Surprising Tax Facts About Doing Business in Canada

For many U.S. businesses and sales tax specialists, we tend to focus on the intricacies of the the sales tax system here in the U.S., and that’s more than enough to keep us busy, right? With all of the different tax rules by state, new legislation being enacted all the time, and everything that sales tax administration and compliance entails, you can dedicate your entire career to learning the U.S. sales tax system.

But even if you are a bonafide U.S. sales tax expert, once you set foot in another country, you may know less about how the sales tax system works in that country than a typical layperson. Being a tax expert in one country does not directly translate to tax expertise in another country.

Businesses & Tax Liability Expanding to Canada

U.S. sales tax system expertise does not render for Canada.

Canada’s tax system operates in a very different fashion from the United States. There are many reasons why companies or taxpayers need to understand these differences and how Canada operates in regard to taxes.

Many U.S. companies have expanded their footprint to Canada. With the tremendous growth in e-commerce, it means that more taxpayers are conducting business in our neighbor to the north every day. If you are doing business in Canada, it is essential to understand how the tax system differs from the U.S. sales tax system.

As an introduction to some of the key differences, here are three tax facts about doing business in Canada that may take you by surprise. If you are currently doing business or plan on doing business in Canada, this information will come in handy.

Canadian Tax Facts

1. Canada doesn’t have just one type of transaction tax

The U.S. sales tax system basically revolves around one sales tax. Yes, we have the use tax as well, and the ways that each state applies sales tax to transactions can vary widely, but we operate on the concept of one sales tax.

Canada doesn’t operate this way; they have multiple types of transaction taxes – a sales tax and a value added tax (VAT), and learning the jargon alone for each of them is quite a task. You’ll hear a lot of acronyms when acquainting yourself with Canada’s sales tax system – especially because the acronyms are often different if you’re speaking English or French. Here’s a quick primer on what common acronyms mean:

• GST stands for Goods and Services Tax. The GST is a 5% value added tax imposed under the federal Excise Tax Act (ETA) on most property and services transactions. To further complicate things, the GST is referred to as TPS in French.
• HST stands for Harmonized Sales Tax. The HST is effectively the GST at a higher rate in “participating provinces.” More on that in a bit. In French, the HST is called TVH.
• QST stands for Quebec Sales Tax.  The QST is really just the HST for Quebec.  Although it is called a sales tax it is a value added tax and follows the rules of a value added tax.  In French, the QST is called TVQ.
• PST stands for Provincial Sales Tax. The PST is similar to U.S. sales and use tax in that it applies to the end user. It taxes most goods and specified services. You may also hear the PST referred to as the RST. Not confusing at all, right? It doesn’t end there…

2. Different provinces combine these taxes in different ways

Now you know a little bit about GST, HST, QST and PST. So no matter where you are in Canada, these taxes apply, right?

Wrong – only the GST (Goods and Services Tax) applies across the entire country. Beyond the GST, you have to look at each province to see which other taxes apply.

• The HST, as mentioned above, only applies in participating provinces. The HST effectively combines the GST and the prior PST rates to create one tax, called HST. In HST-participating provinces, the tax rate currently ranges from 13% to 15%.

The QST is the combination of the GST rate and the Quebec provincial tax.  The main difference with the QST is that Quebec administers the GST and the QST.  In all the other provinces, the Canada Revenue Agency (CRA) administers the GST and HST.

Finally, some provinces apply the 5% GST as well as a PST. The PST rates differ by province.  And of course there are some provinces without any provincial tax at all like Alberta. So that is the place to buy things as you’ll only be subject to the 5% GST!

In other words, one of three tax situations can apply, depending on the Canadian province you’re doing business in:

• Only GST applies
• HST applies
• A combination of GST and PST or QST applies

Hopefully, that clears things up. One more thing…

3. Nexus doesn’t work the same way as in the U.S.

Canada determines nexus a little differently than the U.S. does. (Need a reminder on where things stand in regards to U.S. sales tax nexus? Check out our Remote Seller Nexus Chart to see some of the many different ways that remote sellers can create nexus, depending on the state).

Non-residents of Canada must register for GST/HST purposes if they are “Carrying on business” in Canada.

Every non-resident who carries on business in Canada, other than a small supplier, must register for GST/HST purposes if the non-resident person makes a taxable supply in Canada.  Unfortunately (and similar to the US), “carrying on business” is not easily defined.   It is a fact and circumstance evaluation.  For more information on “carrying on business” in Canada, see this CRA bulletin.

And if you aren’t carrying on business in Canada, it doesn’t mean the sale isn’t taxable – the customer has an obligation to pay the tax either by self-assessing or for goods that come through customs at the time of importation.  The nexus rules for PST are more often based on physical presence – so inventory in a 3rd party warehouse could require registration in the PST provinces.

To be considered a small supplier, your business must be a sole proprietorship, partnership, or corporation with $30,000 or less in total revenue in the last four consecutive calendar quarters or in any single calendar quarter.

If your business exceeds the $30,000 threshold, then you are required to register to collect and remit GST or HST. Note: the small supplier exception does not necessarily apply to the PST, and the rules can vary depending on the province.  These rules are more similar to the US rules in that they typically require some physical presence in the province to create a tax collection requirement.

Taking Things Further

If you are making sales in Canada or considering expanding your company’s footprint to the north, it is essential that you understand how the Canadian sales tax structure works. Not doing so could mean you’re exposing yourself to significant financial risk. You also need to understand your potential tax collection obligations as well as the tax recovery opportunities that may be available to U.S. organizations doing business in Canada.

Now that you have a little more information about the sales tax landscape for Canadian transactions, you can start to really learn about the intricacies of the Canadian tax system. Once you do, you can expand your sales tax expertise beyond the U.S. border.