CRA Appeals Service Header Image — Gateway Surrey

How Indirect Tax Works On Upwork For Canadians

May 8, 2022 Andrew AdolphAudits


How Indirect Tax Works On Upwork For Canadians

 

Your head is probably spinning from seeing terms like indirect tax, sales tax, value-added tax, provincial tax, income tax, and everything in between. It’s that time again, and the taxman’s shadow is looming over you. 

Perhaps you want to make sure you have all your ducks in a row when filing your taxes from the Upwork platform you use so often.

Or maybe you just want to have a firm understanding of how taxes are handled to take better care of yourself and your business. 

Taxes have become an essential part of our society and are the government’s way of financing critical sectors of human care. Many of us have icky feelings about sending our tax income to the IRS, but another way to think about it is if you send a lot, it means you’re making a lot, and you’re contributing to the health of the people around you. 

Since Upwork is the world’s largest work marketplace, they cover a lot of ground and have many rules and regulations to follow. As a Canadian, I will focus on how indirect taxes affect workers and businesses in Canada. 

Whether you’re a client or a freelancer, sometimes it can be hard to make sense of all the taxes our government charges, but I’m here to clear the air so let’s get right to it.

What Is Indirect Tax?

Indirect tax is one of the ways the government generates revenue by charging an additional percentage on goods and services. You mainly see it as sales tax like GST/HST, but it’s also PST and excise duties on goods like spirits, wine, beer, and cigarettes.

GST stands for goods and services tax, and no matter where you are in Canada; it’s always 5%.

PST stands for provincial sales tax, and you will only see this charged separately in Saskatchewan, Manitoba, and British Colombia. In SK it’s 6%; in MB and in BC, it’s 7%. 

HST stands for harmonized sales tax, and it is both GST and PST put together under one tax rate. This is how the rest of the Canadian provinces charge indirect tax.

QST stands for Quebec sales tax and is only charged in Quebec. It’s set at a rate of 9.975%.  

So if that’s indirect tax, then what is direct tax? With indirect tax, an individual or entity is taxed, and then the body collecting that tax delivers it to the government.

Direct tax removes the middle man by having a person pay taxes directly to the government. Some examples of this are income tax and admission fees to national parks. 

How Upwork Collects Indirect Taxes

To adhere to Canadian law, Upwork began collecting indirect taxes in November 2021. That means if a freelancer does work for someone in Canada, Upwork is required to collect sales taxes from the client. 

If the user doesn’t provide a valid tax number, Upwork will collect the necessary tax, depending on which province they are located in. That includes any Upwork fees and subscriptions like:

 

  • Freelancer service fees (not your earnings)
  • Connect purchases
  • Membership fees (the Freelancer Plus plan)
  • The payment processing fees for Direct Contracts

The amount of indirect tax you pay will vary depending on:

  • Which country you live and work in 
  • Enterprise fees
  • Job feature payments
  • Upwork conversion fees (This is the fee clients pay to take business outside of Upwork)

 

If users provide a valid tax number in Upwork’s settings, they will not have to pay sales tax because they are already registered and would be able to claim it back anyway. However, Upwork will automatically have to collect provincial sales taxes (PST) in BC, Saskatchewan, Manitoba, and Quebec regardless of whether freelancers provide a tax number or not. 

It’s important to note that this does not cost the freelancer anything because the purchaser of the work pays for the sales tax. Freelancers will only be charged taxes on payments they make to Upwork.

Another good point for the freelancer to note is that Upwork won’t collect sales tax on rates freelancers charge to clients. For fixed-price contracts, the client does not pay any GST.  

What Makes Indirect Tax Different From Canada’s Digital Sales Tax

Don’t get indirect tax confused with Canada’s new digital sales tax. This tax was made for non-Canadian vendors who sell to consumers in Canada. You will not have to worry about this tax on Upwork. 

This is a new tax imposed on July 1, 2021, and applies to non-resident vendors selling:

  • Digital products and services from across the border. 
  • E-commerce products from warehouses in Canada.
  • Platform-based, short-term accommodation supplied by either the property owner or the platform operator.

Before the digital sales tax, foreign vendors residing outside of Canada could sell digital products and services to Canadian consumers without having to collect GST/HST. This created an uneven playing field because the same type of vendors within Canada had to charge these indirect taxes.  

It made it hard for people to compete against vendors like Netflix, Amazon Prime, Disney+, Spotify, Airbnb, etc. The digital sales tax resolved this issue by making the appropriate companies charge a GST/HST.

Contrary to the name, you won’t see it as DST on an invoice, but rather it will appear as GST/HST and be charged according to the province and consumer. 

Bottom Line

According to Candian law, Upwork has to pass all collected taxes to the Canadian and Provincial governments. If you still have questions and need advice, the best thing you can do is seek the help of a tax advisor. 

You should look out for taxes if you live in Canada and regularly use Upwork. The better you understand indirect taxes, the better you can control your finances and the more efficiently you can make money. Interested in learning more?

To book a free meeting call 604-240-6173 or email me at andrew@gatewaytax.ca. I can answer any financial or tax-related questions and help you set a profitable financial plan. You can also visit the Blog for additional tax-related resources.

 

 

 

Image

Andrew Adolph

Andrew Adolph is a CPA and former CRA auditor with 25 Years of experience. He helps businesses to not par any more in sales taxs than the law says they must and acts as an advocate for you if you are being audited, so you can fous on your business.