Avoiding Tax Audit Pitfalls in Canada

From City Hall to the C-Suite

Jeremy took an unconventional route into the field of tax. After obtaining a business degree and a law degree from the University of New Brunswick, he began his career in municipal government. However, he soon discovered that his true passion lay in tax. This realization led him to a mid-sized accounting firm, where he immersed himself in indirect taxes-specifically, the realm of GST, HST, and provincial sales taxes.

"Most individuals pursue corporate or income tax," Jeremy remarks with a chuckle. "But I found myself captivated by sales and commodity taxes. We've always had a bit of an identity crisis-are we sales tax professionals? Commodity tax? Indirect tax? I simply say: sales tax."

This specialized focus proved to be advantageous. Jeremy's knowledge and skills earned him a leadership role at Sobeys, one of the largest grocery chains in Canada, where he led the indirect tax department (and later the entire tax function) for nearly ten years. In that capacity, he oversaw compliance, risk management, and significant acquisitions-including the $6 billion acquisition of Canada Safeway-striking a balance between technical accuracy and business practicality.

The View from Both Sides of the Desk

Following a decade in-house, Jeremy transitioned back to consulting with a unique perspective-he has experience as both the advisor and the client. He possesses a deep understanding of the technical aspects, as well as insight into how tax policy is implemented within large organizations.

"It's one thing to draft a technically sound memo," he explains. "It's entirely different to ensure that policy is executed across accounting, operations, and logistics teams. Tax doesn't exist in isolation."

How Canada's Sales Tax System Really Works

So, what makes the sales tax system in Canada so distinctive?

To begin with, Canada operates under both a national and provincial tax framework. The federal GST (Goods and Services Tax) is applied nationwide at a rate of 5%. Certain provinces-such as Ontario and Nova Scotia-have harmonized their provincial sales tax with the GST, resulting in the HST, a unified VAT (value-added tax) that can reach as high as 15%.

Other provinces, like Quebec, maintain their own systems. Quebec's QST closely resembles the GST but is administered separately. Meanwhile, British Columbia, Manitoba, and Saskatchewan each have independent PSTs (Provincial Sales Taxes) that function more like U.S. state sales taxes.

"Every province has its peculiarities," Jeremy observes. "When you're operating across borders, particularly in provinces with their own PSTs, you need to relearn the regulations each time."

The "Netflix Tax" and the Digital Shift

In recent years, Canada has introduced what is informally referred to as the "Netflix tax"-a simplified registration system for non-resident digital service providers, including streaming platforms, e-commerce businesses, or SaaS companies that have Canadian customers but no physical presence in the country.

"We transitioned from asking, 'Are you conducting business in Canada?' to 'Are you making digital sales to Canadian consumers?" Jeremy clarifies.

Even if a company does not have a physical presence in Canada, if it surpasses approximately $30,000 in annual sales to Canadian consumers, it may be required to register and collect GST, HST, or the provincial equivalent.

The Import Puzzle: Tax at the Border

One of the most frequent surprises for businesses operating in Canada is the GST applied to imports.

When goods enter the country, a 5% GST is collected by the Canada Border Services Agency (CBSA). Many businesses overlook this-often unaware that it is a recoverable tax, meaning they can claim it back later.

"I've encountered numerous clients who don't even realize they've paid GST at the border," Jeremy states. "It's hidden in their import documentation or broker fees. However, it's money they can frequently recover."

Structuring Smart-and Staying Out of Trouble

For non-resident businesses, becoming subject to Canada's tax obligations is not always unavoidable. With proper transaction structuring, companies can sometimes reduce their exposure.

"You can organize your transactions so they occur outside of Canada," he points out. "In such instances, the Canadian customer becomes the importer of record and manages all the taxes. But this requires careful planning."

Why Compliance Starts with Communication

When asked about goods getting delayed at the border, Jeremy chuckled-not because it's amusing, but because it is often preventable. The primary culprit? Poor paperwork.

Incorrect HS codes, incomplete declarations, or mismatched importer information are the main reasons for most border delays. "It's not always a tax issue," he explains. "Sometimes it's simply customs. Regardless, improved coordination among logistics, tax, and operations can avert many headaches."

Bringing It All Together

Navigating Canada's intricate sales tax landscape is challenging-but not insurmountable. Organizations that invest time in understanding how the GST, HST, and PST systems interact can discover efficiencies and mitigate unnecessary risks.

"Whether you're a domestic company or an international entity, the key is to align your tax strategy with your business objectives," Jeremy states. "When you view tax through that perspective, it shifts from being merely about compliance to becoming a smart strategy."