No matter where you live or where your online business is based — if you have customers in Canada, you must follow Canadian GST/HST rules. That’s what this guide is for! This guide includes everything you need to know about federal digital sales tax laws in Canada, whether your customers live in Alberta or Nova Scotia.
Please note some Canadian provinces also have their own separate sales tax system. If you’re looking for information about that, please check out our other guides:
- British Columbia Business Guide to PST
- Quebec Business Guide to QST
- Saskatchewan Business Guide to PST
- Manitoba Business Guide to RST
Digital Products
First let’s confirm what you’re trying to sell in Canada. Are you selling digital products?
A digital product is any product that’s stored, delivered, and used in an electronic format. These are goods or services that the customer receives via email, by downloading them from the Internet, or through logging into a website.
You’re probably consuming and using digital products all day long, whether or not you realize it. Here are some common ones on the market today:
- E-books, images, movies, and videos, whether buying a copy from Shopify or using a service like Netflix. In tax language, these products are in a category usually called, “Audio, visual, or audio-visual products.”
- Downloadable and streaming music, whether buying an MP3 or using a service like SoundCloud or Spotify. Of course, these products also fall in the audio category.
- Cloud-based software and as-a-Service products, such as Software-as-a-Service (SaaS), Platform-as-a-Service (PaaS), and Infrastructure-as-a-Service (IaaS).
- Websites, site hosting services, and internet service providers.
- Online ads and affiliate marketing. Income from these services can be considered taxable under digital tax policies.
Heads up: you might also hear digital goods referred to as “digital services,” “e-goods”, or “e-services.” All of these terms refer to the same thing.
Not sure if what you sell is considered a “digital product?” Check out our explanation of what a digital product is exactly.
Canada’s GST/HST for digital products
GST/HST is the federal consumption tax throughout Canada, levied on almost everything sold in the country. There are specific rules around digital products, which you must follow closely to stay tax compliant.
If you sell digital products to a customer in Canada, you must charge the 5% GST rate. Simple, right?
Not really. In practice, it’s more complex because most Canadian provinces have their own local tax, too, and they deal with it in two different ways.
1. The combined total
Five provinces layer these two levels of tax — federal and provincial — on top of each other, calling it the Harmonized Sales Tax (HST). The HST process is streamlined with GST, and it’s included in this guide.
2. The separate add-on
This is called the Provincial Sales Tax (PST) or, in Manitoba, the Retail Sales Tax — or in Québec, the Québec Sales Tax (QST). It can be applied in addition to the federal-level GST that we’re covering in this guide. It has a separate registration and filing process.
For detailed advice about selling in such provinces, please check out the following guides:
- British Columbia Business Guide to PST
- Quebec Business Guide to QST
- Saskatchewan Business Guide to PST
- Manitoba Business Guide to RST
Registering for Canada’s GST/HST
Is there a sales registration threshold?
Yes, Canada has an annual sales registration threshold of $30,000 Canadian dollars (CAD) for remote sellers.
What does this mean exactly?
Well, the threshold amount refers to your total sales in the country, during any 12-month period. This can be a calculation of sales in the last twelve months, or a prediction of sales in the next twelve months — any rolling year-long period, past or future.
If your total sales in Canada remains below $30,000 CAD, then you don’t need to worry about GST/HST at all. Phew!
But once your sales do surpass that, then you must register for GST/HST and comply with all of the Canadian rules around tax rate and collection, invoices, and filing returns.
Want to try it out for yourself? Give our free GST Calculator a go.
The registration process
So, turns out you do need to register for tax in Canada. Don’t worry! Just follow these instructions from the Canadian tax authority on how to register for Canadian GST/HST.
Ultimately, you will receive a GST/HST registration number, which establishes you in the Canadian tax system as a legal business. This number tracks your business through the system: the taxes you pay, the tax credits you receive, plus the tax you charge from customers.
Do you need a local tax representative?
No, you don’t need a representative to handle your taxes in Canada. That is, you aren’t required to have one. Some tentative foreign business owners may hire a tax representative for peace of mind. Sales tax in Canada can be an intimidating and confusing topic, especially in a foreign language! Makes absolute sense.
But because the Canadian tax portal is available online, it’s possible for you to handle these foreign taxes on your own. It’s just up to you!
Collecting GST/HST in Canada
Once you’re registered for taxes, you’re expected to charge the correct tax rate on every sale to a Canadian resident.
If your customer is a fellow business, and they’ve provided a valid GST/HST number, then adding and collecting tax isn’t necessary! The buyer will handle tax, via Canada’s reverse-charge mechanism.
Overall, these are the current tax rates on cross-border sales of digital goods:
- 5% (GST) in Alberta, British Columbia, Manitoba, Northwest Territories, Nunavut, Quebec, Saskatchewan, and Yukon
- 13% (HST) in Ontario
- 15% (HST) in New Brunswick, Newfoundland and Labrador, Nova Scotia, and Prince Edward Island
GST/HST invoices in Canada
In order to comply with tax laws, you should include the following information on your invoices to customers in Canada*:
- Your business’ name and address
- Your business’ GST/HST registration number
- Invoice date
- Invoice sequencing number
- Description of the goods or services
- GST/HST rate applied to each item
- Final amount after tax is added
*In some provinces, you might need to also include your PST or QST number.
The easiest solution for the VAT invoice would be to use a tax software that automatically generates and sends all invoices (as soon as the sale is complete), and also stores them in the cloud for you. Quaderno does just that, but we won’t go on about it here. :)
Filing GST/HST returns in Canada
Charging and collecting tax is only the first half of staying compliant. The second, and equally important, half is filing returns and paying whatever you might owe to the government.
In Canada, foreign businesses are expected to file tax returns every quarter. You must file and pay within one month of the end of each reporting period.
Resources
Note: At Quaderno we love providing helpful information and best practices about taxes, but we are not certified tax advisors. For further help, or if you are ever in doubt, please consult a professional tax advisor or the tax authorities.