Owning and operating a Canadian startup company can be a highly lucrative and exciting venture. At the onset of establishing a business venture, however, there are many major decisions to be made regarding how the company will operate. A major piece of the puzzle involves taxes. How much are Canadian startup companies expected to pay in taxes? Are there tax incentives available for small businesses? It can be difficult navigating the world of Canadian taxes, particularly in the midst of many other crucial business decisions.
At Jeremy Scott Law, we provide our clients with professional legal advice to help startup companies make well-informed decisions regarding their taxes. Understanding how Canadian taxes apply to business transactions and corporate organization is vital to optimizing a startup company’s success. As a leading Canadian tax law firm, we believe in leveraging tax incentives and regulations to help startup companies optimize their profits. Call us at 902-403-7201 to learn more today.
The Basics: Types Of Sales Taxes and the Place of Supply Rules
The Canadian tax system utilizes two main categories of sales tax for businesses, both of which must be considered when forming a startup company, depending on where the business is located and the customers it services:
- Goods and Services Tax (GST) is Canada’s federal value added sales tax. Some provinces have opted to ‘harmonize’ their provincial sales tax with the federal government creating the Harmonized Sales Tax (HST). In those provinces, the GST rate is increased, with a portion of the revenues going to the provincial government, even though it has been levied by the Canada Revenue Agency.
- Provincial sales tax (PST) is a separate sales tax levied by the various provincial governments.
The GST applies to most supplies of goods and services made in Canada, including supplies of goods, services, real property and intangible personal property. The GST is levied nationally at a rate of 5%. Several provinces have opted to “harmonize” their provincial sales tax with the GST, creating the HST, although the rate does vary by province. Currently, the HST rate in Ontario is 13%, while the HST rate in Nova Scotia, New Brunswick, Prince Edward Island and Newfoundland is 15%.
Most provinces utilize either a PST + GST combination or a streamlined HST. Alberta is the lone exception, being the only province without a PST or HST. The Retail Council of Canada provides a comprehensive province-by-province list of tax rates. It should be noted that Quebec adopted the Quebec Sales Tax (QST). Like the HST, in that it is a “value added” tax rather than a pure sales tax.
The crucial difference between the Value added tax and a traditional sales tax is that value added taxes are generally recoverable throughout the supply chain. In other words, most businesses (other than those involved in exempt activities) will be entitled to recover any GST/HST/QST paid in the course of their operations. In addition to being involved in a ‘commercial activity’ it is important the business is registered for the applicable GST/HST or QST PRIOR to incurring the expense. Register for the GST/HST or QST too late, and you may lose out on your ability to recover taxes already paid.
Canadian businesses which exceed $30,000 in taxable sales over the last four consecutive calendar quarters are required to register for GST/HST. Note that taxable sales by associated parties may need to be included in the $30,000 threshold calculation. Businesses which do not meet this revenue test may voluntarily register for GST/HST
The Canada Revenue Agency does provide some information to assist startups understand when to charge GST/HST. Check this CRA website for more specific information regarding what are considered taxable supplies in Canada.
Each Province has separate rules for determining if and when a business needs to register for its provincial sales tax. Recent changes in most provinces require vendors to register if they carry on business within a province, or if they make routine sales into the province. It is important that every new business consider whether or not they have sales tax obligation in particular jurisdiction, even if they may not have a physical presence in the province.
Place Of Supply
With the understanding of who charges taxes and how the tax rate differs from province to province in mind, we must now clarify how “place of supply” is established for Canadian startup companies. Especially for companies that operate online and sell globally, establishing “place of supply” can be quite confusing.
In Canada, place of supply refers to the location in which a sale, lease, or taxable supply is made. Place of supply rules operate differently depending on the type of products and services that a startup offers.
Regardless of the type of products or services that your startup provides, you must know where your clients and customers are located. Collect billing addresses or IP addresses to confirm your customer’s locations and charge the appropriate tax rate accordingly. For customers within Canada, you will focus on applicable PST or GST/HST, depending on the province where your customer is located.
Navigating the arena of taxes when establishing a startup company is as stressful as it is necessary. A full understanding of how to charge taxes is crucial, as mistakes can result in very expensive consequences. In order to minimize unnecessary expenditures and adhere to strict tax regulations, speaking with an experienced tax lawyer can make all the difference.
At Jeremy Scott Law, we work alongside entrepreneurs at all levels of the startup journey to uncomplicate the tax process. We ensure that Canadian startup companies are operating in accordance with Canadian and foreign tax rules and regulations while avoiding common tax pitfalls. We take the responsibility off of business owners and allow them to focus on what drives their company forward. Experienced tax lawyers are available at 902-403-7201 to discuss solutions that work for you and your company.
If you found this information valuable, I encourage you to check out my other blog posts.
Please note the content above and throughout this website is provided for general information purposes only and does not constitute legal or other professional advice or an opinion of any kind. I urge you to seek specific legal advice by contacting me (or your current legal counsel) regarding any legal issues you may face. I do not warrant or guarantee the quality, accuracy or completeness of any information found on this website and will not be held liable for anything contained in this document or any use you make of it. Finally, accessing the information on my website does not create a lawyer-client relationship.