Legal and tax implications of expanding internationally into Canada from the US
Canada is known as the Great White North. But is it a great place to expand your operations into?
One thing’s for sure. The similarity in demographics between Canada and the US can make the expansion seem seamless. After all, your marketing campaigns, copywriting, and countless other assets and workflows will likely all resonate in the same way, and you can repurpose them.
But then there are the complicated, convoluted tax and operation laws you need to get familiar with. This hurdle can make even the most surefooted businesses change their mind about expanding into this new territory.
Fortunately, we’ve got a rundown of what your business needs to know before you make the decision.
Legal and tax implications of entering Canada
In Canada, you deal with taxes at three separate levels: federal, provincial, and municipal. What this means for you as a businessperson is that your tax and registration experience may vary based on where you sell or base your operations. But generally speaking, these are the top factors you need to know about.
Obtaining a business number
Before you do anything, you should start the process of obtaining a business number (BN). Your BN registers you with the Canadian Revenue Agency (CRA), and you will use it for almost everything you need to submit going forward. It’s similar to how the IRS uses your tax identification number (TIN) to keep a consistent string of information that applies to that taxpaying entity.
Getting provincial permits
Because Canadian tax and sales laws differ from province to province, where you sell can have big implications for your operations.
For example, each province will require you to register your business formally before conducting business with its residents. You must obtain the license within 60 days of starting a business, with penalties of up to $25,000 for failing to do so.
This is important if you decide to expand into Canada all at once or a bit at a time. To smooth out the process and create less up-front work, you could start by expanding into a single province and slowly start to grow from there. Doing so would also let you expand into each province with fresh knowledge that will make the process easier.
Remember, this is in addition to a federal business license. Getting a federal business license is important to make sure you’re compliant with the following:
The goods and services tax (GST) or harmonized sales tax (HST)
Payroll taxes, such as Canada Pension Plan contributions
Corporate income tax
Duties for the import or export of goods
Registered charity work
Insurance premium tax
Air travelers security charge
Handling sales tax
Canada has multiple types of sales tax, and you’re responsible for charging, collecting, and remitting all of them.
The GST is universal and is 5%. But a province can also charge its own sales tax, called a provincial sales tax (PST), which is typically 6% or 7%. Finally, there’s the HST, which is when a province has both the federal and provincial sales taxes collected at the same time.
Barring some exceptions, you must charge, collect, and remit either GST or HST, depending on the province.
If you’re unfamiliar with Canadian politics, Quebec has an interesting relationship with the rest of the company. It operates as part of the federal ecosystem, but some of its infrastructures are independent as part of its separatist history. It has its own sales tax, the Quebec sales tax (QST), and rather than remitting through the usual channels, you’ll need to go through Quebec’s government system.
It’s worth noting that some of the quirks of commerce in Quebec make it a rather finicky province to break into. Between that and the language barrier, it may be useful to save entering Quebec until after you’ve already expanded into other parts of Canada.
And we can’t stress enough how crucial it is to make sure you accurately record your sales taxes when doing business in Canada. Martin Chee, CFO and co-founder of Amaka, explains further:
“If you’re using an eCommerce or POS [point-of-sale] system, make sure to double-check the settings and ensure the correct amount of either GST or HST is being collected. Then, connect your store to your accounting software with an accounting integration that can automatically sync sales transactions and the relevant associated taxes.”
It might take extra effort, but you’ll be glad you did that double-checking.
Filing a Canadian tax return
Any individual or business “carrying on business” in Canada is required to file a Canadian tax return. But what exactly does that mean?
Simply put, “carrying on business” is conducting any business in Canada or with a Canadian citizen.
If you have a brick-and-mortar location in Canada selling to local citizens, that’s definitely carrying on business.
Are you making a sale to a Canadian who’s serviced from a US warehouse or office? That’s still considered carrying on business.
Even if the sale takes place on US soil, it could still constitute carrying on business so long as the customer is Canadian.
If you don’t have a Canadian location, the tax return you file is referred to as a “treaty-based tax return” or “T2 return.”
When in doubt, it’s best to consult with a Canadian tax professional to confirm when you need to file a Canadian tax return. The consequences of not filing when it’s required far outweigh the potential costs of a consultation to get a definite answer.
Other things to consider
Maybe you’ve already expanded into another territory, or maybe this is your first international move. Either way, it can greatly influence how you conduct your operations, and all relevant stakeholders absolutely must be on the same page regarding the decision and its effects.
Paying local suppliers and contractors
If you’re operating in Canada, there’s a good chance you’ll start working with Canadian suppliers. Because international payments can come with exorbitant fees and subpar exchange rates, you should find a payment solution that simplifies the process and keeps fees down.
Consider opening a Canadian bank account or a sophisticated, international payment and currency account like Airwallex. This will open up local payment options that will save you the pesky fees and keep local suppliers and contractors happy.
Running international payroll
If you find yourself needing a full-time Canadian employee, it’s time to start familiarizing yourself with local payroll taxes and deductions. As with other taxes discussed here, there are both provincial and federal versions of these taxes that you’ll need to remain compliant with. Using an international payroll provider like Deel can help with compliance, and it’s simple and easy to navigate from wherever you access it.
[Related: How to hire in Canada from the US]
Holding foreign currency
Keeping an account with some of the local currency can be extremely useful to how you run your operations. For starters, doing so significantly reduces payment times and fees. Your providers get their money faster, and you save on the cost of sending the payment.
It’s a win-win.
But beyond that, keeping the funds you use in different regions separate helps reduce your recordkeeping workload. Having a clear string of transactions with a running balance related to the Canadian side of your business keeps your recordkeeping simple. It also gives you a clear understanding of the expansion’s profitability.
When you’re ready to expand into Canada, consider holding your funds in an Airwallex account. We’re an American company that provides you with a full financial suite focused on international success. Our business accounts let you clearly separate funds into different currencies, while our digital wallets simplify how you make purchases.
For everything from speeding up your accounts payable process to managing expenses and planning for the future, we’ve got you covered.
Margaret runs marketing for Airwallex US, working with great companies across eCommerce, consumer goods, consulting, and tech to deliver excellent experiences to shared audiences.
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