The Covid-19 pandemic has drastically changed Canada’s economic landscape. It had a very detrimental effect on certain industries. However, other sectors are witnessing significant growth during these troubling times. Such is the case for E-commerce. There has been a substantial increase in E-commerce sales due to containment measures and consumers’ reluctance to in-store purchases. Consequently, a lot of entrepreneurs have lunched their E-commerce business and this sector shall likely experience constant growth in the upcoming years.
In this article, we have summarized 5 legal issues to deal with for the good operation of your E-commerce business.
1. LEGAL STRUCTURE
The choice of legal structure for your E-commerce will vary depending on numerous factors. Some entrepreneurs choose a sole proprietorship or even a partnership to operate their business. However, a corporation provides a lot of advantages for your business operations. Since a corporation is a separate legal entity, this limits your personal liability with respect to your business activities. Also, a corporation makes it easier for you to promote and market your brand and it facilitates business financing. We invite you to read out latest article on the factors to consider for the incorporation of your business.
If you decide to incorporate your business, a federal corporation would be the most advantageous legal structure for you, especially if you have a business name other than a designated number. Every business must obtain a NUANS report during a federal incorporation, a report listing all business names and trademarks in Canada which are similar to your proposed name. This report is analyzed and validated by Corporations Canada during the incorporation process. You thus benefit from a greater name protection and you ensure that there is no other business name which is confusingly similar to yours, a very important factor in the context of E-commerce. Moreover, if you have clients located across Canada or the world, a federal corporation may be the most appropriate legal structure for your business.
2. CONSUMER PROTECTION ACT
If you have an E-commerce business, you will be considered as a merchant under the Consumer Protection Act (“CPA”) and you have certain obligations under such law. Since the sale contract between you and your clients is entered into online, such agreement is considered as a distance contract pursuant to the CPA. As such, the contract must contain mandatory terms and certain information must be provided to the consumer before the conclusion of the contract.
Therefore, you will need a sale contract with the mandatory information prescribed by the CPA, as well as a policy regarding refunds, exchanges, warranties on your products and other terms and conditions with respect to the sale of your products and services, which brings us to the next point.
3. TERMS AND CONDITIONS AND PRIVACY POLICY
The terms and conditions (including refund or exchange policies) and privacy policy of your website are important elements of your E-commerce business for many reasons. Firstly, since the vast majority (if not all) of your business activities are conducted via your website, such documents must contain appropriate provisions for the protection of your business. Then, most online sale transactions do not involve the consumer signing a formal contract. Consequently, the relevant provisions regarding the sale of products and services (conditions of sale, exchange, etc.) are included in the terms and conditions of the website.
Finally, terms and conditions and privacy policies are subject to federal and provincial legislation regarding personal information protection. Such laws provide the conditions under which you can use and communicate your clients’ personal information. There are currently proposed amendments to both federal and provincial laws regarding new obligations for business owners, including rules regarding the clarity of privacy policies and your clients’ consent to the use of their confidential information.
Consequently, it is important that your website terms and conditions and privacy policy are properly drafted to protect your business and ensure that your business activities are in conformity with applicable law.
4. ANTI-SPAM LAW
An E-commerce business usually entails the collection of clients’ email addresses and sending commercial emails to such clients. Canada’s Anti-Spam Legislation (“CASL“) is the legislation that regulates the collection of your clients’ emails and the sending of commercial electronic messages to such clients. A commercial electronic message (“CEM”) is an electronic message that is sent to encourage participation in a commercial activity. There are 3 main obligations under the CASL :
- Obtain your clients’ consent (express or tacit) prior to sending a CEM;
- Provide certain mandatory information when sending a CEM; and
- Enable your clients to withdraw their consent to receive other CEMs.
You must therefore ensure that that you comply with the obligations stated above.
5. TAX OBLIGATIONS – IN PARTNERSHIP WITH BCA CPA
Like any other business, you have tax liabilities to comply with. First of all, in Quebec, you must register for GST and QST if your revenues exceed $30,000 during a calendar quarter (3 months) or for the 4 previous calendar quarters. Even if you do not reach this threshold, it may still be beneficial to register for GST and QST, since by taxing your sales, you may be entitled to claim refunds from tax authorities for taxes paid on your purchases and expenses related to your business activity. Indeed, although the price ultimately paid by the consumer is 14.975% higher when you are registered to GST/QST, it may be a good business decision to register before you reach the $30,000 threshold if your business purchases and expenses are taxable.
For instance, Audrey owns an e-commerce website where she sells soaps made in Quebec. She’s able to generate $10,000 in sales, but has $5,000 in purchases and business expenses (raw materials, equipment, website, all taxable with GST/QST).
If she is not registered to GST/QST:
Sales $10,000.00 (no tax because it is not registered)
(-) Purchases ($5,748.75) (she has $5,000 in expenses on which she pays taxes)
Profits $4,251.25 (on which she will have to pay income tax)
If she is registered to GST/QST :
Sales (incl. taxes) $11,497.50 ($10,000 income plus GST/QST)
(-) GST/QST remittance ($1,497.50) (taxes charged must be remitted to Revenu Québec)
(-) Purchases ($5,748.75) (she has $5,000 in expenses on which she pays taxes)
(+) GST/QST claim $748.75 (taxes paid are claimed from Revenu Québec)
Profits $5,000 (on which she will have to pay income tax)
As you can see, Audrey has $748.75 more in her pockets at the end of the year by being registered to GST/QST. However, her clients pay 14.975% more for their soaps than if she were not registered. She will have to do a price elasticity analysis to see if her customers will buy the same amount of product if they are taxable. In most cases, if the transactions are small, such as soaps in this case, the effect of taxes on sales is minimal.
The other point to consider in this analysis is the administrative burden of dealing with taxes if you want to register, because very often, if you are not familiar with the process, you will have to hire professionals to deal with the taxes and make the related returns (cost vs. benefit analysis). In the example above, if Audrey’s sales are the same whether she is registered for taxes or not, as long as her professionals (lawyers, accountants) charge her less than $748.75 to manage her taxes, she is bound to make a profit!
If you are registered for taxes and sell products/services in the same province as your province of residence or business location, unless the product/service is not taxable, you will have to charge federal and provincial taxes in your province. If you are selling in provinces other than your own, you should also be careful about which provincial taxes to apply when selling online.
If you sell goods and provide a delivery service to your customers in provinces other than your own:
If the consumer buys a good and the sale includes delivery to his or her home, then your customer’s province of residence prevails and you must charge and remit the provincial and federal taxes of your customer’s province.
In this case, let’s use the example of Audrey and her soaps. Audrey’s soap business is growing rapidly and she is now required to be registered for GST/QST. She has also started selling and offering delivery service in Ontario. For her Ontario customers, since the goods are delivered to their homes, Audrey must charge them HST (13%), which is the Ontario tax, and remit these taxes afterwards.
If you sell goods and do not provide delivery service to your customers in provinces other than your own:
If your customer buys a good and the sale does not include home delivery (in some cases, with higher-value items or very large items, for example), then the delivery is considered to be made in the province of the business, so GST/QST would have to be charged if the business is in Quebec.
Let’s take the example of Audrey-Anne who sells her soaps. She has just opened a physical shop in Gatineau and she has an e-commerce website where customers can pre-order and pre-pay for their favourite soaps, but they have to pick up the soaps at the shop because Audrey does not yet offer a delivery service. In the case of a customer living in Ottawa who places an order online (order and payment), since the goods are picked up in Quebec, Audrey must charge GST/QST and not HST, even if the customer is from Ontario.
Your e-commerce platform is normally able to deduct provincial and federal taxes based on various parameters, you just need to enable them. Then, you need to report the income and expenses generated by your e-commerce business to the tax authorities, depending on your legal structure. If your business is registered and not incorporated, you will have to include the income and expenses in your personal tax return and pay personal income tax on the profits.
If your business is incorporated, you will have to report your income and expenses generated by your e-commerce business on a corporate tax return, which is a separate tax return from your personal tax return. The biggest advantage of incorporation is that you do not have to pay QPP and QPIP premiums (employer and employee) on all income earned, and the tax payable at the end of the year is calculated at a tax rate that is often lower than your marginal personal tax rate.
Information provided in this article is intended as general introductory information only. The information provided in this article is not legal advice. It should not be construed as legal advice and should not be relied upon as such. Should you want legal advice regarding the information provided in this article, please contact one of our lawyers.
