Internet Tax Site - Paying Taxes on Online Income in Canada
In reality, paying taxes on online income in Canada is no different than someone paying taxes with a storefront or physical location. For some reason, however, many people mistakenly believe that online income is somehow different, but according to the Canadian government, income is income. Unless there is some legitimate reason for revenue to be exempt, all monies are taxable, and the Canada Revenue Agency, and the provincial governments expect their shares of your earnings.
Further, the federal government has taken steps to thwart tax "hiding" or misrepresentation in the numbers, specifically in enterprises that are deemed "cash businesses". These types of businesses tend to be trades such as plumbing, landscaping, and other "handyman" type endeavors. Also, mom and pop stores that do not necessarily use cash registers to document all sales. Before continuing, though, we would like to stress that these businesses are by no means the only kinds that fall under that "cash" category. Basically any type of business operation that allows the owners to pocket monies without an official trail is considered risky to the government in terms of obtaining the most amount of tax dollars.
In fact, the problem is so rampant, according to the government, that a court allowed the federal government to seek information about Canadian ebay sellers. The website was forced to hand over information detailing earnings for power sellers, so that the income tax office could determine whether the sellers were indeed reporting the full amount. Individuals who had neglected to report earnings were given an amnesty period in which they could voluntarily state they made a mistake and were revising their income tax filings.
Another way that governments are trying to capture their share of cash businesses was demonstrated when local and provincial offices decided to crack down on flea markets and garage sales. Because it was felt that flea market sellers were trying to avoid city permits to operate and also avoid paying taxes, many cities decided to limit the number of garage sales held in a season by the same persons. If they exceeded the amount, then they were considered liable for reporting taxes and paying permit fees. To the government's way of thinking, there is a huge difference between making a few dollars from getting rid of some junk in the garage one or two times a year versus selling goods from one's driveway and front lawn every weekend of the summer. The latter is income, whether a business is registered or not.
To completely understand paying taxes on online income in Canada, it would first be helpful to break down the different tax structures. Basically, taxes are found in the form of PST, GST, HST, and income tax for individuals, sole proprietorships and corporations. Following are brief definitions.
PST refers to Provincial Sales Tax
This tax is determined by individual provinces and is placed upon goods sold in that province. The percentage varies by province, but sellers are required to collect and remit PST. Historically, Alberta was so rich from oil that it did not charge its residents PST. Other provinces quickly introduced a harmonized tax when the federal government launched the GST program.
GST refers to Goods and Services Tax
This is the federal tax on goods and services that are moved throughout the whole country. GST is not collected from clients or businesses outside of Canada.
Where some items may be exempt from PST, as they were considered necessities, they are not, however, exempt from GST. Further, sellers and businesses have the option to register to collect and remit GST if their gross sales are under thirty-thousand dollars per year. If they choose not to register, they cannot claim any associated deductions. This means that any items they buy for their businesses and upon which they pay GST, they cannot use those GST amounts to offset GST remittances, although, the amounts would be part of their total expenses paid on their income statements reducing their total income.
For businesses that choose to register, and those that exceed $30k, the GST amounts paid out are deducted from the GST collected to determine the amount redeemable to the federal government. It is possible to get a refund in this scenario. For obvious reasons, it is sometimes advantageous to register if you do not have to. And, if you do not register, thinking that you are just a hobby business or small enterprise, the minute you reach $30k in sales, you are legally obligated to register.
Lastly, it should be noted that CRA takes GST remittance seriously. Many business owners have been known to go bankrupt because they either kept shoddy sales volume records, or they never collected and remitted GST. When the tax was introduced, they was much confusion and often, businesses decided that certain things and certain people were exempt. This led to audits and ultimately high bills that had to be paid in taxes. If a business withholds or misrepresents its true sales figures, for example, the federal government does not only seek to capture the lost income tax, but it will determine an amount that it feels it should be paid in GST remittances. On a large sum of sales, this could prove financially disastrous to a business owner. One never wants to be in a position where the CRA is dictating the dollar amount attributable to sales.
HST refers to Harmonized Sales Tax
When the GST was introduced, the provinces had the choice to charge the GST and PST separately, GST only, or combine the PST and the GST to make the HST. Typically, the down-east provinces chose right in the beginning years to harmonize their sales taxes. Ontario just recently moved to an HST scenario, and British Columbia's residents in the last few months beat down the HST directive. One of the reasons, HST is not advantageous is everything is taxed, and as a result, goods become more expensive to buy for consumers, meaning businesses lose sales if people cannot afford the taxes. An example is in the fast food industry. Where PST previously was not charged, but GST was, under a harmonized situation, everyone pays the full HST which is GST and PST combined.
As we have stated earlier, the PST, GST and HST have a direct correlation to income taxes if a business is incorrectly reporting sales or gross revenue. On the outside, it appears as though each is separate, but, in reality, the consequences of underreporting sales can be devastating. As soon as a business is audited, and the government completes its findings, rendering a decision in its own favour, CRA is not going to go after only income taxes owing, it will, also, go after GST owing, based on its determination of gross revenue.
Individual Income Taxes as it Relates to a Business Undertaking
Some people start businesses as hobbies. They never expect to make more than a few dollars a month, and never expect to register a business. This is where problems begin for many. Once they begin to make extra income, regardless of how small, and once they produce sales of at least $30k per year, they are responsible to the government. Misguided, many people think that because they do not register a business they are exempt from income and sales taxes. This is simply not accurate. Individuals who earn money in any way are obligated to report that income, whether they believe it is minute or not. They must report on their personal income taxes "other income" if they are doing this as an addition to their jobs. If they have no jobs and earning more than about six-thousand dollars per year on this hobby, it must be reported as income. A business registration, or lack thereof, does not constitute a reason to avoid reporting income. On the other hand, they also have the right to use expenses to offset that income, assuming they include a Profit and Loss Statement to their individual personal tax forms.
Sole Proprietorships and Income Taxes
Generally, as far as income taxes are concerned, sole proprietorships are similar to individuals. The difference is the business is usually registered. Registration is not a big ordeal, as in most provinces, it means a sixty or eighty dollar fee to say that the enterprise is a business entity. In order to open a bank account in a business name, an owner would need this type of registration at the very least. It does not, however, provide any real trademark protection, meaning that you still need to do a trademark search to ensure that you have not encroached upon another's trademark registration.
In terms of taxes, an individual personal tax filing is completed with a detailed Profit and Loss Statement, the ending number being entered into the total mix. There is also the ability to carry over losses from one year to the next to reduce income, and subsequently how much taxes are paid. In the case of a partnership that is not a corporation, the two would divide the net income or net loss according to the partnership agreement percentages.
Corporations and Online Income
Corporations have the most involved tax filings, as percentages are placed on varying amounts of income. So, the total income is taxed at the corporate level, and then those taking out the earnings are taxed at the individual level. As far as GST, PST, and HST collection and remittance, they are the responsibility of the corporation.
As you can clearly glean from this brief outline, taxes in Canada are serious, and the government expects taxes regardless of business type, and regardless of whether an individual believes he or she is a business. Income does not necessarily equate to business registration. The tax laws are there for everyone, offline or online. Of course, charities have a different tax structure, but again, there are specific laws governing those organizations.
Please note
that while we own a business and pay relevant taxes, we are not tax specialists, and as such, it is always wise to consult your own accountant. Tax law is continually changing and is always open to interpretation. It is also quite different province to province, and is dependent on various factors including the type of business registration into which you have legally entered, the laws of the specific province, the credits permitted in a province, and how that province interacts with the federal government for reporting.
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