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Growth

Canada Sales Tax: A Guide For SaaS Businesses

Tyler Parker

Content

Author

Tyler Parker

Date

February 6, 2024

Category

Growth

Canadian regions, such as the Toronto-Waterloo corridor, have earned a reputation for being the "Silicon Valley of the North.”

Here, you will find a flourishing tech community — far bigger than New York, Boston, or Seattle — alongside a burgeoning startup scene. With its close proximity to the, Canada presents a brilliant customer base for software-as-a-service (SaaS) products.

However — just like how sales tax is important in the United States, you need to understand Canadian tax laws. This article digs into the workings of Canadian sales tax, outlining the expectations for SaaS companies operating in this market.

Lemon Squeezy Merchant of Record
Sell your SaaS or digital products with Lemon Squeezy and we'll handle global sales taxes for you.

Understanding Sales Tax in Canada 

Just like other modern economies, Canada charges a federal sales tax to businesses that sell to their residents. This is locally known as goods and services tax (GST), and it’s levied at a flat rate of 5%. 

In Canada, GST applies to a range of items, such as tangible personal property, which includes clothing and electronics, and professional services, like legal or accounting services. 

Let’s say you have a shoe store in the Northwest Territories where you sell a well-known brand of sneakers for C$130. 

When a customer looks at their receipt, they will notice that the total cost is broken down into a C$6.50 GST charge and a C$123.50 product cost.

However, some items such as basic groceries, prescription drugs, and certain medical devices, are exempt from federal tax. 

This exemption is to be distinguished from zero-rated items, which are subject to a 0% GST rate but are classed differently from exempt items.

Zero-rated vs. exempt supplies
Zero-rated supplies are categorized as 0% so that they can remain within the tax chain, allowing businesses to claim input tax credits (ITC).

This means that even though there is no tax collected from the end consumer, businesses can recover the taxes they paid on inputs.

For example, if a business sells hearing aids, which are considered zero-rated goods, they note a charge of 0% GST to their customers.

Just like other GST items, they can then claim ITC to make up for their expenses, such as transportation and manufacturing costs.

Items that have a zero tax rate should mention the 0% GST charged on invoices, while exempt supplies shouldn’t mention GST on their invoices at all.

Besides ITC, Canada also provides specific rebates on taxable goods and services, such as new housing, which allows you to claim a portion of the GST spent on these expenses. 

Federal tax applies to all regions

Canada’s federal government is home to ten provinces and three territories. The provinces have more autonomy, while the territories are managed by the federal government. 

While many of these regions charge additional taxes such as provincial sales tax (PST), Quebec sales tax (QST), or retail sales tax (RST), four regions solely charge GST: 

Province or Territory GST PST QST RST TOTAL
Alberta 5% N/A N/A N/A 5%
Northwest Territories 5% N/A N/A N/A 5%
Nunavut 5% N/A N/A N/A 5%
Yukon 5% N/A N/A N/A 5%

Alberta is the only province that doesn’t charge a provincial tax, and the remaining three areas are Canadian territories in the northwest of the country. 

There may be other taxes in these areas you need to consider. 

For example, in Alberta, there’s a 4% tourism levy, which gets added to GST, resulting in an overall tax of 9%. But these are niche taxes, and the majority of goods and services are only liable for GST. 

The rest of Canada can be divided into two tax systems: 

Dual Sales Tax

The majority of provinces have added their own tax on top of federal GST. Under the dual tax system, the GST and regional tax rates are handled independently.

This province-specific tax needs to be reflected in a separate line on receipts and invoices because it’s collected and remitted independently from the federal GST. 

The dual tax system allows provinces to maintain a degree of autonomy, giving them the freedom to fund local initiatives without federal approval. 

There are three types of regional sales taxes: 

Provincial Sales Tax (PST) 

This is the most widely used regional tax and it varies from province to province. 

Only two provinces charge provincial sales tax under the dual tax system: Saskatchewan, which has a PST of 6%, and British Colombia, which has a PST of 7%. 

Quebec Sales Tax (QST) 

As the name suggests, this is the provincial tax that’s charged in Quebec.

Quebec is a French-speaking province that’s set on preserving and promoting its culture. The use of Quebec sales tax reinforces the province's unique identity.

Standing at 9.975%, it’s also the only Canadian sales tax that uses decimals. 

Retail Sales Tax (RST) 

This is the third and final kind of provincial tax in Canada and it’s only applicable in Manitoba. Here, they charge a 7% RST, which is added to the 5% GST. 

Similar to Quebec sales tax, Manitoba has kept the term RST for historical reasons — perhaps to reinforce its independence from other provinces. 

Have a look at the below table to see these numbers in context: 

Province GST PST QST RST TOTAL
Saskatchewan 5% 6% N/A N/A 11%
British Colombia 5% 7% N/A N/A 12%
Quebec 5% N/A 9.975% N/A 14.975%
Manitoba 5% N/A N/A 7% 12%

Harmonized Sales Tax

Most provinces have combined their provincial sales tax (PST) with goods and services tax (GST) to create a harmonized sales tax (HST). 

Unlike the dual tax system, which keeps these taxes separate, the harmonized sales tax system writes this up as a single figure, which is collected and remitted as one. 

Five provinces, including Nova Scotia and Prince Edward Island, fall under the harmonized tax system. 

For example, New Brunswick, Newfoundland, and Labrador all have a provincial sales tax of 10%. If you add this to the GST (5%), they will charge a total harmonized sales tax of 15%. 

Have a look at the table below, where the final column (“total”) has been replaced by HST:

Province GST PST QST RST HST
New Brunswick 5% 10% N/A N/A 15%
Newfoundland and Labrador 5% 10% N/A N/A 15%
Nova Scotia 5% 10% N/A N/A 15%
Ontario 5% 8% N/A N/A 13%
Prince Edward Island 5% 10% N/A N/A 15%

Sales Tax for small to medium-sized SaaS companies 

In 2019, a Canadian report was released explaining that the country lost C$69 million ($51 million) in indirect taxes in 2017 by not taxing nonresident digital services. 

At the time, foreign digital companies weren’t liable for the same taxes that local businesses were, which the audit team felt was unfair to Canadian business owners. 

In 2021, this resulted in them amending their tax rules to include foreign digital companies, such as SaaS businesses, in their tax rules. If you run an American communications platform and you sell to Canadian residents in New Brunswick and Nova Scotia, you previously wouldn’t have been liable for sales tax. 

However, after 2021, you would have to pay a 15% tax on each sale, since both of these provinces fall within the harmonized tax system (5% GST + 10% PST). 

From then on, you also need to abide by the following requirements: 

1. When and how to register for sales tax 

If your SaaS business has Canadian customers, you have to register for GST/HST, as well as any relevant regional sales taxes. 

In terms of GST/HST, you can opt for either the simplified or normal registration method, depending on your annual revenue. 

The simplified method in Canada is designed for small businesses with annual revenues of C$1 million or less. It offers streamlined rules and easier reporting requirements. 

This includes paying your remittances quarterly rather than monthly and potentially paying in a different currency. 

The normal method applies to businesses exceeding the C$1 million threshold, involving more comprehensive reporting and charging. 

Unlike the simplified method, you can claim ITC, which may reduce your sales tax burden. This is more applicable to larger companies that want to offset their costs. 

You can also voluntarily register for Canadian sales tax before reaching the threshold. 

If you sell to Canadian residents in dual-tax regions, you need to separately register for their sales tax. Here are links to the relevant portals:

Province Where to register?
Saskatchewan saskatchewan.ca 
British Colombia etax.gov.bc.ca
Quebec revenuquebec.ca
Manitoba residents.gov.mb.ca

2. Threshold to pay sales tax

SaaS businesses are required to pay GST or HST in provinces or territories that impose these taxes if their sales exceed C$30,000 over a 12-month period. 

Additionally, if you sell to Canadian customers in dual-tax regions, you need to consider the following thresholds and register once you’ve hit them: 

Province Threshold
Saskatchewan C$0
British Colombia C$10,000
Quebec C$30,000
Manitoba C$0

If you sell to customers in these provinces, you need to start paying the respective sales tax rates once you’ve crossed their thresholds. However, you don’t need to start paying GST until you hit the federal tax threshold of C$30,000. 

Let’s say you sell accounting software to customers in British Columbia. As soon as your sales exceed C$10,000, you need to start paying provincial sales tax of 7%. 

As your business grows, you eventually surpass the C$30,000 mark, which means you also become liable for GST (5%). From then onwards, you will collect sales tax for both of these, which amounts to 12% in total.

3. B2B vs. B2C

In Canada, goods and services tax and harmonized sales tax are only applicable to B2C sales. If you sell your SaaS services to Canadian businesses (B2B), you don’t have to collect and remit sales taxes. 

Let’s say you have a SaaS company that provides project management software. If you sell a subscription to a Canadian marketing agency (B2B), you won't collect GST or HST. 

Instead, through the reverse-charge mechanism, the marketing agency will become liable for the relevant sales tax. However, you still need to verify that they are properly registered to handle these taxes. Make sure you: 

  • Communicate their tax responsibility to them. 
  • Confirm their registration on the GST/HST registry
  • Note their tax responsibility on your invoices. 

When it comes to the dual-tax system, the respective regional sales taxes are only applicable in B2C transactions. 

British Colombia is the only exception to this, where both B2B and B2C are taxed according to their provincial sales tax.  

Sales Tax for multinational SaaS companies

Following the new tax laws introduced in 2021, the Canada Tax Agency recommended that a digital sales tax of 3% be added to digital multinational companies. 

This took effect on 1 January 2024 and it applies to foreign businesses based on: 

  • Global earnings: If their total earnings from all sources globally exceed 750 million euros or more in the previous year.
  • Revenue in Canada: If the revenue generated from providing digital services to Canadian online users exceeded C$20 million ($14 million) in the current calendar year.

Imagine you own a business that specializes in virtual collaboration tools, and over the last year, you've been actively selling your services to Canadian customers. 

Your business experiences significant growth, and as you review the new tax regulations, you realize that your company now exceeds either of the above thresholds. Your multinational SaaS company is now required to add a 3% digital sales tax to all transactions. 

Can you manage sales tax alone? 

If your business is small, you may not have to worry about sales tax in some Canadian regions. However, as soon as you hit the respective thresholds, you will have to dedicate a number of days to managing this tax — as well as any other applicable global sales taxes. 

Having to navigate all these tax-related complexities means that you’ll have less time to focus on your core business activities. 

Get Started Lemon Squeezy
Overwhelmed by Canadian sales taxes? Sell your digital products with Lemon Squeezy and we'll handle them for you.

If this becomes a concern, you could decide to pass on this work to a merchant of record, such as Lemon Squeezy. This will allow you to spend time on what’s important to you. We will make sure you’re tax-compliant anywhere in the world and you can focus on growing your business. 

Regardless of whether you need to consider value-added tax, sales tax, or goods and services tax, we will make sure you remain compliant. 

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