The Digital Services Tax (“DST”) has come into force in Canada!  It was enacted in the Digital Services Tax Act (Bill C-59)  (the “Act”) and came into effect with an order-in-council issued on June 28, 2024, and with effect to January 1, 2024 – targeting large Canadian and non-Canadian businesses generating revenue from
“in-scope” digital services.

In short, this is a potential significant piece of taxing legislation, with potential retroactive effect to January 1, 2022, requiring major digital entities like Netflix, Amazon Prime, and Spotify to pay a 3% annual tax on digital services revenue attributable to Canadian customers.

Background

In its 2024 Budget, the Canadian federal government emphasized its re-commitment to the controversial DST and Canada’s aim to tax the largest and most profitable global corporations, across all sectors including digital, to ensure that they – in the Liberal government’s view anyways – ‘contribute their fair share of taxes on Canadian business operations'.

While Canada continues efforts to finalize a multilateral treaty on digital taxation and establish an internationally agreed approach with other countries, the new Act steps in to regulate the monetization of data and content from Canadian users by digital businesses, to ensure that Canada is not at a disadvantage relative to other countries. 

Currently, seven other countries, including France, Italy and the U.K., have implemented similar digital service taxes, highlighting a global trend towards taxing digital activities.  In Canada, the DST is projected to boost federal government revenue by $5.9 billion over the next five years, but has been largely opposed by the US.

Who does the DST apply to?

The DST applies to taxpayers or consolidated groups exceeding two specific revenue thresholds: (1) a “Global Revenue Threshold” (i.e., total revenue earned from all sources surpassing €750 million) and (2) an “In-Scope Revenue Threshold” (i.e., revenues earned from Canada users exceeding $20 million, including revenue from (i) online marketplace services, (ii) online advertising services, (iii) social media services, and (iv) Canadian user data.

If both threshold tests are met, the DST applies at a rate of 3% and taxes the specific taxpayer’s Canadian digital revenues exceeding CAD $20 million, and is implemented annually.

Filing & Registration Requirements

Taxpayers with Canadian digital revenues exceeding $10 million annually are required to register for the DST by January 31^st of the following year (see section 41(1) of the Act), and taxpayers meeting the threshold test are required to file DST returns and make payments by June 30^th of the following year.  Failure to meet deadlines in a timely manner can result in significant consequences.

Takeaways

The introduction of the DST underscores Canada’s commitment to modernizing tax legislation in response to the evolving digital economy.  It aims to ensure that even the largest global corporations across all sectors, particularly digital giants, contribute fairly to their taxes.  Businesses operating in Canada should remain vigilant in their compliance – to avoid hefty penalties! 

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