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Compliance - Tax & Trade Blog

International Trade Report

SPECIAL SALES TAX RULES FOR DIRECT SELLERS


Sales tax in Canada can be complex – especially in provinces that do not participate in the GST/HST harmonization system. This complexity becomes even more pronounced in industries that do not follow the typical retail model, like direct selling.  This blog explains how Canadian sales tax systems apply to the direct selling industry, and how special rules can help businesses streamline compliance.

Background

Under Canada’s standard sales tax rules, any person making taxable supplies over a certain threshold must register for GST/HST and provincial sales tax (where applicable), collect tax from customers, and remit it to tax authorities.  In a typical retail setup, the business itself tracks its revenue and ensures compliance.  But in a direct selling network, each participant may independently meet those thresholds.  Requiring every participant to track earnings, register, charge tax, and file returns would create a massive administrative burden and could discourage participation.

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When it comes to a Direct Selling Company’s legal relationship with its Distributors, Canadian direct sellers are treated differently from those in the US, where IRS deeming rules operate to clarify that Distributors are independent contractors and not employees!

In Canada, there is no such special status, and the “common law” determines employee vs. independent contractor (“IC”) status, making this a perennial compliance issue.

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Most of Canada’s largest provinces have a version of something usually called an “Employer Health Tax” – or “EHT” for short – and that is imposed on provincial employers based on annual employee remuneration.

While EHTs are levied provincially, just how these provincial taxes are supposed to work intra-jurisdictionally is complicated.  Think of an employer, with multiple work locations and with “remote employees scattered across Canada reporting to those multiple work locations.  With all of those permutations and combinations, EHT liability can become a difficult question, fraught with potential double-tax issues.

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