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Canada's Proposed Digital Services Tax (DST) - Overview

July 26, 2021

What is the Digital Services Tax (DST):

During the 2021 Federal Budget announcement, the Canadian government confirmed its plan to roll out a new federal tax aptly named “Digital Services Tax”, or DST for short, with the aim of targeting businesses that rely primarily on digital technology, including intermediation and social media platforms, to engage with Canadian consumers and generate some or most of their revenues from the data collected about their users’ interests. 

Who will the DST affect?

The DST would apply to large foreign and domestic entities – corporations, trusts, and partnerships, or members of a group – that meet both of the following thresholds:

  • €750 million or more in global revenue from all sources in the previous calendar year, and
  • In-scope revenue associated with Canadian users of more than $20 million (CAD) in that calendar year.

For these businesses, the DST would apply only to in-scope revenue associated with Canadian users that exceed the $20 million threshold.

tax measures

When will the DST come into effect?

The Canadian Governments’ proposed Digital Services Tax (DST) will come into effect as of January 1, 2022, until a suitable multilateral approach involving the Organisation of Economic Co-operation and Development (OECD) is developed.

What are some of the main highlights of the proposed DST?

Rate and base

DST on in-scope revenues will be taxed at a rate of 3%. This would not include any applicable value-added tax or sales tax collected on the transaction.

In-scope revenue

The DST would apply to revenue generated from online business models, where the participation of online users to generate revenue is a key value driver. These online business models are:

  • Online marketplaces 
  • Social media
  • Online advertising
  • User data

Revenue sourcing

When revenue is generated from both in-scope and other business activities, the in-scope revenue would need to be reasonably allocated among the activities. As proposed in Budget 2021, there are two general approaches for determining an entity’s in-scope revenue related to Canadian users:

  • Transactional: when information can be traced to Canadian users, that revenue amount would be in-scope
  • Non-transactional: when information cannot be traced to Canadian users, the in-scope amount would be allocated through a formula that varies depending on the revenue’s nature

Location of users

As suggested in Budget 2021, to source revenue related to digital service users in Canada, look to the users’ ordinary location (geolocation, IP address, billing address, delivery address, and telephone number area code), or real-time location (data based on real-time location of user) for specific types of revenue.

Income tax treatment

As is the case with other non-income taxes, the DST would be deductible from a business entity’s taxable income based on the usual Canadian income tax principles. However, DST liabilities would not be eligible for a Canadian income tax credit.

Filings and payments

As outlined in Budget 2021, businesses subject to DST would be required to file an annual return after the end of the proposed calendar-year reporting period.

  • One annual payment would be required after the end of the reporting period,
  • One designated entity would be allowed to file the DST return and pay the related liability for the entire group, and
  • The group would be jointly and severally liable for DST payable by any other group member.

Consultation with the provinces and territories:

The government engaged with the provinces and territories this past June to discuss the implications of the DST. It has collected feedback from key stakeholders on the proposed approach to implementing the DST and is looking to release draft legislation for public comment sometime later this summer. This legislation would subsequently be included in a bill to be introduced in Parliament.

Updates regarding the DST:

With detailed legislation yet to come, many areas are still unclear, and more information is needed. For the latest updates or to learn more about the proposed Digital Services Tax (DST), please refer to the Government of Canada website by clicking here.

If you would like more information on this topic, please contact a member of the Empire CPA team by filling out the contact form below.

Canadian and foreign tax laws are complex and have a tendency to change on a frequent basis. As such, the content published above is believed to be accurate as of the date of this post. Before implementing any tax planning, please seek professional advice from a qualified tax professional. Empire, Chartered Professional Accountants will not accept any liability for any tax ramifications that may result from acting based on the information contained above.

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