurisdictions in Canada have unique tax regulations.
The main differences between sales and income tax are presented in the table below.
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Essential Sales Tax Information For Specific Niches
The tax system within Canada has unique differences between provinces and territories. Acting as different subnational units, each province and territory upholds a set of regulations binding for taxpaying entities (individuals or corporations).
To do business successfully in any location in Canada, it is necessary to know the guiding laws of taxation for that province or territory.
Canada is also known as ”the alphabet soup” of taxation. This is because of certain distinctive abbreviations that stand for the type of sales tax that is obtainable in a particular province or territory.
There are generally 4 of these sales tax abbreviations: GST, PST, HST, and QST.
- GST means Goods and Sales Tax. It is remitted to the federal government.
- PST is the Provincial Sales Tax, which, true to its name, is paid to the province.
- HST represents Harmonized Sales Tax, a merger of GST and PST into a single tax.
- QST is a unique tax paid in the province of Quebec. And yes, it stands for Quebec Sales Tax. A taxpayer in the Quebec province is under this special tax model.
The sales tax guidelines for the 10 provinces and 3 territories are outlined below.
- Alberta: Alberta is the only province of Canada that does not have a provincial sales tax (PST). Taxpayers here are only mandated to pay the Goods and Sales Tax (GST) of 5% to the Federal government
- British Columbia: British Columbia is among the provinces that charge the Goods and Services Tax (GST) and the Provincial Sales Tax (PST). It charges 7% PST and 5% GST.
- Manitoba: The Manitoba provinces charge 7% Provincial Sales Tax (PST) and 5% Goods and Services Tax (GST), making a sales tax total of 12%
- New Brunswick: New Brunswick is one of the Canadian provinces which charges a Harmonized Sales Tax (HST), which entails merging the PST and GST into one unified tax fee. New Brunswick charges a 15% HST
- Newfoundland and Labrador: Like New Brunswick, Newfoundland, and Labrador charges Harmonized Sales Tax (HST) of 15%
- Nova Scotia: Here, the Harmonized Sales Tax of 15% is also in force
- Ontario: Ontario also has a Harmonized Sales Tax of 13%
- Quebec: Eccentric among the provinces, the province of Quebec charges a distinctive form of Provincial Sales Tax called Quebec Sales Tax (so swap PST for QST). The QST is pegged at 9.975%, while the GST takes up 5%
- Prince Edward Island: Prince Edward Island charges a Harmonized Sales Tax (HST) of 15%
- Saskatchewan: The province of Saskatchewan charges a 6% PST and 5% GST
- Northwest Territories: This territory charges equally at both provincial and federal levels. The PST is 5%, and GST is 5%
- Yukon: Following the norm in the Northwest Territories, the territory of Yukon charges 5% for both PST and GST
- Nunavut: Keeping with the ”territorial tradition,” Nunavut requires 5% for PST and GST respectively
| Province | Provincial Sales Tax (PST) | Goods and Services Tax (GST) | Harmonized Sales Tax (HST) | Total Tax |
| Alberta | Nil | 5% | Nil | 5% |
| British Columbia | 7% | 5% | Nil | 12% |
| Manitoba | 7% | 5% | 12% | |
| New Brunswick | Nil | Nil | 15% | 15% |
| Newfoundland and Labrador | Nil | Nil | 15% | 15% |
| Nova Scotia | Nil | Nil | 15% | 15% |
| Ontario | Nil | Nil | 13% | 13% |
| Quebec | 9.975% | 5% | Nil | 14.975% |
| Prince Edward Island | Nil | Nil | 15% | 15% |
| Territory | Provincial Sales Tax (PST) | Goods and Services Tax (GST) | Harmonized Sales Tax (HST) | Total Tax |
| Northwest Territories | 5% | 5% | Nil | 10% |
| Yukon | 5% | 5% | Nil | 10% |
| Nunavut | 5% | 5% | Nil | 10% |
Sales Tax Percentages: A Brief Explanation of The Figures
The percentage rate of sales tax is calculated as a percentage of the selling price of your product. Take the British Columbian PST of 7%, for instance (see the table above).
As mentioned earlier, the PST is paid to the coffers of the province. So what does the 7% imply? If you sell a product for $20,000 the provincial tax rate of 7% of that selling price. This equals a tax of $1,400.
The same arithmetic applies to the GST, except that it is paid to the federal government.
Role of Accountants in Maximizing Income Tax Savings
Accountants are financial experts well-positioned to help your business make informed financial decisions. One such decision borders on optimizing savings on tax returns.
An expert accountant can use their professional knowledge of finances to enhance your tax efficiency. These experts can prove invaluable in keeping you on the right side of the law. They also promote healthy financial habits like early filing of tax returns, proper paperwork and documentation, and of course, the general accuracy of the calculations. It’s always in your favor to avoid penalties for tax misdeeds.
A solid financial expert can also assess your financial status by studying your statements and papers and can help keep your business on a solid footing from a tax perspective . The rewards of a single recommendation can often be enormous.
Final Thoughts
Good working knowledge of tax rates in different Canadian territories is very valuable to the success of your e-commerce business. However, navigating this information can be confusing, especially if you have just started your eCommerce company.
In this case, enlisting the services of an experienced financial expert with excellent knowledge of e-commerce and the Canadian tax system is highly recommended.
Let us help you. Do you have questions about your tax situation? Get in touch with us here or sign up to get more accounting and tax tips in our newsletter here.
The accounting and tax information provided in this post does not constitute advice and is meant to be for general information purposes only. The information is current as at the date of this post and does not reflect any changes in accounting and/or tax legislation thereafter. Moreover, the information has been prepared without considering your company or personal financial/tax circumstances and/or objectives.