Reselling: A growing business
If resellers had a motto, it would be "buy low, sell high". While reselling in the form of distributors, wholesalers and retailers has been around for a long time, the growth of available online platforms for reselling, notably but not exclusively eBay, has allowed individuals to engage in flipping goods for profit. These resellers engage in arbitrage by purchasing goods at low prices at places like Goodwill, yard sales and estate sales, and reselling those goods on eBay, Mercari, physical storefronts and other platforms for higher prices. They may repair or clean up the product or often just resell the product as is.
Resellers may take up reselling as a hobby, side business or even their main source of income. They need to be aware of the Canadian tax rules which apply to them. Provincial and federal tax regulation bodies in Canada are currently in the process of updating their tax rules to reflect the changing online environment. This may impact resellers who should consult with a professional Canadian tax lawyer to make sure they comply with all applicable Canadian tax guidelines.
Income Tax Implications of Reselling
While many people may use Facebook Marketplace, eBay or other platforms at some point for one off sales such as sales of old furniture or other items, this article is specifically discussing resellers who are operating a business of reselling goods. A business is defined as an activity carried on with the intent of profit. An activity can still be considered a business if no profit results. Taxpayers may also be considered to earn business income if they engage in an "adventure or concern in the nature of trade".
Defining whether or not a particular taxpayer is engaged in a business is based on the specific circumstances of the selling activity. The courts consider factors such as:
- The taxpayer's occupation
- The type of goods the taxpayer sells
- The frequency and number of similar transactions
- The effort exerted by the taxpayer to bring about the sale
- The intention of the taxpayer
None of these factors are individually determinative. A taxpayer who does one sale could be considered to earn business income on that sale, though that is much less likely than a taxpayer who does frequent sales being found to operate a business.
Canadian taxpayers who resell as a business must report business income from their activities on their tax return. They are also entitled to deduct business losses and business expenses, with certain restrictions.
If you are unsure whether your reselling could be considered a business, or feel you should have been reporting business income on your sales, our experienced Canadian tax lawyers can assist.
GST/HST/Sales Tax Implications
Sales tax in Canada comes in three types:
- Goods and Services Tax (GST) is the federally imposed sales tax. It applies in all provinces and territories.
- Provincial Sales Tax applies where the province has its own separate sales tax system and rules. British Columbia, Saskatchewan, Québec, and Manitoba all have their own provincial sales tax. Provincial Sales Tax is known as Québec sales tax in Québec, Retail Sales Tax in Manitoba and Provincial Sales Tax in the remaining provinces. Alberta, and all three territories do not have their own provincial or territorial sales tax.
- Harmonized Sales Tax is where the provincial and federal sales tax are collected and administered together as a single rate. Five provinces – Newfoundland& Labrador, New Brunswick, Nova Scotia, Ontario and Prince Edward Island – have adopted this system.
Which sales tax applies to a specific sale depends on the location of the purchaser. Sales to international customers are "zero-rated", which means GST/HST applies but that tax is 0%. However, businesses who sell internationally need to be aware of the sales tax rules in the destination country.
Taxpayers who collect and remit GST/HST can claim input tax credits ("ITCs"). An ITC is the GST/HST payable or paid on the purchases and expenses incurred for use in a business' commercial activities. When a business reports its GST/HST payable for the reporting period, it decreases the amount of GST/HST owing by claiming ITCs. As such, the business recovers GST/HST it paid on products or services which it utilizes in creating goods or services for sale. ITCs cannot be claimed to offset Provincial Sales Tax (PST). In Québec, Québec sales tax is reported and input tax refunds are claimed in place of ITCs. There are also restrictions on claiming ITCs and input tax refunds.
Taxpayers are only required to report and remit GST/HST if they are registered for GST/HST. Taxpayers are obligated to register for GST/HST where their world-wide revenue exceeds $30,000 CAD in the four previous calendar quarters. The CRA may, without an application, register a taxpayer for GST/HST if the taxpayer is not registered and otherwise meets registration requirements. A taxpayer who is not obligated to register for GST/HST may still choose to voluntarily register. The main benefit of voluntary registration is potentially earning a refund from claiming ITCs.
Resellers who are concerned they may have unremitted GST/HST should contact our experienced Canadian tax lawyers who may recommend a voluntary disclosure (VDP or tax amnesty) submission.
Surviving a Tax Audit
Resellers should be aware that the CRA is monitoring activity on popular online platforms to catch those skirting the tax rules. In 2008, an order from the courts resulted in eBay providing the Canada Revenue Agency ("CRA") with the full information of any power seller who recorded more than $1,000 of sales per month for any consecutive three month period.
Where the CRA gets suspicious that a taxpayer may not be properly reporting and remitting tax, they will likely conduct a tax audit. All Canadian taxpayers who are involved in any business should keep detailed records of their purchases, expenses and sales for a minimum of seven years in order to substantiate their tax reporting in the event of a tax audit. If the reseller is claiming input tax credits, the Input Tax Credit Information (GST/HST) Regulations states the supporting documentation must show the supplier's business names per the records of the CRA, the ITC claimants' business name or the name of authorized agent or representative and the supplier's business number. There is some variation to these rules for taxable supplies for consideration under $150.
Pro Tax Tips: Consider Incorporation of Reseller Business
Resellers may wish to consider incorporating their reselling business. Being incorporated negates the risk of personal liability for the reseller, including with regards to taxation issues, and allows the reseller to employ tax planning strategies to access their income while minimizing the tax imposed. The downsides of incorporation are that the reseller cannot use the corporation's business losses to offset his or her personal taxable income, and there are compliance costs associated with running a corporation.
Our experienced Canadian tax lawyers can assist in identifying whether incorporation is right for your reselling business, and with setting up the corporation and transferring the business into the corporation using a tax-free rollover under section 85 of the Income Tax Act.