Understanding the Tax Obligations of Canadian Online Sellers Selling to US Customers

For Canadian online sellers looking to expand their services to the United States, understanding the tax implications can be crucial. This article aims to clarify the tax obligations involved, primarily focusing on goods and services sold to US customers.

Understanding GST and PST

Goods and services sold to US customers from Canada may fall under different tax categories. Importantly, the Goods and Services Tax (GST), levied by the Canadian federal government, applies at a rate of 0% for US-bound sales. This can simplify things, as sellers do not have to charge any GST on these sales.

However, Provincial Sales Tax (PST) needs to be considered, but its applicability varies by province and the nature of the goods sold. PST is typically charged by the province in which the tangible personal property is shipped from or used. Therefore, local sales tax rules can introduce some variability.

Taxes at the US Border

In addition to these Canadian taxes, US import duties and tariffs may also apply when goods cross the border. These taxes are levied by the US government and are outside the control of the Canadian seller. Importers (in this case, US customers) are responsible for paying these additional fees.

Tax Obligations Based on the Type of Business Structure

The taxation rules vary based on the business structure. For individual sellers, whether as a sole proprietorship or LLC, income taxes are generally paid based on where the seller resides. If the seller lives in Canada for 183 or more days in a year, they are taxed by Canada on all income earned, regardless of where it is earned.

However, if a Canadian business with a US LLC (LLC taxed as a partnership) collects income from US sources, they are required to file a US tax return (1040NR) and pay taxes to both the US and Canada on the same income.

Proper Tax Treatment for Canadian Corporations Selling Decentralized Goods

In the case where a Canadian corporation (referred to as a Foreign Corporation (FC)) sells goods to US customers using Amazon Fulfillment Centers (AFC), there are specific tax implications to consider:

The FC may be subject to US federal income taxes according to the rules under 882a of the Internal Revenue Code (IRC). This is because the sales made via AFC can constitute a US Trade or Business (USTB). Given the indirect nature of the sales through AFC, the FC may be considered to have a USTB in the US. Additionally, US-source income from USTB is effectively connected income, and the FC must pay federal income taxes on these profits.

However, the Canadian-US Bilateral Tax Treaty may provide a shield against these taxes in some cases. Article 7 of the Treaty does not generally require a foreign corporation to pay US taxes if it does not have a permanent establishment (PE) in the US. A PE typically includes physical locations used for business activities, but excludes storage and shipping facilities. Thus, despite having a USTB, the FC may avoid US taxation based on its compliance with treaty terms.

It is crucial to recognize that reporting obligations still apply, and the FC must submit a special tax return to the US Treasury, preparing it according to the specific terms of the treaty. Failure to do so could result in fines.

Conclusion

To summarize, while it is technically necessary to charge GST to US customers, no PST needs to be applied. The US may impose import duties and tariffs on goods crossing the border, but payment is not the responsibility of the Canadian seller. The tax obligations for Canadian sellers can vary based on the nature of their business and the structure used. It is advisable for sellers to consult with a tax professional to ensure compliance with all applicable laws and treaties.

Keywords: tax obligations, sales tax, cross-border e-commerce