Customs, Taxes, and Regulations—Top Considerations When Expanding Your Distribution Into Canada
[Guest Post: Munish Gupta is Founder/CEO of Supply Chain Advisory Group, a logistics consulting firm specializing in aiding companies with global product distribution and international expansion.]
Canada is the first country that US businesses should think of when they start looking at international expansion. Not only because Canada is geographically close—sharing a border with the US—our common language, and similar culture and values make it a natural first choice. With a population of 36.5 million and a GDP per capita that is the fifth largest in the world, it offers a large consumer base for American companies.
Expansion into any new country requires many new processes, and ultimately due diligence to ensure all paperwork happens according to the import country’s standard. When considering expanding into Canada, specific attention should be paid to the following: product labeling, shipping requirements, tax implications, and customs and duties regulations.
Canada is a bilingual country (English and French) and you can’t sell to Canadian customers if you lack the correct labeling and translations required by law. Failure to label in both languages will stop your products at Canadian customs, they will not be allowed into the country.
So how can you avoid having your products held hostage by customs? Working with a 3PL or Supply-Chain Agency that specializes in international logistics will make this transition as seamless as possible. They will be able to provide resources for you to get you labels translated within regulatory compliance.
To research the correct labeling requirements on your own, a full list of rules can be found in the Guide to Consumer Packaging and Labelling Act and Regulations (managed by the Canadian Competition Bureau), and the Charter of the French Languages (managed by the Office de la langue Française).
The Intricacies of Import Taxes
There are a few different ways the product can be shipped to Canadian customers—each approach has different tax implications.
Option 1: Setting up as a Non-resident Importer (NRI)
Any person or entity residing outside of Canada but wishing to import into Canada is required to become a Non-Resident Importer (NRI). An NRI is a foreign-based company that does not have a permanent residence in Canada but imports into Canada under their own name and business number.
To import to Canada as an NRI you will need: a Canadian Business Number (BN), Import-Export Program Account Number, and GST/HST Tax Account Number.
The process of getting set up as an NRI is relatively quick and not very expensive. The benefit of this approach is that you can be the Importer of Record (IOR) for your products into Canada. The IOR is significant, it refers to the entity that is responsible for ensuring goods are imported in accordance with the law. As the IOR, you pay the import duties and GST taxes with Canadian customs and the end consumer is not responsible for them. This simplifies cross-border shipping and adds simplicity and efficiency when tracking your taxes and product records.
A side note on the Canadian tax system:
Canadian tax regime is based upon both provincial sales taxes and a federal sales tax. Each province has had the option of retaining its Provincial Sales Tax (“PST”) system alongside the federal Goods and Service Tax (“GST”), or joining the national harmonized sales tax system (“HST”).
Canada has 13 provinces and territories. Nine of these fall under the federal government levy of a Value-Added Tax (GST/HST). In addition, there are four provinces that levy a provincial retail sales tax—Saskatchewan (PST), British Columbia (PST), Manitoba (RST), and Quebec (QST). Companies must register for the federal GST/HST program as well as the provincial sales taxes in British Columbia, Manitoba, Quebec, and Saskatchewan.
You are liable for taxes in Canada. However, the only taxes that you are responsible for are the sales tax in the different provinces. You are not responsible for any corporate or income tax. Another huge benefit about the GST/HST tax is that it is a “pass-through” tax. This means that the end consumer is responsible for all the GST/HST tax and the GST that the company pays at import is returned to you. This leads to zero tax liability for your company.
Option 2: Setting up a Canadian tax entity
If you already have a large volume of business, it may be best to set up a Canadian office, which will give you more control over the operations, staff, customer service, and local fulfillment. Plus if you hire locally there’s a higher likelihood that your Canadian staff will be better versed in potential partner companies, specific laws, and regulations. When setting up a Canadian office, you’ll need to think about all of the overhead and oversight to do it right: follow local laws, vet local business partners, comply with HR policies, local and state taxes. This should be done only if you have enough business volume to justify the effort it takes to set up as a Canadian entity, and the resources to pay the extra tax compliance costs.
Customs and Duties
Once you’ve decided to expand distribution to Canada, it’s important to understand how Canadian customs works.
Most imported goods are subject to GST tax at a rate of five percent. In addition, customs duties can be applicable to your product. The GST tax is different from customs in that while the GST rate is standard for all products, the customs duty is dependent on the product characteristics and the 10 digit Harmonized Tariff Code (HTC) for the product. Your freight forwarder and customs broker can provide detailed info on the HTC codes for your product. It is your responsibility to comply with all Canada Customs laws and regulations, including applicable duty and tax requirements.
Canada offers plenty of opportunity for American businesses seeking growth in new markets overseas. Expanding to international distribution for the first time is a big endeavor. Canada is a great first step, but it still requires a lot of due diligence to set up correct compliance, customs, and all operational systems.
Working with an agency like Supply Chain Advisory Group can help ensure you get your duties, taxes, product labeling, and customs clearance right the first time. Working with an expert in the field will give you the peace of mind that your expansion is smooth and creates growth for your business.