Canadian E-Commerce Businesses Selling Internationally: A Tax Guide

If you're running an e-commerce business, you may be thinking about tapping into more markets, reaching new customers, and expanding your global footprint—that is, if you're not doing that already. Whether you’re selling homemade goods on Etsy or building a retail business on Amazon, you have many opportunities to drive sales from different countries.

With widespread reach, however, comes added tax responsibilities. For both incorporated business owners and sole proprietors, it’s crucial to know how to report any foreign income and how to claim the federal foreign tax credit (FTC). You might also be wondering if and how you need to make currency conversions and stay compliant with regulations from the Canadian Revenue Agency (CRA).

What qualifies as foreign income?

Foreign income is any income earned from sources outside of Canada. For e-commerce businesses, this typically includes sales made to international customers through platforms like Amazon or Shopify. However, foreign income can also come from rental properties located outside of Canada as well as dividends and interests earned from non-Canadian bank accounts and investments.

For example, you might live in Canada and run a Shopify store that sells and ships clothing to customers based in the U.S. and Europe. Or you might be an Amazon.ca seller who also lists your items on Amazon.com and receives payments in U.S. dollars. In cases like these, you're receiving foreign business income, which can impact how you file your taxes.

 

How does GST/HST work when selling outside of Canada?

Normally, Canadian businesses are required to collect sales tax from customers, such as the Goods and Services Tax (GST), Harmonized Sales Tax (HST), and Provincial Sales Tax (PST); they do this by registering for a GST/HST account.

What's the good news for global e-commerce businesses? Most products exported from Canada are zero-rated for GST/HST (exceptions include excisable goods like beer and tobacco products). That means businesses generally do not have to tax foreign customers for their purchases.

How to report foreign income on your tax return

If you are a Canadian resident, you must report all income—including from foreign sales—on your tax return in Canadian dollars. To convert income received in different currencies, use the Bank of Canada's exchange rate for the day of the transaction. If you have to convert a large volume of small transactions, you can generally use the Bank of Canada’s average annual rate.

So, where do you report this income? Sole proprietors report all their business income, including foreign sales, on Form T2125, Statement of Business or Professional Activities, as part of their T1 General Tax Return. Meanwhile, incorporated business owners report their income on Schedule 125 as part of their T2 Corporate Tax Return.

What is the federal foreign tax credit?

If you paid foreign income tax on income earned outside of Canada, you may be eligible for the federal foreign tax credit. For example, you may have to file foreign income taxes if your business operates a permanent establishment, such as an office or warehouse, in another country.

The CRA establishes treaties with other countries to offer the federal foreign tax credit and help people avoid double taxation: paying both foreign and Canadian taxes on the same income. Basically, with the foreign tax credit, businesses can reduce the amount of Canadian tax they owe.

The credit is typically used to offset the lesser of the foreign income tax you paid or the amount of Canadian income tax you would owe on that foreign income.

How to claim the federal foreign tax credit

To be eligible for the federal foreign tax credit, you must:

• Have been a resident of Canada during the tax year
• Have paid foreign income tax to another country's government

To claim the foreign tax credit, take these steps:

• Gather your tax information. Identify the countries you paid foreign income tax to, including the amount you earned. If you earned income from more than one country, you need to submit a separate foreign income tax credit form for each country.
• Convert currencies. Foreign taxes have to be converted to Canadian dollars; use the Bank of Canada exchange rate from the date the taxes were paid.
• Submit your forms. Sole proprietors can claim the federal tax credit using Line 40500 on Form T2209 of their T1 return. Incorporated business owners can use Schedule 21 of their T2 return.

Documentation for reporting

Make it easier to report your foreign income and apply for the foreign tax credit by keeping track of certain documents throughout the year, like:

• Sales records. Compile any invoices and sales receipts from e-commerce platforms and marketplaces.
• Proof of foreign taxes paid. Keep your tax slips, official receipts, and statements from foreign tax authorities.
• Currency conversion logs. Maintain detailed records of exchange rates used for each transaction.

Staying on top of your record keeping doesn’t have to be too overwhelming, either. You can use these tips to stay organized:

• Leverage accounting software. Rely on software like TurboTax to organize your financial information and receive expert tax guidance throughout the year.
• Download exchange rate tables. Save exchange rate tables from the Bank of Canada so you can use them for currency conversions.
• Separate personal and business finances. If you're a sole proprietor, consider creating a separate business account so your transactions are easily accessible.
• Preserve your records. The CRA recommends keeping your financial records and documents for 6 years in case they are needed for reviews, audits, or verification.
• Stay up to date. You can use QuickBooks Online to keep your books current and track income and expenses throughout the year.

Common mistakes to avoid

It’s also important to look out for these common mistakes when preparing your foreign income taxes:

• Double taxation. Don’t forget to claim the foreign tax credit if it applies to you. Otherwise, you might end up paying tax twice on the same income.
• Ignoring tax treaties. Always check for any tax treaties between Canada and other countries so you don’t overpay or miss out on tax credits.
• Not tracking exchange rates. Using incorrect or inconsistent exchange rates can trigger CRA audits or penalties.
• Changing exchange rate sources. Avoid using the Bank of Canada exchange rate for one year and then switching to a different bank rate the next. Once you choose a method for converting currency, stick with it for continuity.
• GST/HST errors. Remember to zero-rate eligible foreign sales; you generally don’t have to charge GST/HST to foreign customers.

How to report foreign income for sole proprietors vs. incorporated business owners

Here's a breakdown of the forms and resources you'll need to report foreign income depending on your business type:

Business type	Tax return form	Where to report foreign income	Where to claim foreign tax credit
Sole proprietor	T1	T2125	T2209 (Line 40500)
Corporation	T2	Schedule 125	Schedule 21

Be prepared for global business growth

Reaching international buyers opens up valuable opportunities to increase revenue and expand your customer base. Still, it’s important to be prepared for the tax obligations that come with driving global sales. By understanding how to report foreign income and claim the right credits, you can stay compliant with CRA regulations and keep more of your hard-earned profits as your business grows.

Still have questions? TurboTax has you covered.

Use TurboTax, a CRA-certified tax software, to file your taxes with ease and accuracy. You can get unlimited help and guidance during your return, and a final review before you file, so you’re never on your own. TurboTax can also offer expert year-round help with your corporate GST/HST questions and returns, and other bookkeeping and payroll help.

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