Author: Brandon Smith

Corporate bankruptcy in Canada: Introduction

A brand-new report from PwC Canada discloses that in 2018, Canadians anticipate spending an average of $1,563, up 6.7% over last year. Men are expected outspend women by almost $400. That got me to start thinking about what the most complex issue for corporate bankruptcy in Canada is when an online business fails?

The report finds that the majority of Canadians still prefer the in-store experience. Nearly two-thirds consider brick-and-mortar retail for their primary holiday season shopping. The rest is online shopping. Unsurprisingly, most millennials (51%) think of online purchasing first, which is in line with United States consumers overall (50%).

E-commerce, like any other industry, has its startups and more mature companies. There will be winners and losers. The fulfilment of online digital products is done online. The fulfilment of physical goods orders bought online more often than not will be done by a third party. That third party may not necessarily be fulfilling orders from Canada.

Corporate bankruptcy in Canada: The most complex issue for an e-commerce business, IMO

With that said, the retail vendor’s inventory, computer hardware and software value are relatively easy to determine. But to my way of thinking, the #1 issue for corporate online vendors, both solvent and viable or insolvent and not viable, is the area of sales tax.

In attempting to abide by tax laws for your e-business, you might find yourself falling down the rabbit-hole, going through the looking glass, and attending a Mad Tea-Party.

Sound judgment, logic, and fairness never did apply totally to the field of taxation, however, this is specifically true of e-commerce deals.

Corporate bankruptcy in Canada: Canada Customs Welcomes You to Canada!

Considering that I’m situated in Canada, let’s start here. To keep things simpler, but certainly not simple, I will review this issue strictly from a Federal tax collection perspective, i.e. Harmonized Sales Tax (HST).

Canada has what you may call a nationwide sales tax or a value included tax (VAT). This Goods and Services Tax (GST) of seven percent is applicable to lots of Canadian transactions.

Not just is it critical to identify whether a taxable sale was made in Canada or not, but also where in Canada. If it was made (or deemed to be made) in any of the HST provinces, a higher rate applies. This is due to the fact that those provinces have allowed Canada to gather their provincial sales taxes for them, as follows:

Each province and territory has its own guidelines. Ontario charges 8 percent retail sales tax on numerous common internet deals whereas Alberta has no provincial sales tax.

Obviously, this is just scratching the surface. This entire blog by necessity is an oversimplification of an extremely complicated topic. As a licensed insolvency trustee (formerly called a bankruptcy trustee), I would certainly require the advice of a professional tax advisor to help me through e-commerce Taxland.

Since I am not a tax professional, you should also seek the advice of a tax professional. This is merely one bankruptcy trustee’s view of the issues in the insolvency of an e-commerce business.Corporate bankruptcy in Canada: When Exports Aren’t Exports!

In Canada, exports are “zero-rated” sales for GST purposes. This means that when you ship a product to someone outside Canada, you don’t charge GST. Yet, you get to claim (or subtract from the GST collected by you) all the “input tax credits” (GST that you spent for business functions) to make that export.

However, if you export items aside from physical products, beware! There are lots of mistakes to look out for.

As one example, think about digitized products that you may offer from Canadian sites, such as e-books, downloadable software application, or subscriptions to a material. You would be considered to be selling “intangible personal property”. Unless your item is also thought about “copyright” (such as software or e-books that you produced or have gotten the rights for), you will need to charge GST. The reason, according to the Canada Revenue Agency, is that it could be utilized inside Canada, even if it isn’t.

Say you sold a subscription for accessing digitized content (from various sources) on your Canadian site to a client in the United States. Given that there are no restrictions regarding where the intangible personal property might be used, and the property is not considered copyright (nor the provision of a service), the American client goes through GST, even if he never comes to Canada.

Strangely, the same logic doesn’t apply when an American buys a routine book (or an automobile) which he could bring into Canada with him and utilize here. It holds true that it is much easier for Canada to assess such products at the border than in the online world. However, I have not heard of any cases of Americans being taxed on the cars and trucks or books they bring with them when they come to reside in Canada for a part of the year.

As a Canadian registrant, one way you might legally avoid this ridiculous March Hare is to clearly mention on your website and invoice that utilize of such intangible personal effects in Canada is restricted (or requires an extra charge and the payment of GST).

Corporate bankruptcy in Canada: When imports Aren’t imports

Goods shipped to Canada are subject to GST on importation. Such tax is often assessed at the border. What if you are a Canadian registered for GST, selling to a Canadian customer but your provider is in a foreign country?

Pretend that your Canadian consumer has bought a book from you from your Canadian website. Your dropship supplier is located in the United States and is signed up for GST. You send your order to the American business, and they, in turn, ship the book for you (total with Customs Declaration and their GST Business Number).

Since they paid the GST, you wouldn’t think you would need to charge it again, would you? “Wrong!”, smiles the Cheshire cat. Since you are a registrant located in Canada, you need to charge and remit the GST. But you are entitled to input tax credits, aren’t you? In many cases, the answer is “No”.

It might be very tough for you to satisfy the documentary and other technical requirements. As an example, it is not uncommon for American providers to absolutely refuse to provide an invoice breaking down the GST or to enable you to be the importer of record. This complicates their life unnecessarily and they just don’t require the aggravation.

There are easing tax provisions covering drop shipping, sales agencies, and other situations. In most cases, sadly, the most practical option is to permit the tax to be paid twice.

Corporate bankruptcy in Canada: When you are subject to tax where you’re not subject to tax

It makes sense that countries impose a tax on sales and earnings made in their own jurisdiction. Does it make sense for Germany to tax sales made in the United States?

Starting July 1, 2003, the European Union actually did just that by enforcing an online sales tax.

This implies that if somebody from England buys an e-book from somebody in the United States, the American should submit this tax. Naturally, If the sale was to someone in Germany, the tax rate would be more complicated.

The reasoning behind this is as follows: Since countries can’t gather sales tax on internet deals at their borders, the only method they can collect it (other than a self-assessment system) is with an online sales tax. Even more, it is claimed that companies in the European Union suffer a significant competitive disadvantage due to the fact that they need to gather Value Added Tax but others don’t.

Corporate bankruptcy in Canada: But that isn’t all

So that is just a “scratching of the surface” description of the issue for Canadian companies selling online when it comes to HST. But if the company is insolvent, and will go into either receivership or bankruptcy, the story gets worse.

For every insolvent company in receivership, an HST liability is a trust claim against the assets of the company. So in a liquidation, the HST liability would have to be paid before a secured creditor, normally a chartered bank, recovers any money. What this means for the owner(s) who guaranteed the bank debt, is that they have additional exposure for any shortfall of the bank debt by the amount of the HST liability.

In a bankruptcy though, the HST liability is not a trust claim, but rather an unsecured claim. So, the good news is that it does not come ahead of the bank debt the owners have probably guaranteed payment for. However, the bad news is that the HST liability is always a Director liability. So in a bankruptcy, there are always insufficient funds to pay off the unsecured creditors 100%. So, the Directors of the bankrupt company will be on the hook for any unremitted HST.

Corporate bankruptcy in Canada: Does your company have too much debt?

Is your company, either a traditional retailer, online retailer or both, experiencing financial difficulties? If yes, call the Ira Smith Team. Our approach for each file is to create an end result where Starting Over, Starting Now takes place. This starts the minute you are at our front door.

The earlier you contact us, the more options we will have to implement. Whether it is a corporate restructuring or personal debt settlement through a consumer proposal, the goal is to avoid bankruptcy. However, if bankruptcy turns out to be the best option, we can assist there too.

You’re simply one phone call away from taking the necessary steps to get back to leading a healthy, balanced hassle-free life, ending the pain and stress you are feeling forever. Call Ira Smith Trustee & Receiver Inc. today for your free consultation.