Tax & Trade Blog

A common theme of our direct selling blogs is that direct selling businesses should pay close attention to the wording of their key documents (compensation plans, contracts, and policies and procedures, etc.) to ensure that plan participants are properly characterized as independent contractors and not as employees.

While not in a direct selling context, a recent decision at the Tax Court of Canada serves as a cautionary tale for businesses that fail to examine the details of their documents – their workers may be characterized contrary to their intentions!

The direct selling industry poses a number of unique challenges for Canadian sales tax regimes. The patchwork of separate federal GST/HST and provincial PST/QST regimes only further complicates the matter, making it difficult for new entrants to the Canadian market to determine their collection, remittance, and reporting obligations. This article provides a brief overview of the optional sales tax rules available to direct sellers.

Direct sellers in the United States could soon faceupdated rules which would ban businesses from relying on non-competition clauses in worker contracts. This parallels recent moves in certain Canadian provinces to further restrict same and is a perfect opportunity for direct sellers in Canada to review their own non-competition clauses in anticipation of potential changes.

Direct sellers in the US have a “safe harbour” which does not exist in Canada. Specifically, section 3508 of the US Internal Revenue Code expressly excludes the salesforce from the definition of “employee” for federal tax purposes! By contrast, direct sellers operating in Canada need to be proactive about making sure that the salesforce stays on the right side of the employee – independent contractor divide, which is a “common law” test in Canada.

The recent Tax Court of Canada (“TCC”) case of Mazraani provides a good refresher – and some positive comments for Canadian direct sellers – on the difference between employees and independent contractors.

Canada is often viewed as a natural extension of the American direct selling ecosystem: it has a common dominant language, similar culture, convenient land border, and a market of over 38 million people!

While there are many similarities, there are still unique legal and regulatory features that direct selling businesses operating in Canada must be aware of and adapt to — all of which can be easily avoided with the right planning, structuring or advice. This includes the appropriate “Canadianization” of plan documents and overall business strategies.

In the fifth of a 5-part series, we review one of the major risk areas facing the Canadian direct selling industry:

The Employee or Independent Contractor Issue

Canada is often viewed as a natural extension of the American direct selling ecosystem: it has a common dominant language, similar culture, convenient land border, and a market of over 38 million people!

While there are many similarities, there are still unique legal and regulatory features that direct selling businesses operating in Canada must be aware of and adapt to — all of which can be easily avoided with the right planning, structuring or advice. This includes the appropriate “Canadianization” of plan documents and overall business strategies.

In the fourth of a 5-part series, we review one of the major risk areas facing the Canadian direct selling industry:

Individual Rep Licensing Required Locally!

Canada is often viewed as a natural extension of the American direct selling ecosystem:  it has a common dominant language, similar culture, convenient land border, and a market of over 38 million people!

While there are many similarities, there are still unique legal and regulatory features that direct selling businesses operating in Canada must be aware of and adapt to — all of which can be easily avoided with the right planning, structuring or advice.  This includes the appropriate “Canadianization” of plan documents and overall business strategies. 

In the third of a 5-part series, we review one of the major risk areas facing the Canadian direct selling industry:

Understanding CBSA Verifications

Canada is often viewed as a natural extension of the American direct selling ecosystem: it has a common dominant language, similar culture, convenient land border, and a market of over 38 million people!

While there are many similarities, there are still unique legal and regulatory features that direct selling businesses operating in Canada must be aware of and adapt to — all of which can be easily avoided with the right planning, structuring or advice. This includes the appropriate “Canadianization” of plan documents and overall business strategies.

In the second of a 5-part series, we review one of the major risk areas facing the Canadian direct selling industry:

Importing to Canada under “NFR” Structures

Canada is often viewed as a natural extension of the American direct selling ecosystem: it has a common dominant language, similar culture, convenient land border, and a market of over 38 million people!

While there are many similarities, there are still unique legal and regulatory features that direct selling businesses operating in Canada must be aware of and adapt to — all of which can be easily avoided with the right planning, structuring or advice. This includes the appropriate “Canadianization” of plan documents and overall business strategies.

In the first of a 5-part series, we review one of the major risk areas facing the Canadian direct selling industry:

Planning For & Avoiding “Structural Recruitment”

New Part XI.1 to the Employment Standards Act (the “ESA”), titled “Written Policy for Electronic Monitoring”, generally requires employers who had 25 or more employees as of January 1, 2022 to put in place a written policy with respect to electronic monitoring of employees by October 11, 2022, and to share that policy with their employees. The Ontario government indicated that this requirement would “provide transparency for employees with the goal that employers will tailor electronic monitoring to legitimate business purposes”. 

In July 2022, Ontario updated the online Guide to the Employment Standards Act (the “Guide”) to add a new section giving employers basic information on the need for a written policy for electronic monitoring of employees, and provide some relevant examples for employers to consider.

Before 2010, Canadian direct selling companies were often organized as Unlimited Liability Companies ("ULCs"), for good reason.

The ULC structure could operate under the US "check-the-box" rules as a flow-through entity, which was often desirable from the perspective of the US corporate owner, which was usually structured as an S Corp or LLC.

Changes to the US-Canada Tax Treaty (the "Treaty") made effective in 2010 threw a wrench into these historically common structures – exposing some to a 25% unrecoverable tax under Part XIII of the Canadian Income Tax Act on any payments of dividends, interest, and royalties.

Every business operating in Québec should already be aware that it is a French-speaking province and that given the population it would make sense to operate in French when carrying on business in the province.

We are frequently asked, however, about the requirements of the Charter of the French Language (the “CFL”), particularly about whether specific documents must be translated, and whether websites must be offered in French as well.  

The December 20, 2017 decision of the Québec Court of Appeal in 156158 Canada Inc. v. Attorney General of Québec, 2017 QCCA 2055 provides a useful summary of the major provisions of the Charter of the French Language and upholds the validity of all of them, including the relatively recent requirement for French language websites.

As a general rule, non-resident employers who send their employees to Canada to perform various tasks for them are required to withhold tax in respect of the employees earnings while in Canada, and remit same to the Canada Revenue Agency (CRA).  Employees, are then required to file Canadian income tax returns to recover those taxes, if meeting certain tax treaty tests for determining taxability of those earnings in Canada.

Perhaps not surprisingly, these rules have made sending US employees to Canada an extremely cumbersome process for US employers, with full technical compliance with these rules perhaps honored more in the breach that the observance.

Thankfully, the CRA has instituted a brand new program addressing this situation, aimed at certifying non-resident employers, and then allowing a stream-lined process for sending US employees to Canada.   The program will apply for all payments made to US employees after 2015, and offers possible relief from the withholding tax requirements referred to above, upon certification.

Canada's new "Anti-Spam" Legislation will come into effect on July 1, 2014 (for simplicity, Canada's "ASL").

While a step forward for Canada in this legislative area, a more pessimistic view of it might position it as largely ineffectual when it comes to removing spam from my inbox and your inbox (because it does not contain any real measures aimed at enforcement on foreign owned computer systems or internet providers where much of Canadian spam actually originates), and the spam that it does effectively remove (Canadian-based spam) seems to be at a huge cost to legitimate Canadian businesses that seek to market their legitimate products and services to Canadians in the digital market-place).