With the COVID-19 pandemic, many Canadians have resorted to working from home and operating online. E-commerce businesses have become a popular industry for Canadians looking to start their own businesses, as opposed to a brick and mortar location. Depending on your business model, many of these E-commerce businesses would not even require you to leave your home office, but rather operate through drop shipping 3rd parties such as Amazon, eBay etc. However, with E-commerce business often operating outside of Canada, supplying to customers worldwide – there is some difficulty when it comes to navigating your tax responsibilities. Here are some tips to best prepare your E-commerce business for tax season:
With an e-commerce business, there are sales occurring outside of Canada and in different currencies. It is important when bookkeeping and preparing for filing your taxes that all expenses and revenue has been converted to CAD, as per CRA guidelines. There is accounting software such as QuickBooks that can handle this aspect for you.
- Accurate records
E-commerce businesses often spark interest from CRA and can be commonly audited. Make sure to keep detailed and accurate records and hold on to records for 6 years. When dealing with multiple currencies and disparity with sales taxes, you may find hiring a bookkeeper or a bookkeeping software such as QuickBooks can make the bookkeeping easier and more accurate. However, along with the software it is important to also keep all receipts and invoices.
It is also important when selling through 3rd parties such as Amazon, eBay etc. to accurately track your revenue. With these 3rd parties, often the funds received are your revenue minus their fees, shipping costs etc; therefore adjustments will need to be made to properly account for this.
- Sales taxes
Businesses earning more than $30,000 in taxable revenue in a fiscal year must charge GST/HST on all sales to Canadian customers (whether online or in store). However, many e-commerce businesses do not sell to just Canadians. The sales to other customers that are not in Canadian would therefore be exempt of GST/HST.
This is also important to keep in mind for GST/HST input tax credits. For many e-commerce businesses, their cost of goods sold and/or supplies would be from another country and would not charge GST/HST. Keep a close eye out for these types of transactions and be careful when tracking GST/HST input tax credits.
- Income taxes
In general, Canadian residents and businesses are taxed on worldwide income and obligated to pay tax on it. It is important to note the structure of your e-commerce business will play a role as well into the amount of income tax you will owe (i.e.: sole proprietorship versus incorporated businesses).
For Canada and the US, your tax responsibility depends on the degree of your business’ involvement in their economies.
- For businesses that do not directly use any local companies or independent agents there is no tax consequences
- For businesses that sell products through a 3rd party such as Amazon and do not have a physical presence in that country will be required to file treaty-based tax returns with no taxes payable
- For businesses that have a physical presence in that country will be required to file tax returns and pay income taxes based on that income
It is important to note that these types of businesses are more complex when it comes to taxes, especially considering businesses often happening in multiple countries and currencies. At Jibe Accounting, we have experience with E-commerce businesses and can help with preparing and filing your taxes, incorporating your businesses and tax planning for your businesses’ future.