The inventory moved north. Did anyone tell the tax adviser?
Many U.S. ecommerce sellers think of Canadian sales tax as something collected at the border. For orders shipped from a U.S. warehouse, that is roughly right. Put inventory in a Canadian fulfillment warehouse, though, and the picture changes.
Since July 1, 2021, a U.S. seller storing goods there and selling to Canadian consumers can be required to register for Canada’s goods and services tax or harmonized sales tax (GST/HST), charge tax, and file Canadian returns once those sales pass CAD 30,000 over 12 months. Third-party logistics providers make that move easy. U.S. advisers rarely hear about it.
Which sales count?
Section 211.22 of Canada’s Excise Tax Act sets the rule. A non-resident seller not carrying on business in Canada and not already registered must register once qualifying sales to unregistered Canadian customers exceed CAD 30,000 in any 12-month period.
The “not carrying on business in Canada” condition matters. Inventory in Canada is itself a factor the Canada Revenue Agency (CRA) weighs when deciding whether a business is carried on there. Sellers carrying on business in Canada fall under the ordinary rules instead: their CAD 30,000 test counts worldwide taxable sales, including those of associated businesses.
For sellers covered by section 211.22, not every sale counts toward the total.
- Goods mailed or couriered from outside Canada do not count, provided the seller keeps shipping evidence. The rule covers goods delivered or made available in Canada, such as warehouse stock.
- Sales to registered businesses do not count. The threshold counts sales to customers who are not registered for GST/HST, consumers, and Canadian businesses too small to have registered. Wholesale sales to a registered Canadian retailer are excluded.
- Marketplace sales usually do not count. When a registered platform operator, typically a marketplace that sets the terms of the sale, facilitates a sale for an unregistered seller, the law treats the platform as the seller. The platform charges the tax, and those sales drop out of the seller’s threshold count.
The test also looks forward. Registration is required from the first day the actual or reasonably expected total for a 12-month period passes CAD 30,000. The application is due within 30 days.
One seller, four sales channels
Consider a U.S. kitchenware seller holding stock in an Ontario fulfillment warehouse. Assume it is not carrying on business in Canada. Over the past 12 months, its Canadian sales were:
- CAD 60,000 through a registered marketplace, from stock that marketplace holds in Canada.
- CAD 42,000 through its own website, shipped from the Ontario warehouse to Canadian consumers.
- CAD 25,000 from that warehouse to registered Canadian retailers whose GST/HST numbers it has checked.
- CAD 15,000 couriered from its U.S. warehouse, with shipping records kept.
Of CAD 142,000 in Canadian sales, only the CAD 42,000 from the website counts toward the threshold, and that is enough to require registration.
The threshold decides whether the seller must register, not what is taxed afterward.
From the day registration is required, the seller’s own sales from Canadian stock are taxable, including retailer sales, whether or not it has registered yet. Once it actually registers, the marketplace stops being treated as the seller. A registered non-resident’s sales delivered in Canada count as made in Canada.
The seller then charges GST/HST on marketplace sales too, and usually on courier sales. Here, that means up to CAD 142,000 a year, not CAD 42,000. Registered retailers can generally claim their tax back. In practice, the seller also needs to update its tax status with the marketplace.
What comes with the number
Registration is under the normal GST/HST system; the simplified system for foreign sellers of digital services is not available for goods.
The delivery address sets the rate. For example, 13 percent HST in Ontario, 14 percent in Nova Scotia, and 5 percent GST in provinces without HST. Separate provincial sales taxes are outside this article.
Returns and payment follow. The seller files GST/HST returns with the CRA and pays the net tax.
Registration can recover money, too. A registered importer can generally claim input tax credits (ITCs, Canada’s value-added tax-style credit for tax paid on business inputs) for GST, or the federal part of HST, paid on import. An unregistered importer cannot.
Security is usually required. A non-resident without a permanent establishment in Canada must give security. The CRA generally asks for 50 percent of estimated net tax for the first year, between CAD 5,000 and CAD 1 million. None is required if estimated Canadian taxable sales are CAD 100,000 or less and net tax is within CAD 3,000 either way.
Getting registration wrong eats into margin. Sellers collect tax as agents of the Crown, in trust for the government. A seller that should have registered can therefore be assessed for tax it never charged.
And these sellers are traceable. Canadian warehouses storing goods offered for sale by non-resident sellers must notify the CRA and keep records on those clients.
Five questions worth asking
- Does any inventory sit in Canada, with a third-party logistics provider, a marketplace’s fulfillment network, or your own space?
- Which sales of that stock go through your website, and which through a marketplace?
- How much goes to customers without a Canadian GST/HST number?
- What were those sales over the last 12 months in Canadian dollars, and what is expected for the next 12?
- Who is the importer of record, and who pays GST at the border?
If non-marketplace sales from Canadian stock to unregistered Canadian customers exceed CAD 30,000 in any 12 months, past or expected, the client needs Canadian registration and a Canadian adviser. Finding that now is far cheaper than finding it at audit.
ABOUT THE AUTHOR:
Bashar Qawas is a partner at Better Books Canada, a bookkeeping and tax firm in Ottawa, and a former Canada Revenue Agency auditor. He works with non-resident businesses that sell into Canada.
Photo credit: Praveen Kumar Nandagiri/Unsplash
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