What Is Dropshipping And How Can You Make Money With It

If you’ve been researching how to make money online - or how to set up a side business - chances are you’ve come across dropshipping. But what exactly is dropshipping, and is it a get-rich-quick miracle, or a disaster waiting to happen?

Read on for all you need to know about dropshipping:

• What it is
• If dropshipping is profitable
• If it’s legal in Canada
• How to start
• Taxes you should know about

This article should hopefully help you to decide if it is right for you - and inform you of some smart ways to get started on your dropshipping adventure.

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What is dropshipping?

Dropshipping involves selling goods which are then shipped directly to customers via a third party supplier. As a dropshipper, you’ll select the products you sell, and advertise and market them online. Once you’ve connected with a customer and agreed a sale, you pass the customer information to your third party supplier who will then send out the goods.

Dropshipping comes with a number of advantages. You won’t need to store or ship your own merchandise. You won’t need to buy large volumes of product to hit manufacturer minimum order volumes. And you won’t usually need a large upfront investment to get started.

All that said, dropshipping is no easy ride. You can expect to work hard to turn a profit.

Are drop shipping businesses profitable?

It’s no surprise that dropshipping businesses have increased in popularity hugely over the past few years. Online shopping in general is growing globally - and of course, more and more people choose to work for themselves, or start a side hustle to bring in a little extra cash. Dropshipping seems like the perfect solution.

But while dropshipping can be a smart move for someone who has already built an online audience, it’s neither an easy, nor a quick ticket to millionaire’s row for most of us.

The truth is that dropshipping requires hard work. You’ll need time to build a brand and business which is memorable, delivers high quality products customers want, and can continually evolve to deal with the changing landscape. To make it work for you, you’ll need to find products you’re passionate about, which come with a healthy profit margin, and can be shipped with ease. You should also be prepared to compete for customers in an ever more crowded marketplace.

None of this should be seen as a reason not to try. But it’s certainly a reason to do your research and be ready to get your hands dirty before you turn much of a profit.

Don’t forget to also consider costs you’ll likely hit along the way, which can take your business from growing to flatlining if you don’t plan in advance:

• You’ll need to pay for your domain name

• If you open a store on Shopify or sell on Amazon, or a different platform, you’ll pay fees to the platform

• There may be a fee to incorporate your company if you decide to do so

• You may need professional services such as accountancy and tax advice - which come at a cost

• If you’re selling to customers based overseas, or use an international supplier, there could be cross border payment and currency conversion fees. Check out Wise Business to see how you can cut these costs.

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Is dropshipping legal in Canada?

Dropshipping is legal in Canada. However, even though dropshipping itself is perfectly legal, there are still some ways you can end up on the wrong side of the law while you build your business.

Make sure, for example, that the goods you’re selling can be legally sold in Canada. You’ll also need to check proper duties have been paid when importing, and that your suppliers have not breached copyrights or sent out dangerously faulty products.

In order to protect yourself, it’s also wise to have a dropshipping agreement with the manufacturer of the goods you’re selling¹.

How to start a dropshipping business in Canada

While each situation will be different, there are a few key stages most ecommerce entrepreneurs will have to go through when building a dropshipping business. Here’s a walkthrough of the steps you’ll usually need to take.

Research your market and choose the perfect products

Finding the right products to sell requires a bit of research.

You’ll want something which can be easily shipped - not too heavy or fragile. Great products should also appeal to people with enough disposable income to buy on a whim - and should not be found at any old highstreet store. You need a good profit margin, which is usually easier to achieve on a higher value item.

Finally, in an ideal world, you’ll sell something you’re passionate about - or at least something you have a basic knowledge of, and a willingness to learn.

Once you have a few ideas, do some research to check if customers are actually looking for your product online. What would your competition be? Will you be able to build a brand strong enough to stand out?

Find and test out suppliers

Once you know what you want to sell, you need a supplier. How you find a supplier will depend a lot on the products you wish to sell. If you’re planning on dropshipping a unique local product, for example, you may not have a wide choice of suppliers and manufacturers. However, if you’re looking to sell something which is commercially produced in large volumes, you may have more of a decision on your hands. Here are a few ways to find a supplier:

• Use an online directory from a third party like Alibaba
• Ask the manufacturer of your chosen products for their wholesale distributor lists
• Attend a relevant trade show or look at the attendee lists of a recent show and use that as a starting point
• Use Google searches to find manufacturer listings
• Buy a supplier directory from a reputable online source

Don’t forget that your supplier will be responsible for much of your customer’s experience. Make sure you can communicate easily with them, check the quality of their product and get a legally binding agreement before you start working together.

Build your website or store

Now you need to work out how your customers might find you. This could mean you build your own website if you have the skills. However, there are also plenty of plug and play options out there, including platforms like Shopify, which make it easy to set up a store with little technical expertise. You may pay for some of the services involved, but getting a quick way to connect with customers and starting to make some sales may make it worth the outlay.

Build a marketing campaign to reach customers

The internet is a busy place, so you’ll now need to build a plan to reach and engage with your customers. If you already have a strong online presence then following this may be relatively straightforward. If you’re starting from scratch, be prepared to spend a little time and money on this stage. Consider Facebook Ads, for example, which lets you get your brand in front of a targeted range of customers for a fee.

Adjust and optimize as your business grows

It doesn’t finish once you start to make sales. You’ll also need to continually refine your approach and make sure you’re giving a great experience to your customers. Use all the data available to analyze what works and what does not, and be prepared to make changes and test out new ideas to see your business grow.

Are there special taxes in Canada for dropshipping?

Chances are that you won’t need to pay any special taxes on your dropshipping business. However, there are a broad range of taxes you’ll need to understand when you start earning an income². Take professional advice if you’re unsure at all. Here’s a round up of the common taxes you should know about.

Personal income tax:

Here are the 2020 federal tax rates³⁺⁴:

• 15% on the first $48,535 of taxable income, +
• 20.5% on the next $48,534 of taxable income (on taxable income over 48,535 up to $97,069), +
• 26% on the next $53,404 of taxable income (on taxable income over $97,069 up to $150,473), +
• 29% on the next $63,895 of taxable income (on taxable income over 150,473 up to $214,368), +
• 33% of taxable income over $214,368

You may also need to pay Provincial or Territorial income taxes, depending on your location. Check out the details with your local tax authority.

GST/HST

Depending on your location and your annual turnover you may also need to register for GST or HST, and then collect and pass this tax on to the authorities. The rate you pay is also impacted by what you’re selling, and who you’re selling to⁵.

The calculations are a little complex, but there’s a calculator available, over on the Canada Revenue Agency website⁶, along with a lot of helpful information. As with all tax matters - ask a professional if you’re unsure.

Taxes when working across borders

When working with customers or suppliers overseas, it is worth taking a look at how your tax liabilities may be impacted. For example, selling internationally may mean you need to collect the equivalent of GST on sales made abroad. Dealing with foreign suppliers may leave you liable for duties upon export.

Each situation will be different - but doing some research in advance is the best way to make sure you don’t accidentally fall foul of the law in any of the countries you work in.

Deductible expenses

If you’re a sole proprietor or have registered a business, you may also be able to claim back relief on some expenses you incur as part of running your business. It’s worth getting help with this when you start out, as the rules about what can and can not be claimed are complex and not always intuitive. More details online, over on the Canada Revenue Agency website⁷.

So there you have it. Some food for thought on dropshipping and how to get started with a dropshipping business in Canada. Take some time to research your options before you dive in, to make sure you’ve got the right product and marketing plan, and can focus on connecting with customers and driving sales. Good luck!

Read more about Wise Businesses

Sources used for this article:
1.Blog - What is a dropshipping agreement?
2.CRA - Canada Revenue Agency
3.CRA - Income tax
4.CRA - Canadian income tax rates for individuals - current and previous years
5.CRA - When to register for and start charging the GST/HST
6.CRA - GST/HST calculator (and rates)
7.CRA - Business expenses