Disclaimer: Please note this article is not financial advice. The purpose of our blog is purely educational, so please consult a professional accountant or financial advisor before making any financial decision.
Are you a new Ontario-based seller? Do you sell products to customers in the province of Ontario? If so, you must understand your obligations under the Ontario sales tax system. Tax compliance is a vital aspect of your business, but it can get tricky when eCommerce is involved, so you must learn the ropes as early as possible.
This article will provide a basic overview of this system and highlight tips for ensuring tax compliance with all applicable laws.
The Ontario Tax System: An Overview
Before we focus on sales tax, here's an overview of the entire Ontario tax system. This will allow you to see what investments and programs the tax system supports and which ones you'll likely get charged for.
List of Taxes and Charges
Ontario's tax system applies to various sectors, such as education, skills, health care, and transportation infrastructure. Some examples of their taxes are beer and wine tax, corporations tax, employer health tax, estate administration tax, and gasoline tax.
You can check the Ministry of Finance's website for more detailed information on their long list of taxes and charges.
The Anatomy of Sales Tax in Ontario: Things You Should Know
Now, let's focus on the sales tax system that will affect your eCommerce business. Ontario's sales tax system is composed of two types:
(1) Retail Sales Tax (RST) - applies to the taxable sale, supply, or transfer in Ontario.
(2) Harmonized Sales Tax (HST) - combines services tax and federal goods with provincial sales tax.
However, in July 2010, HST replaced RST, except for certain insurance premiums and benefits and private purchases of specific vehicles.
Harmonized Sales Tax
The Ontario Harmonized Sales Tax (HST) is a value-added tax (VAT) charged on the province's sale of goods and services. It applies to most items sold in the province, with a few exceptions. The rate of taxation is 13% of the total purchase price; it's the sum of the provincial portion of the HST (8%) and the federal portion (5%).
Not all Canadian provinces use HST. Only five provinces follow the HST act: Newfoundland and Labrador, Ontario, Nova Scotia, Prince Edward Island, and New Brunswick. They all use a 15% HST charge except Ontario (13%).
Collecting, Filing, and Remitting Your Taxes
Once you've come up with your HST calculations, the next thing to do is collect them from your customers. Also, remember that you must file and remit your sales tax on time even if no payment was collected from customers for a specific period.
Here's how Canadian areas like *Ontario process sales tax filing:
- Determine if you have to register for an HST account. Check if you make supplies, sales, and leases taxable and ensure you're not a small supplier (e.g., you sell more than $30,000 worth of goods in the previous four quarters).
- Register and manage an HST account. Receive a business number (BN) upon registration of the GST account. Ensure to have details of (1) the effective registration date, (2) fiscal year for HST purposes, (3) total yearly revenue, and (4) basic company information. You may register via telephone, fax, or online.
- Start tax charging and collection. Determine tax rates and organize financial documents such as invoices and receipts for tax collection.
- File an HST return on time. File a return following the due date regardless of whether you have business transactions and net tax or none.
- Remit your collected tax. Lastly, pay for the HST you collected. Note that filing a return has a different deadline from paying the tax. There are monthly, quarterly, and annual deadlines. You can find the exact due date on your GST34-2 form.
Tax Rebates, Refunds, and Credit
As a business owner in Ontario, there are certain credits and rebates that you may be able to take advantage of.
What is a Tax Rebate?
A tax rebate is the tax liability (total sum of tax owed in a certain period) that you can claim to help reduce your income tax burden.
What is a Tax Refund?
Meanwhile, a tax refund classifies the amount given to you by the government when your paid taxes surpass the calculated tax liability.
What is a Tax Credit?
Tax credits are subtracted from the tax you're paying and are either refundable or non-refundable, depending on certain conditions. For example, if you have been charged more tax, the excess amount can be your tax credits.
Minimize Tax Errors and Achieve Faultless Compliance: Tax Monitoring Tips
Sales tax filing can be daunting, but it doesn't have to be this way. What you need are careful planning and accurate execution. Here are tips to help you out.
Create a System for Tracking Sales Invoices and Expenses
When a consistent system helps you track sales expenses, things are easier to manage. Monitoring allows you to establish a timely filing process, understand your obligations, evaluate previous data, and determine what's taxable and what's not.
Ensure Correct Calculations
Double-check your calculations and take the time to get them right to avoid costly mistakes. In addition, laws surrounding sales tax are always changing, so stay up-to-date on these changes that might affect your estimations.
Use Automated Software or Tools
Many software and online tools can help automate the sales tax filing process to help you save time and ensure accuracy. Top accounting tools such as QuickBooks Online, Sage, or Freshbooks all have good features, but you have to find one that meets your needs.
Understand the Nexus Agenda
Nexus is the linkage between your business and taxing authority and comes in two forms: economic and physical. Economic nexus refers to the sales you make in a particular state. In contrast, physical nexus refers to your business's physical location (e.g., office, warehouse, or staff working in a particular area). Criteria for nexus differ by state, so you also have to be aware of them for accurate compliance.
Be Mindful of Economic Thresholds
Keep in mind that there are also different sales tax thresholds for each state. For example, California's minimum sales or transaction value is $500, while Idaho has $100,000. Once you reach these limits, you'll be required for tax registration, collection, and filing.
Determine Taxable Goods
What's taxable in Ontario may not be taxable in another Canadian city. Each city, state, or area has its unique list of taxable goods. While the general rule is that tangible properties are taxable, you must familiarize yourself with the specific differences for proper compliance.
Unloop, Your Reliable Tax Management and Compliance Business Partner
Ontario sales tax filing is an important process for those who have to deal with it. Keeping organized and up-to-date will help you stay out of trouble with the CRA, which can save you money from fines or penalties down the line. We understand that taxes are no small matter, but they don't have to be a burden either.
Unloop can help you with seamless tax management and compliance. We cater to e-commerce businesses in Canada and the USA. We are a team of experts in e-commerce bookkeeping and work with trusted accountants to aid you in accounting obligations.
Want to know more about sales tax differences in other countries? You can check out some of our articles about sales tax in the USA, such as California, Connecticut, or Ontario NY sales tax rates.