Published: October 21, 2024
The Canadian Federal Government has enacted a controversial Digital Services Tax that will bring in billions of dollars while threatening Canada’s trading relationships by taxing the revenue international firms earn in Canada.
The Liberal government proposed the tax in its 2019 election platform. It later agreed to hold off on implementing the measure in the hopes it could reach a deal with other OECD (The Organization for Economic Cooperation and Development) countries on how multinational digital companies should be taxed.
On June 28, 2024, the federal government issued an Order in Council (OIC) to enact the Digital Services Tax Act. It received royal assent on June 20, 2024.
Katherine Cuplinskas, press secretary to Deputy Prime Minister and Finance Minister, Chrystia Freeland, informed Canadians on July 4, 2024, that Canada’s priority and preference has always been a multilateral agreement and Ottawa still hopes a deal can be struck in the near future. “Unfortunately, despite best efforts, repeated deadlines to reach an international agreement have come and gone,” she said.
Digital firms that have global annual income of at least CA$1.1 billion will see annual revenues in Canada over CA$20 million taxed at a rate of three per cent. The first year of the Digital Services Tax includes revenue earned since Jan. 1, 2022.
The Parliamentary Budget Office estimated in 2023 that the Digital Services Act would bring in more than $7 billion over five years. The 2024 budget forecast revenues at $5.9 billion over five years, starting in 2024-25.
Multinational digital companies such as Meta, Alphabet, Facebook and Amazon are not based in many of the countries where they conduct business, allowing them to avoid paying certain taxes.
The federal government sees the Digital Services Tax as a way to bring the tax code up to date and capture revenues earned in Canada by firms located abroad.
Canada strongly supports international efforts to end the corporate tax race to the bottom and to ensure that all corporations, including the world’s largest corporations, pay their fair share, Cuplinskas said.
U.S. escalates efforts to halt Canada’s Digital Services Tax Act – Office of the U.S. Trade Representative requests dispute settlement consultations with Canada
The Canadian Federal Government says it’s in close contact with its American partners as the Biden administration escalates efforts to halt Canada’s tax on large foreign digital services companies.
The Office of the United States Trade Representative has requested dispute settlement consultations with Ottawa under the Canada-U.S.-Mexico trade agreement. “The United States opposes unilateral digital service taxes that discriminate against U.S. companies,” said U.S. Trade Representative Katherine Tai in a news release on August 30, 2024.
Americans have been critical of the three per cent levy on foreign tech giants that generate revenue from Canadian users. It means the companies will have to pay taxes on that revenue in Canada.
Tai called the Digital Services Tax discriminatory and said it is inconsistent with Canada’s commitments not to treat U.S. businesses less favourably than Canadian ones. The Liberal government’s decision to impose the Digital Services Tax before an international agreement could be reached with other OECD countries has raised concerns about possible negative impacts.
The U.S. trade representative reiterated those concerns during a meeting with Canada’s International Trade Minister Mary Ng in Washington earlier this week of Aug 26, 2024. Ng and Finance Minister Chrystia Freeland remained steadfast behind the tax in a joint statement on August 30, 2024. It said consultations will show “how Canada is meeting its trade obligations.” “Canada strongly supports international efforts to end the corporate tax race to the bottom and to ensure that all corporations, including the world’s largest corporations, pay their fair share wherever they do business,” the statement said.
A Canadian government representative speaking on background said Ottawa was not worried or surprised by the move to bring the issue under the trade agreement.
If the two countries are unable to resolve America’s concerns within 75 days, the U.S. may request a dispute settlement panel to examine the issue.
Other countries have similar tools
Other countries have brought in similar tools to tax the profits of large multinational companies in the digital sector.
The Canadian ministers said on August 30, 2024, the preference has always been a multilateral agreement.
“We have been clear that Canada’s provisional tax would be rescinded upon the entry into force of an acceptable multilateral measure,” the joint statement said.
The Digital Services Tax has drawn opposition from trade associations and business groups on both sides of the international border.
The Canadian Chamber of Commerce said it had been warning Ottawa about how the Digital Services Tax could damage trading relationships and increase costs in Canada.
But following significant delays to that process at the Organization for Economic Co-operation and Development (OECD), Canada went ahead with its own tax.
Earlier in August of 2024, Google announced it will implement a 2.5 per cent surcharge for ads displayed in Canada starting in October of 2024. Groups representing Canadian advertisers have warned other companies could follow the tech giant’s lead.
The Computer and Communications Industry Association, which represents companies such as Amazon, Apple and Uber, applauded action of August 30, 2024, against the Canadian Digital Services Tax. “We expect that under [the trade agreement], the facts and the law will demonstrate that Canada should remove this measure expeditiously,” said Jonathan McHale, the association’s vice-president of digital trade, in a news release.
The Information Technology Industry Council, a policy organization whose members include global tech companies, urged the Biden administration “to keep in mind all tools at its disposal” as consultations progress. “While it is unfortunate Canada ignored repeated requests from stakeholders to forgo its controversial measure, industry greatly appreciates the Biden Administration taking this step to stand up for U.S. companies and workers,” Megan Funkhouser, the council’s senior director of tax and trade policy, said in a news release.
Ontario Government opposition
The Canadian Chamber of Commerce issued media statement on July 4, 2024, that a retroactive discriminatory Digital Services Tax will harm Canada’s relationship with the U.S. and raise the cost of living in Canada. The government should reverse its unilateral decision that is out of step with our allies, and instead work with our trading partners on an international solution that would better serve Canadians, Robin Guy, the chamber’s vice president of government relations, issued media statement.
On June 28, 2024, Ontario Finance Minister Peter Bethlenfalvy wrote to Freeland asking that the Digital Services Tax’s implementation be paused. Canada, like the rest of the world, is taking steps to address the tax fairness issues that arise from the digital transformation of the global economy, Bethlenfalvy wrote. “However, we must do this carefully and not in a way that will impose unnecessary taxes on people and businesses or risk isolating Canada from the U.S. marketplace.” Bethlenfalvy’s office issued media statement on July 4, 2024, that it was disappointed with the decision to impose the tax before an international agreement could be reached.
In June of 2024, the U.S. Computer and Communications Industry Association, which represents big tech companies such as Amazon, Apple and Uber, wrote to U.S. President Joe Biden asking his administration to initiate formal dispute settlement procedures under the United States-Mexico-Canada Agreement (USMCA). The group said that move is necessary because a digital services tax could cost American firms up to US$2.3 billion annually and result in the loss of thousands of full-time U.S. jobs.
Pro Tax Tip
While we wait to see whether the government will bring the Digital Services Tax Act into force, we recommend that taxpayers who will potentially be affected by the Digital Services Tax start taking the following necessary steps to ensure their readiness to comply with the new rules if and when the Digital Services Tax Act comes into force:
- Consider whether revenues earned in 2022 and 2023 fall into any of the four categories of in‑scope Digital Services Tax revenues.
- Calculate global consolidated revenues for 2021 and 2022 to determine whether they meet the Digital Services Tax total revenue threshold for 2022 and 2023, respectively.
- Determine the consolidated revenues derived from any of the four in‑scope revenue activities associated with users in Canada for 2022, 2023 and 2024.
- For budgeting purposes, calculate the estimated Digital Services Tax that may become payable in 2025 for 2022, 2023 and 2024.
- Monitor the coming into force provisions to determine if or when to recognize an obligation for accounting purposes.
Taxpayers should start implementing the necessary systems to capture the required data to determine their Canadian Digital Services Revenue. Taxpayers that are prepared and that have tracked the relevant data for 2022 and 2023 may benefit from a planning opportunity that is available due to a compliance-saving election.
Frequently Asked Questions
Which Taxpayers will be subject to Canada’s Digital Services Tax?
Taxpayers are subject to the Digital Services Tax if they meet both of the following revenue thresholds (to be calculated on a consolidated group basis):
- Global revenue from all sources of €750 million or more in a fiscal year of the group that ends in the previous calendar year;
- Canadian digital services revenue of more than CA$20 million.
The 3% tax is to be levied on the amount by which Canadian digital services revenue for the particular calendar year exceeds CA$20 million (which is prorated among consolidated group members). Although taxpayers that exceed the global revenue threshold (calculated on a consolidated group basis) and have Canadian digital services revenue of CA$20 million or less will not be liable to pay the 3% Digital Services Tax, they will still be required to:
- register for the Digital Services Tax, and
- file an annual Digital Services Tax return,
if their Canadian digital services revenue exceeds CA$10 million in a particular calendar year.
Which sources of revenue will be subject to Digital Services Tax?
In-scope revenue would generally be comprised of Canadian-source digital services revenue arising from:
- Online marketplace services;
- Online advertising services;
- Social media services;
- The sale or licensing of user data obtained from an online marketplace, a social media platform or an online search engine.
What is “Online Market Services” and how will the Digital Services Tax be calculated?
For purposes of the Digital Services Tax, an online marketplace is defined as a digital interface (e.g. a website or application), which allows users to interact with other users and facilitates the supply of property or services, including digital content, between those users. Digital interfaces with a single supplier, or digital interfaces with the main purpose to provide payment services, make advances, grant credit, or lend money (or facilitate supplies of financial instruments) are specifically excluded from being an online marketplace and are therefore outside the scope of the Digital Services Tax.
Online marketplace services revenue includes revenue received from:
- providing access to, or use of, the online marketplace (e.g. subscription fees and pay‑per‑use fees)
- facilitating a supply between users of the online marketplace (e.g. transaction commissions and payment service fees)
- providing premium services, preferential listing services or other optional enhancements to the online marketplace service
Revenue obtained from providing storage and shipping services is specifically excluded from being online marketplace services revenue for purposes of the Digital Services Tax, to the extent that the revenue reflects a reasonable rate of remuneration for the service.
Canadian online marketplace services revenue is calculated based on a formula that considers the portion of online marketplace revenue that is associated with Canadian users, as follows:
- For revenue earned in respect of supplying a service that:
- is physically performed in Canada,
- is in respect of real property in Canada, or of goods that are situated in Canada,
all of the revenue will be sourced to Canada.
- For revenue in respect of fees for a particular transaction, such as commission fees, the portion of the revenue sourced to Canada is based on whether the users are located in Canada.
- When both the supplier and purchaser are in Canada, all of the revenue will be sourced to Canada.
- If only one of the supplier or purchaser is in Canada, half of the revenue will be sourced to Canada.
- If neither the supplier nor the purchaser is located in Canada, no revenue will be sourced to Canada.
There is also a specific formula in the Digital Services Tax Act to source online marketplace revenue to Canada when the revenue is non-transactional in nature, i.e. it is not in respect of a particular supply between users.
What is meant by “Canadian Online Advertising Services Revenue” and how will Digital Services Tax due will be calculate?
Online advertising services revenue, for Digital Services Tax purposes, includes revenue earned from:
- facilitating the delivery of an online targeted advertising service through an online digital interface
- providing digital space for an online targeted advertisement
An online targeted advertisement generally refers to any content that is prominently placed for the purpose of promotion and includes sponsored content and preferential placements; it is meant to include display advertisements, rich media, video and political campaign advertising, public notices and promotions that are “targeted” within the common meaning of the term or context in the advertising industry.
To minimize the cascading of the Digital Services Tax, online advertising services revenue that is earned between members of a consolidated group is specifically excluded from the calculation of online advertising services revenue.
Canadian online advertising services revenue is calculated based on a formula that considers the location of the targeted user where the revenue is directly attributable to a display of, or an interaction with, an online targeted advertisement.
When the online advertising services revenue is not directly attributable to a display of, or an interaction with, a specific user or when the revenue is generated by a specific user, whose location is indeterminable, the portion of the revenue sourced to Canada is determined by a pro‑rating formula.
What is included in Canadian Social Media Services Revenue for the purposes of Digital Services Tax?
For Digital Services Tax purposes, social media services revenue includes revenue earned from providing a social media platform that facilitates interactions between users, or between users and user‑generated content. This includes revenue received from:
- providing access to, or use of, the social media platform and premium services
- facilitating interactions between users, or between users and digital content generated by other users on the social media platform
Exclusions include revenue considered to be from online marketplace, online advertising or social media services arising from transactions between members of a consolidated group, and revenue earned by a social media platform for providing access to its own content.
Canadian social media services revenue is the portion of the total social media services revenue of a taxpayer, or its consolidated group, which is associated with Canadian users.
What is included in Canadian User Data Revenue for the purposes of Digital Services Tax?
For Digital Services Tax purposes, user data revenue includes revenue earned from the sale or licensing of data (e.g. a user’s name, mailing or email address, preferences, billing data, etc.) gathered from users of an online marketplace, a social media platform or an online search engine. For a taxpayer or its consolidated group, exclusions include user data revenue that is earned from the sale or licensing of data that was not collected by the taxpayer or its consolidated group, and that is earned from transactions between members of a consolidated group.
When the user data can be traced to a single user that is located in Canada, the revenue that is earned from selling or licensing that user’s data is Canadian user data revenue for Digital Services Tax purposes. When the user data is collected from multiple users, and the revenue is not traceable to a specific user’s data or when the user’s location is not determinable, Canadian user data revenue is determined based on the portion of the users that are located in Canada.
When is filling deadline for Digital Services Tax and which forms should taxpayer use?
The Digital Services Tax requires taxpayers that meet the Digital Services Tax thresholds and have an obligation to pay the 3% Digital Services Tax to file annual tax returns and pay any tax payable by June 30 of the year following the calendar year. Canada Revenue Agency representatives have indicated that they would start issuing the relevant forms and publishing additional administrative guidance on Digital Services Tax reporting and compliance when the Digital Services Tax Act comes into force.
Disclaimer: This article just provides broad information. It is only up to date as of posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on. Every tax scenario is unique to its circumstances and will differ from the instances described in the article. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.
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