Dropshipping removes inventory from your warehouse. It does not remove it from your books.
Assuming you are selling as principal rather than acting as an agent, you are the seller of record for the customer transaction. Customers pay you, or a marketplace collects from the customer on your behalf. You pay the supplier. The supplier ships directly to the customer. From a legal and tax perspective, you made a sale and incurred a cost. For GST/HST, you are responsible for taxable Canadian supplies unless a marketplace or platform rule makes the platform responsible for that specific sale. The fact that you never touched the product does not automatically shift the obligation to the supplier.
The bookkeeping model for dropshipping is straightforward once you understand the structure. The problems arise when sellers treat the business as if it were a pass-through arrangement, netting the supplier cost against customer revenue before recording anything, or ignoring GST/HST because it seems like the supplier’s responsibility.
The Core Accounting Structure
A dropshipping transaction has three components: revenue, cost of goods sold, and gross margin. That structure is the same as any product business. What is different is the timing and the mechanics.
Revenue is what the customer pays you for the product, including any shipping you charged. It is not reduced by what you pay the supplier. Revenue is recognized when the sale occurs and your performance obligation is complete, which for physical goods is usually when control passes under your sales terms.
Cost of goods sold is what you pay the supplier for the specific unit the customer ordered. The supplier invoice for that order is your COGS. It is recognized in the same period as the sale, not when you pay the supplier invoice.
Gross margin is the difference: what you charged the customer minus what you paid the supplier. Your operating expenses (platform fees, advertising, software subscriptions, payment processing) sit below gross margin and reduce net income further.
A seller who records only the net transfer between customer payment and supplier cost is collapsing two accounting entries into one. The result is understated revenue, no COGS line, and a margin picture that cannot be analyzed by product, supplier, or channel.
Revenue Recognition
Revenue is recognized when earned, not when received. For a dropshipping sale, revenue is usually earned when control of the goods has passed to the customer under your sales terms and platform rules. In many direct-to-consumer setups, that is when the supplier ships the order; in others, delivery may be the better cut-off point. Waiting until the customer confirms receipt is more conservative but reasonable for businesses with high dispute or return rates.
Cash collection from the customer may happen before, during, or after shipment depending on the platform and payment method. A customer who pays by credit card at checkout has paid before the supplier ships, even if the processor payout arrives a few days later. The payment and the revenue recognition date are related but not identical.
For tax purposes, CRA’s income inclusion rules for business income generally follow the earned standard rather than the cash received standard. Accrual accounting produces the correct picture for both financial reporting and tax filing. Sellers using cash-basis bookkeeping may misstate revenue timing, particularly around year-end orders where customer payment and supplier shipment fall in different months.
COGS Timing
COGS is matched to the sale. When a customer places an order and you place the corresponding supplier order, the supplier cost becomes COGS in the period the sale is recognized, not in the period you pay the supplier.
If you pay the supplier immediately upon receiving the order, the cash timing is straightforward, but COGS is still matched to the related sale. If the supplier invoices you on net terms, the timing separates: COGS is recognized when the related sale is recognized, and the supplier invoice is a payable until you remit. If you pay the supplier in advance for a batch of potential orders, the prepayment sits as a prepaid asset on the balance sheet until matched to specific customer orders.
The practical outcome is that your COGS line should mirror your revenue line. A period with high sales volume should have proportionally high COGS. If a month shows high revenue and no COGS, the bookkeeping is incomplete.
GST/HST for Dropshipping Sellers
For direct-store sales, and for marketplace sales where the platform is not responsible for remitting tax, you are the merchant of record. That means you are responsible for collecting and remitting GST/HST on taxable Canadian supplies you make to Canadian customers. The fact that your supplier ships directly does not, by itself, change your GST/HST obligation to CRA.
The registration threshold is CAD $30,000 in worldwide taxable supplies, before expenses, from all your businesses and associated persons, measured in any single calendar quarter or over four consecutive calendar quarters. If your taxable sales cross that threshold, you are required to register, but the effective date depends on how the threshold is crossed. See CRA: When to register for and start charging GST/HST for the full threshold rules.
Once registered, you charge GST/HST at the applicable rate on taxable supplies to Canadian customers. For GST/HST purposes, rates depend on the place of supply: 5% GST for Alberta, British Columbia, Manitoba, Quebec, Saskatchewan, Northwest Territories, Nunavut, and Yukon; 13% HST for Ontario; 14% HST for Nova Scotia; and 15% HST for New Brunswick, Newfoundland and Labrador, and Prince Edward Island. See CRA: Charge and collect the GST/HST for current rates and place-of-supply guidance. Separate QST, PST, or RST obligations may also apply and are outside the GST/HST calculation.
Your Shopify store, if configured correctly, will calculate and collect the tax at checkout. Shopify does not remit it for you. The amount collected belongs to CRA and must be reported on your GST/HST return and remitted on time. See Shopify GST/HST and Tax Settings for Canadian Stores for configuration details.
If you sell on Amazon, Etsy, or eBay, those platforms may collect and remit GST/HST on qualifying sales when the platform rules apply, especially where the vendor is not registered under the normal GST/HST regime. If you are registered for GST/HST, you generally continue to collect, report, and remit GST/HST on taxable supplies that you make in Canada. Confirm how each platform handles registered sellers in its Canadian tax settings, and make sure your registration number is added where required.
Input Tax Credits on Your Business Expenses
As a registered GST/HST seller, you can claim input tax credits on the GST/HST you pay on eligible business expenses. The key distinction for dropshipping is between Canadian and foreign supplier costs.
Canadian suppliers: If your supplier is a Canadian business registered for GST/HST, their invoices will include GST/HST. You can claim an ITC for that GST/HST on your return, provided the expense relates to your commercial activities and you hold the required documentation. The ITC reduces your net GST/HST remittance.
Foreign suppliers: US, Chinese, and other non-Canadian suppliers shipping goods from outside Canada generally do not charge Canadian GST/HST on their product invoices. If no GST/HST was charged or paid by you, there is no ITC to claim. The full supplier invoice amount is your COGS with no ITC component. If you are the importer of record and pay import GST/HST to CBSA, that import GST/HST may be recoverable as an ITC if the goods are for your commercial activity and you hold the import documentation.
For most Canadian dropshippers sourcing from AliExpress, US wholesalers, or similar foreign platforms, the majority of COGS produces no recoverable ITC. Platform fees, payment processing fees, advertising, and software subscriptions may carry recoverable GST/HST if the provider charges GST/HST under the normal regime and your documentation meets the ITC rules. If a non-resident supplier is registered under the simplified digital-economy regime, provide your normal GST/HST registration number during account setup; CRA says GST/HST charged under that simplified regime may be difficult or impossible for a registrant to recover as an ITC.
CRA’s documentation requirements for ITCs scale with invoice amount. For total sales under CAD $100, you generally need the supplier’s business or trading name, the invoice date or tax payable date, and the total amount paid or payable. For CAD $100 to CAD $499.99, you also need the GST/HST amount or a statement that GST/HST is included at the applicable rate, the status of taxable and exempt supplies where mixed, and the supplier’s or intermediary’s GST/HST registration number. For CAD $500 or more, you also need the buyer’s name or trading name, a brief description of the property or services, and payment terms. See CRA: Input tax credits for the complete requirement schedule.
Working With Foreign Suppliers: Import and Duty Considerations
When a foreign supplier ships directly to a Canadian customer, CBSA may assess customs duties and import taxes on the goods. The question of who bears that obligation depends on how the shipment is structured and who is named as the importer of record.
In a true dropshipping arrangement, the customer is often the importer of record on the package. The courier or postal service may collect duties and import GST/HST from the customer at delivery if the shipment exceeds Canada’s low-value thresholds. The general mail and courier threshold is CAD $20 for shipments from countries other than the United States and Mexico. Under CUSMA, courier shipments imported from the United States or Mexico are duty and tax free up to CAD $40, duty free but taxable above CAD $40 and up to CAD $150, and subject to duties and taxes above CAD $150. These are not blanket thresholds for every foreign shipment; see CBSA: CUSMA low-value shipment thresholds. If the customer is the importer, the import charge is a transaction between the customer and CBSA: you did not import the goods, and import duties are not your cost to record.
If you have structured the arrangement differently, if you are named as the importer of record on supplier shipments, or if you are using a freight forwarder who imports on your behalf before forwarding to customers, the duty and import GST/HST is your cost and belongs in landed cost calculations. That scenario is not typical for direct-to-customer dropshipping but does arise with some consolidated shipment models.
If you are unsure how your specific supplier arrangement works, examine the commercial invoice on a sample shipment to see whether your name or the customer’s name appears as the importer.
Platform Fees Are Not COGS
Platform fees on marketplace sales are operating expenses, not cost of goods sold. COGS represents the cost to acquire or produce the goods you sold. Platform fees are the cost to access the distribution channel.
For a Shopify dropshipping business, COGS is the supplier cost per order. Shopify subscription fees, app subscription fees, and Shopify transaction fees are separate operating expenses. For Amazon, eBay, or Etsy dropshipping, the referral fee and transaction fee are separate from COGS even though they are deducted before the deposit arrives.
Bundling supplier costs and platform fees into a single “product cost” account produces a COGS figure that looks like the true product cost but is not. When fee rates change or when you switch platforms, the margin picture shifts in ways that cannot be traced back to the underlying cause.
Keep supplier cost, platform commission, payment processing fee, and advertising spend in four separate accounts. The gross margin line should reflect only the spread between what the customer paid and what the supplier charged. Everything below that is an operating expense.
Cash Flow Characteristics of Dropshipping
Dropshipping creates a different cash flow profile than inventory-holding businesses. You do not tie up large amounts of cash in stock. But the timing between customer payment and supplier payment matters.
If you collect customer payment before placing the supplier order, you are operating with positive working capital: cash in before cash out. This is the most common structure for Shopify dropshipping stores with credit card checkout. The cash arrives within one to three business days; the supplier is paid when you place the order.
If you are selling on a marketplace that has a payout delay or account-level reserve, the structure can reverse. The marketplace may release cash only after delivery, settlement review, or a scheduled payout cycle. If you pay the supplier immediately upon order placement, you are financing the product cost until the marketplace releases the payout. On high-volume periods, this gap can be meaningful.
For sellers with multiple active orders and payout delays, tracking total outstanding supplier payables against expected marketplace settlements gives a clearer picture of cash position than looking at the bank balance alone. See Inventory as a Cash Flow Problem for the broader framework, even though dropshipping does not involve physical stock.
Returns and Chargebacks
Returns in a dropshipping model create more complexity than in a fulfilled-from-stock model because there are two logistics decisions: whether the customer returns the item at all, and whether you return it to the supplier.
From an accounting perspective, a customer return is a reversal of revenue and COGS in the period the return is processed. If the customer paid GST/HST, that amount is also reversed. CRA requires a credit note or adjustment for the GST/HST portion if the original supply was taxable.
The supplier side depends on the supplier’s return policy. If the supplier accepts the return and issues a credit, your COGS reverses when the credit is received. If the supplier does not accept the return, you absorb the cost: revenue reverses but COGS remains, and the return produces a net loss on that transaction. That outcome belongs in the books as a write-off, not hidden inside a COGS entry.
Chargebacks are a bank-side reversal of the customer payment. The chargeback reverses your cash and eliminates the receivable. If the chargeback is lost, the sale is unwound. The COGS for the order remains if the supplier already shipped and will not accept a return.
A dropshipping model with a high return rate and a supplier that does not accept returns will show a recurring pattern of revenue reversals with no COGS offset. That margin impact belongs in the books, not absorbed silently into an undifferentiated expense account.
For a detailed treatment of the journal entries and GST/HST handling for returns, see Returns, Refunds, Chargebacks, and Reimbursements.
Amazon Dropshipping Policy
Amazon permits dropshipping but imposes specific requirements. The seller must be identified as the seller of record on all packing slips, invoices, and external packaging. A supplier’s branding or contact information cannot appear on the package as shipped to the customer. Amazon prohibits purchasing from another retailer and having that retailer ship directly to the customer with their branding intact.
The accounting treatment does not change based on these policy rules, but compliance matters operationally. A supplier who ships in their own branded packaging violates Amazon’s dropshipping policy and can result in account suspension. The policy is at Amazon Seller Central: Dropshipping Policy.
What to Record in Your Books
When a customer places and pays for an order:
- Debit: Cash (or accounts receivable if payment is pending)
- Credit: Revenue, at the gross selling price
- Credit: GST/HST payable, if you are registered and the supply is taxable
When the sale is fulfilled and the corresponding supplier cost is known:
- Debit: Cost of goods sold
- Credit: Accounts payable or cash, at the supplier’s invoice amount
When you pay the supplier:
- Debit: Accounts payable (supplier)
- Credit: Cash
When platform fees are deducted or invoiced:
- Debit: Platform commission expense
- Credit: Accounts payable (platform) or cash, depending on timing
When a customer return is processed:
- Debit: Sales returns
- Debit: GST/HST payable (reverse the collected tax)
- Credit: Cash (or accounts receivable)
- If supplier accepts return: Debit accounts payable, supplier credit receivable, or cash, depending on timing; Credit COGS
- If supplier does not accept return: COGS remains; the transaction produces a net write-off
Common Mistakes
Netting supplier cost against customer revenue. Recording only the profit margin per order rather than gross revenue and separate COGS produces incorrect financials. Revenue is understated, COGS does not exist as a line, and the books cannot be used to analyze margin by product, supplier, or channel.
Assuming GST/HST is the supplier’s problem. The supplier ships the goods, but you made the sale to the Canadian customer. If you are registered for GST/HST, the collection and remittance obligation is yours on taxable supplies for which a platform is not remitting the tax, regardless of who physically moved the product.
Claiming ITCs on foreign supplier invoices. A US or Chinese supplier shipping goods from outside Canada generally does not charge Canadian GST/HST on the product invoice. If no GST/HST was charged or paid by you, there is no ITC to claim. Claiming fictional ITCs produces incorrect returns and potential CRA liability.
Recording supplier payment as COGS. COGS is recognized when the sale occurs, matched to the revenue it generated. If you pay the supplier on different timing, the payment is a cash flow event, not the accounting event that determines when COGS is recorded.
Treating marketplace deposits as revenue. Amazon, eBay, and other marketplaces deduct referral fees before the deposit. The deposit is net of fees. Recording the deposit as revenue understates gross sales and eliminates the fee expense from the books. See Amazon Settlement Report Reconciliation for the correct reconciliation approach.
Missing the GST/HST registration threshold. Sellers who grow quickly on Shopify may cross the CAD $30,000 threshold before reviewing their registration status. If the threshold is exceeded in a single calendar quarter, GST/HST starts on the sale that takes you over the threshold. If it is exceeded over the previous four or fewer consecutive calendar quarters but not in a single quarter, you generally stop being a small supplier at the end of the month after the quarter in which you crossed the threshold. CRA may assess GST/HST owing on taxable sales made after the effective date, even if tax was not collected.
Ignoring USD supplier costs. If your supplier invoices in USD, the CAD equivalent at the time of the transaction is your COGS. Exchange rate movements between when you record the liability and when you pay it produce a foreign exchange gain or loss. See Foreign Exchange and Multi-Currency Payouts for how to handle FX in the books.
Related Guides
- GST/HST for Multi-Platform Canadian E-Commerce Sellers explains how the registration threshold accumulates across every channel you sell on, not per platform separately.
- GST/HST Input Tax Credits for Canadian E-Commerce Sellers covers which business expenses carry recoverable GST/HST and the documentation required to claim them.
- Landed Cost for Canadian E-Commerce Sellers is relevant for sellers who import goods themselves before supplier-shipping them, rather than direct-to-customer dropshipping.
- Returns, Refunds, Chargebacks, and Reimbursements covers the full accounting and GST/HST treatment for unwound transactions.
- Advertising Spend and True Profitability covers how to evaluate whether the paid acquisition costs driving your dropshipping store are producing real margin.
- Foreign Exchange and Multi-Currency Payouts is relevant if your supplier invoices in USD or if you receive payouts in a currency other than CAD.
Scope of This Guide
This guide covers the accounting structure, COGS recognition, GST/HST obligations, and common mistakes for Canadian sellers operating a dropshipping model. It does not cover:
- US sales tax nexus obligations on sales to American customers (see US Sales Tax Nexus for Canadian E-Commerce Sellers)
- Print-on-demand accounting, which shares some structural similarities but involves distinct platform mechanics
- Income tax treatment of dropshipping income for incorporated sellers or sole proprietors
- Provincial sales tax regimes such as Quebec QST, BC PST, Saskatchewan PST, and Manitoba RST
CRA’s GST/HST rules, registration thresholds, and marketplace facilitator rules are set by legislation and updated through administrative guidance. Confirm current rules at Canada Revenue Agency: GST/HST for businesses before filing.
Get in touch if your dropshipping books show only net margin per order and you need to restructure them to show gross revenue, COGS, and fee expenses as separate lines.