Doing Business in Canada? Canadian Sales Taxes and Customs IssuesTax Professionals' Resource
September 17, 2012 — 1,500 views
Whether an entrepreneur is establishing a new business in Canada or is simply planning to offer goods and services to Canadians, several tax and customs issues are sure to arise. One of the most important tax issues concerns the Goods and Services Tax (GST). However, business owners and operators must also be aware of income tax, withholding tax and customs duties.
Goods and Services Tax
The GST is the federal sales tax collected by the Canadian Revenue Agency (CRA). This tax is charged on most goods and services sold in Canada, and it is currently set at 7 percent. However, several strategies can be employed to reduce the total amount of GST paid by a business.
In addition to the GST, each province may charge a provincial sales tax (PST). The PST varies in each province with the exception of five provinces that have entered into a standardized tax agreement with the federal government called the Harmonized Sales Tax (HST). The HST is a combined sales tax of 15 percent that includes the 7 percent GST and an 8 percent PST.
It is important to note that GST amounts may be creditable because they are imposed on businesses, which pass it on to buyers. In contrast, PST amounts cannot be reduced because PST is a tax levied on buyers, which is only collected by businesses for the CRA.
Canadian income tax is collected by the CRA from all residents and from nonresidents who are deemed to be carrying on business in Canada. Carrying on business is a legal term defined in the Canadian Income Tax Act. Nearly every act of business that takes place on Canadian soil may be considered carrying on business, including the following:
• Contracts signed
• Goods delivered
• Payment accepted
• Operations carried out
Businesses operating in Canada are subject to a 25 percent withholding tax on many payments, such as rent, royalties, management fees and interest. However, Canada holds tax treaties with several nations that reduce the amount of withholding tax. Canada's tax treaty with the United States reduces the tax owed on interest to zero and the tax on royalties to 10 percent.
Any goods imported into Canada may be subject to customs duties, but treaties such as the North American Free Trade Agreement (NAFTA) may reduce the total amount of duties owed. In some cases, the duties paid are reduced, but in other cases, refunds are issued after the full amount is paid.