How is dropshipping income taxed in Canada?

Why gross sales, not your markup, is your revenue

A frequent mistake in dropshipping bookkeeping is recording only the profit margin as revenue, treating the supplier's cut as if it never touched your books. That understates both revenue and expenses. If a customer pays you $60 for a product and your supplier charges you $35 to fulfill it, your revenue is $60, your cost of goods sold is $35, and your gross margin is $25, and all three figures need to appear on your books, not just the $25.

This matters beyond bookkeeping accuracy. The $30,000 small supplier threshold for GST/HST registration is based on gross revenue, not margin, so a dropshipper doing $150,000 in gross sales at a 20% margin has crossed that threshold many times over even though take-home profit is a fraction of that figure.

Tracking supplier costs as cost of goods sold

Even though you never hold physical inventory, the amount your supplier invoices you for each order is still cost of goods sold, matched to the same period as the sale it fulfilled. This differs from a business that holds stock, where landed cost includes freight and duty paid on inventory sitting in a warehouse; a dropshipper's cost of goods sold is generally the supplier's per-order charge, since the supplier is the one absorbing freight and handling into their own pricing.

Keep supplier invoices or platform reports (AliExpress, Spocket, CJdropshipping, or a similar supplier) reconciled against your sales records regularly, since a mismatch between orders placed and orders your storefront shows as sold is one of the more common bookkeeping gaps in a dropshipping business, especially where refunds or cancelled supplier orders are not cleaned up on both sides.

GST/HST on sales to Canadian customers

Once registered, you charge GST/HST on sales to Canadian customers based on the customer's province, the same rule any other retailer follows, detailed further in which province's sales tax to charge customers in other provinces. Where your supplier ships directly to your Canadian customer from outside Canada, the shipment may also be subject to import GST/HST assessed at the border, separate from the tax you charge the customer on your invoice; how that interacts with your own registration depends on the specific supply chain, so it is worth reviewing with whoever prepares your GST/HST return rather than assuming one tax replaces the other.

Sales to customers outside Canada are generally not subject to Canadian GST/HST, but that does not mean no sales tax applies anywhere; it shifts the question to the destination country's own rules instead.

US economic nexus and sales tax on US customers

Selling to US customers can create a US state sales tax obligation once your sales into a particular state cross that state's economic nexus threshold, independent of whether you have any physical presence in the US. Many marketplaces, including Amazon and Etsy, collect and remit this tax automatically under state marketplace facilitator laws, but a dropshipper selling through their own Shopify store generally does not get that automatic coverage and needs to track state-level exposure directly, covered in more detail in what is economic nexus for Canadian online sellers.

This is a separate question from Canadian income tax. A Canadian dropshipper generally remains taxable in Canada on worldwide business profit regardless of where US sales tax collection obligations arise, and US sales tax registration does not by itself create a Canadian or US income tax filing obligation beyond what already applies to the business.

Recording platform and payment fees correctly

Shopify subscription fees, transaction fees, and payment processor fees from PayPal or Stripe are operating expenses, deducted separately from cost of goods sold rather than netted against revenue before recording the sale. Recording the gross sale amount as revenue and the fee as its own expense line, rather than only recording the net deposit that lands in your bank account, keeps your books accurate and matches how the CRA expects revenue and expenses to be reported; see how to record PayPal and Stripe fees and payouts for the mechanics of that reconciliation.

Sole proprietor or corporation for a dropshipping business

A new dropshipping store commonly starts as a sole proprietorship, which is simple to set up and keeps early losses, if any, usable against other personal income. As sales volume and profit grow, incorporating can reduce the tax rate on income kept in the business up to the small business limit, and it also creates a cleaner structure for holding supplier and marketplace accounts separately from the owner's personal name.

Why refunds and chargebacks need their own tracking

A dropshipping store typically sees a higher rate of refunds and chargebacks than a business shipping from its own stock, since delivery times and product quality sit with a third-party supplier the customer never sees directly. A refunded sale should reverse both the original revenue and the matching cost of goods sold, not just the revenue side, and a chargeback that the payment processor resolves in the customer's favour needs the same two-sided reversal plus any chargeback fee recorded as its own expense. Skipping the cost-of-goods-sold reversal on a refunded order is a common way gross margin ends up overstated in a dropshipping business specifically.

Where a supplier issues a partial refund or credit for a defective or late shipment rather than the platform processing a full customer refund, that credit reduces the cost of goods sold for the affected order rather than counting as separate income, since it is adjusting what the order actually cost rather than generating new revenue.

How we handle dropshipping bookkeeping

We set up bookkeeping that records gross sales and supplier costs separately from day one, reconcile Shopify, PayPal, and supplier reports against each other monthly, and monitor US economic nexus exposure alongside GST/HST registration so both sides of the border are covered as the business scales. Our dropshipping accounting page covers the full setup we use for dropshipping sellers.