Tax Obligations of Amazon Seller
Taxes and death are inevitable. In Canada, a business owner must understand and fulfil his tax related obligations in number of ways. Not only filing of those tax returns is important, but timely payment is also important to avoid penalties. In this article, we will list down some of the most common tax obligations for small business owners, especially with reference to Amazon or other e-commerce sellers.
We have reference to two scenarios for each type of taxes, sole proprietorship, or corporation. Partnership is not discussed separately because partners will still act as sole proprietor (for tax purposes) for their share of income and expenses.
- Corporate Income Tax
If you are an Amazon seller operating as sole proprietor, you would still file personal tax (T1) only and will include your business-related income and expenses in Schedule 2125.
However, if you are a corporation, you must file corporation’s own tax return called T2. Corporate tax return is more comprehensive than sole proprietor’s tax return and needs detailed information. Thus, instead of running around at the eleventh hour for tax filing, it is good idea to keep your books updated on, at least, monthly basis. This is true both for sole proprietor as well as corporations.
One of the advantages of monthly bookkeeping is that you will be able to figure out your corporate income tax liability on a month-to-month basis and you can build reserve (set aside funds) upto that amount to avoid a shock at year end. Normally, if monthly books are not maintained, there is often a tendency to consider all the money in bank account as available for business use.
- HST/ GST/ PST Returns
If you are registered for HST/ GST/ PST/ QST (various forms of sales taxes in Canada), you must file return and pay to CRA on periodic basis (most quarterly or annual for a small business owner). Again, monthly bookkeeping provides you an opportunity to estimate how much money to set aside to pay to CRA at the end of month/ quarter or year.
While Amazon collects and pays sales tax in various jurisdictions in Canada under Marketplace Tax Collection (MTC) arrangement, it is applicable only if seller is not registered in that jurisdiction. If you are registered, Amazon will collect and remit to you as part of your payout. This means that a portion of money credited in bank account as Amazon Payout belongs to CRA. Seller needs to be sure that correct tax information and product codes are entered in Seller Central and should monitor sales level for non-MTC jurisdictions.
Sales tax return is always a separate return where you are a corporation or sole proprietor.
- Payroll Taxes
If you are a sole proprietor, you can draw money from business without any formal payroll. However, you would still need to pay CPP and personal income tax at the end of the year when filing T1. So, it is recommended to set aside funds for that.
For a corporation, the business owner can draw money either as payroll (salary/ hourly) or as dividend. If it is payroll (for owner or other employees), one needs to ascertain appropriate payroll deductions (taxes, CPP employer portion and employee portion) and remit those to CRA on periodic (usually monthly) basis. If it is dividend, no deductions are needed. But the business owner is personally responsible for income tax on that money at the year end. So, it is recommended to set aside funds for that. Care must be taken with respect to the rules applicable for taking out dividends from a corporation.
Last, but not the least, in either of these scenarios, the business also needs to report to CRA once the calendar year ends for amount of payroll drawn (with deductions) or dividend taken through T4 or T5 tax slips respectively.
Likewise, if you have employees or sub-contractors (in Canada), you will have to issue T4 and T4A for those individuals respectively.
One of the key take away from above discussion is that monthly bookkeeping forms the basis for staying organized as an Amazon seller with respect to your finances and it helps avoiding the shock or lack of funds when those taxes are due. It may appear that sole proprietorship is relatively simple from tax point of view. But, that should not be only consideration when deciding between sole proprietorship or corporation. Refer to our article that discusses pros and cons of both options.
For more details about managing your amazon sellers tax, contact finnection via email at info@finnection.ca or call us at (647) 795-5462
Disclaimer: Above information is subject to change and represent the views of the author. It is shared for educational purposes only. Readers are advised to use their own judgement and seek specific professional advice before making any decision. Finnection Inc. is not liable for any actions taken by reader based on the information shared in this article. You may consult with us before using this information for any purpose.