Virtual business is the selling of goods and services through electronic means, often referred to interchangeably as website or on-line or internet selling. However, e-commerce also encompasses selling through television, phone, fax and automated banking machines and credit cards.
E-commerce in Canada accounted for an estimated 5 billion dollars in sales in 2017, the vast majority coming from on-line selling. Over 85% of Canadians admit to shopping on-line, with a reported 27% of Canadians shopping on-line every month.
With numbers like these it’s no wonder Canada Revenue Agency (CRA) has adapted its tax returns to require the specific valuation reporting of e-commerce revenue, and even requires the identification of the websites where this revenue is being generated.
As with all businesses, virtual business owners must complete the applicable T2125 business schedules within the T1 personal tax return, or in the case of an incorporated business, the T2 return’s schedule 88.
As part of the completion of these schedules, up to five websites, complete with URL, must be listed on the tax return, and not just any five, the top five revenue producing websites. These include websites owned and operated by the business that accept orders, third party marketplace websites like Amazon or E-bay that “sell” the business’ services or products, and other such websites that drive buyers to the business’ website. And websites hosted outside of Canada are not excluded from making this list.
Telephone directories and information-only websites do not need to be listed.
Determine the revenue generated by each website and calculate the percentage of this sales revenue as a proportion of total revenue generated for the entire business which also includes revenue from non-website activities, if any. The percentage is reported on the tax return for each website.
When it comes to the costs of operating an on-line business, CRA has well established guidelines on how particular business costs must be expensed. Typically computer equipment, software and website development costs are not considered “current and deductible in the year they are incurred”. Rather they are deemed “capital and deductible under the rules for capital cost allowance”.
In plain language this means these costs cannot be written off as a 100 per cent expense when they are purchased. Instead they are treated as an asset and grouped into a class of like-items, then depreciated at a specific percentage rate each year with that proportional dollar value claimed as an expense. Over time an asset class can be added to and subtracted from.
A word about GST and PST, although as always recommended, speak with the GST and PST people.
The GST small supplier exemption for businesses that have sales revenues under $30,000 is available to on-line businesses. Noteworthy to this, sales of products and services that are sold outside of Canada do not enter the calculation of this $30,000 threshold.
PST rules in BC include a $10,000 small supplier exemption on the sale of most goods, but not all. Unlike GST, sales sold outside Canada factor into this $10,000 PST threshold.
Ron Clarke has his MBA and is a business owner in Trail, providing accounting and tax services. Email him atron. clarke@JBSbiz. ca. To read previous Tax Tips & Pits columns visit www.JBSbiz.net.