Sales Tax 101 For Canadian Startup Companies

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.
Who Must Register For GST/HST?
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.
Who Must Register For PST?
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.
How Can A Tax Lawyer Assist My Canadian Startup Company?
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.
The Disclaimer:
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.
GST/HST on Digital Products in Canada
GST/HST on Digital Products in Canada
Canada has always been a global importer and exporter of goods and services. However, with more and more digital products in the marketplace, it is important to understand the impact of GST/HST on digital products in Canada. Legislative changes occurred in 2021 that directly address the taxation of digital economy businesses. If your business has digital products, contact the experienced tax attorney at Jeremy Scott Law at 902-403-7201 to help you better understand how you can remain compliant under these new laws.
New Canadian Tax Laws for Digital Economy Businesses
The Fall Economic Statement 2020 by the Government of Canada specifically addressed digital economy businesses. The measures discussed were ultimately revised and adopted as of July 1, 2021. As of this date, any digital economy business (including digital economy operators) may have new GST/HST obligations on their digital goods and/or services.
Types of Businesses Impacted by These New Laws
Every foreign business owner should receive specific advice regarding the way these new laws may impact their digital goods and/or services. In some cases, a business may not be required to charge and collect GST/HST. In other cases, businesses may be under an obligation to charge their customers GST/HST as a ‘digital platform operator’ for supplies obtained through a digital source or platform. Some of the types of businesses that may be affected by these new laws could include the following:
International Sellers of Digital Services and Products
Foreign-based businesses, vendors, or distribution platform operators that sell taxable digital services and/or products to Canadian companies or consumers may now face GST/HST obligations. Under the previous law, non-resident persons did not need to collect or remit GST/HST if they were not considered to be carrying on business in Canada. As a result, the consumer that purchased the digital good or service was required to self-assess the tax applicable on the good or service and pay the tax directly to the CRA. In reality, consumers rarely assessed and self-remitted this tax, and many purchases of digital goods and services through digital platforms went untaxed. As a result, Canadian business that supplied digital goods and services and who were required to collect the GST/HST were at a significant financial disadvantage when compare to these non-residents suppliers. The new law essentially requires that all non-resident vendors collect and remit GST/HST if the total amount of their taxable digital goods and services sold to Canadian consumers exceeds $30,000 over a 12-month period.
Fulfillment Warehouses
Non-resident vendors and/or non-resident distribution platform operators who distribute qualifying goods that are delivered and/or made available in Canada may also face these new GST/HST obligations. Vendors involved in making supplies of “qualifying tangible personal property” and who have goods located in a fulfillment warehouses in Canada, will also need to register for and collect GST/HST.
Again, under the new rules, both resident and non-resident distribution platform operators would need to register if the total amount of their qualifying goods to Canadian purchasers exceeded $30,000 over a 12-month period of time.
Short Term Accommodation Platforms
Suppliers of short-term accommodation services (or accommodation platform operators) may also face these GST/HST obligations. Specifically, the new GST/HST laws will impact transactions that involve short-term accommodation rentals of private residential property that are made available through digital platforms. For example, whether or not GST/HST applied on an accommodation through a platform such as AirBnB depended upon whether or not the property owner was registered to collect GST/HST. Under the new rules, the platform operator will often be required to collect GST/HST on all short term stays, regardless of whether or not the owner is a GST/HST registrant.
Impact of GST/HST on Digital Products in Canada
According to the previously mentioned Fall Economic Statement, retail e-commerce in Canada rose by nearly 70% in 2020. While some of this trend may be due to the lockdown and COVID-19 global pandemic, society as a whole has moved towards consuming more digital goods and services. The tax laws of Canada proved far too antiquated to capture these digital transactions, which placed local business at a financial disadvantage when compared to foreign competitors. If your company is involved in the sale, distribution, or transfer in any way of digital goods and services in Canada (either as a domestic or foreign entity), you should consider contacting an experienced tax attorney at Jeremy Scott Law to see if you have any increased legal or financial obligations under these new laws.
More Changes in 2022
Additionally, along with these new GST/HST laws, the Canadian government is expected to implement a new tax on corporations providing digital services, effective January 1, 2022. This new proposed tax will attempt to capture revenue from digital corporations specifically regarding value-creating activities through remote digital means. This could include the collection of user data or content creation, which is not currently under or subject to the Canadian corporate tax laws. The tax landscape for Canadian businesses is ever evolving and changing, especially when it comes to those corporations that are involved in the sale or distribution of digital goods and services. Visiting with an experienced tax attorney can help ensure your business remains compliant, regardless of any new adopted laws.
Contact an Experienced Canadian Digital Sales Tax Attorney
If you are a resident or non-resident business that provides digital goods or services to Canadian residents, you may have questions regarding whether you have any new financial obligations with respect to GST/HST on digital products in Canada. If your business has digital products that are offered for sale to Canadian consumers, contact an experienced tax attorney at Jeremy Scott Law at 902-403-7201 to ensure you understand all your legal obligations.
If you found this information valuable, I encourage you to check out my other blog posts.
The Disclaimer:
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.