Dropshipping is a great eCommerce business model for those who are looking to start a small business on a budget. However, one important factor to consider when starting a dropshipping business in Canada is the applicable tax rates. This article will provide a brief overview of the Canadian tax system applicable to dropshipping businesses and will outline the various tax rates that apply.
Why are dropshipping taxes important?
Dropshipping is a great way to start a small business, but it can also be a bit of a pain to keep track of all the tax implications. Here’s a short note about dropshipping taxes in Canada.
In Canada, you’re considered to be selling through an “online market place” (OMP) if you have sales of more than $100 in any 12-month period. This means that you’re subject to the same GST/HST (Gross Domestic Product) and PST (Provincial Sales Tax) rates as an online retailer who has sales in person. In other words, you’ll pay GST on your sales at the regular rate of 10%, and HST at the rate of 13%. You’ll also need to charge PST on your sales, except in Quebec where the PST rate is 0%.
If you’re only selling through your own website, you’re not considered to be selling through an OMP, and you’re exempt from GST and HST. You’re also exempt from PST in Quebec.
The three types of dropshipping taxes in Canada
There are three types of dropshipping taxes that you may encounter in Canada: federal, provincial and municipal. Each has its own rules and requirements, so it’s important to know which one applies to you.
Federal Dropshipping Taxes
The federal government imposes a Goods and Services Tax (GST) of 5% on the total value of all sales made through your online store. This includes both physical and digital products sold through your store. The GST is charged on the selling price of the product, not the cost of the product. You must include the GST in your prices and report it on your tax return.
Provincial dropshipping taxes
Pursuant to section 151 of the Canadian Income Tax Act, provinces may levy an add-on sales tax (ASB) on the gross proceeds of your business operations. The ASB is calculated as a percentage of the selling price of products sold through your store, and it is payable by you as part of your income tax calculation. Unlike the GST, the ASB is not levied on the cost of products but rather on their selling price. Municipal dropshipping taxes
Some municipalities also impose a tax on the sale of products through your store. This tax is usually based on the value of the products sold, and it is payable by you as part of your municipal income tax calculation.
Which type of dropshipping taxes applies to me depends on my province or municipality of residence. Consult a tax professional to determine which type of tax applies to you and how to pay it.
What to do if you’re not sure about your taxes
Dropshipping is a great way to start your own business, but it can be tricky to figure out your taxes. In this short note, we’ll outline what you need to know about dropshipping taxes in Canada.
If you’re not sure whether you’re required to pay federal or provincial taxes on your sales, here are a few tips:
-If you only sell online, you likely owe taxes on your income (including any profits) at the federal level only. Provincial taxes may apply to some people, but not others. Check with your provincial government for more information.
-If you also sell through physical stores, or if you have employees working for you who receive wages (even if they’re only getting tips), then you need to account for federal and provincial tax separately. You’ll also need to withhold taxes from each employee’s wages.
-Finally, if you have international sales (either through online channels or through physical stores in other countries), then you’ll also need to pay federal and provincial taxes on those profits too. Again, check with your provincial government for more information.
How to Avoid Canadian Dropshipping Taxes
Here are a few tips to help you avoid Canadian dropshipping taxes:
1. Use a Canadian e-commerce platform: If you’re Dropshipping in Canada, using a Canadian ecommerce platform will make it easier for you to comply with the tax laws in Canada. These platforms will provide you with all the necessary tools to track your sales, and they will usually have built-in tax software that will help you calculate and collect the correct taxes from your customers.
2. Use Canadian suppliers: When you use Canadian suppliers, you can reduce your international shipping costs and reduce your exposure to foreign taxes. You can also use Canadian suppliers if you want to benefit from the country’s favourable trade policies.
3. Use accounting software: If you’re dropshipping in Canada, it’s important to use quality accounting software that can help you keep track of your finances and comply with the tax laws in Canada. This software will also allow you to prepare accurate income tax returns on behalf of your business.
4. Contact a Canadian tax advisor: If you have any questions about taxes in Canada, or if you need help complying with the tax laws in Canada, contact a Canadian tax advisor. These advisors will be able to provide you with expert advice and help you to navigate through the complex tax system in Canada.
Conclusion
If you’re running a dropshipping business in Canada, it’s important to be aware of the different types of sales taxes that apply. Here are the three most common: GST/HST, PST, and QST. Each has its own rules about when and how sales tax is applied, so it’s important to keep track of which province your products are being sold in as well as the applicable tax rates.
