Canada’s digital services tax (DST) is an annual 3% tax on Canadian-source digital services revenue earned by certain large domestic and foreign businesses. The Digital Services Tax Act received Royal Assent on June 20, 2024. The earliest date this measure may come into force is retroactive to January 1, 2024. Regardless of the effective date, the DST would apply retroactively to Canadian digital services revenues earned as of January 1, 2022. While the federal government confirmed their intention in Budget 2024 that the DST would begin for calendar year 2024 (with that first year covering 2022, 2023, and 2024), the enactment date is to be fixed by order of the Governor Council, which could result in a change or delay in implementation.
The DST is intended to be a unilateral interim measure until an acceptable multilateral approach is adopted under the Organization for Economic Co-operation and Development’s (OECD) Pillar One framework. Refer to our 2022 federal budget summary for further information on Pillar One.
Determining whether DST applies to your business can be challenging, as the digital services revenue streams subject to DST are broadly defined, and some businesses may be impacted even where they aren’t primarily engaged in digital services. It can also be difficult to determine whether certain revenue is sourced to Canada for DST purposes. Therefore, it's important to consult your advisors promptly, as conducting a revenue analysis could be time-consuming.
What is digital services revenue?
Digital services revenue for DST purposes includes:
- Online marketplace services revenue
- Online advertising services revenue
- Social media services revenue
- User data revenue
Only in-scope revenue sourced to Canada is relevant for the DST, with the sourcing rules varying depending on the nature of the revenue.
Who must register under the DST rules?
A Canadian or foreign entity may be required to register under the DST even if it doesn’t meet the thresholds beyond which DST applies. Where the following conditions are met for a calendar year, registration is required by January 31 of the subsequent year where the entity hasn’t already registered (with transitional rules for calendar years 2022 and onwards until the rules come into force):
- The entity earns Canadian digital services revenue.
- The entity (or the consolidated group of which it is a member) earned more than €750 million (approximately CAD $1.1 billion) in global revenue.
- The entity (or the consolidated group of which it is a member) had more than $10 million Canadian digital services revenue.
An entity can de-register if it hasn’t met the DST registration threshold in the prior three years.
Who must pay DST?
Domestic and foreign enterprises would be subject to Canada’s 3% DST for a calendar year (2022 and onwards) if they (or the consolidated group) have “in-scope revenue (i.e., Canadian digital services revenue over $20 million) in that year and exceeded a certain prior-year global revenue threshold.
The prior-year global revenue threshold is exceeded where any one of the following conditions are met:
- The entity had at least €750 million in total global revenue for a fiscal year that ended in the prior calendar year.
- The entity was part of a consolidated group at any time in the prior calendar year and the group had at least €750 million in total consolidated global revenue for a fiscal year that ended in the prior calendar year.
- The entity joined a consolidated group in the current calendar year, and the group had at least €750 million in total consolidated global revenue for a fiscal year that ended in the prior calendar year.
Note that the €750 million threshold is prorated for short fiscal periods.
The first $20 million of Canadian digital services revenue in a particular calendar year is generally not subject to DST. This $20 million deduction from the revenue base must be allocated amongst consolidated group members using a complex formula based on the relative amounts of in-scope digital services revenue earned by group members.
When are DST returns due?
Entities required to pay DST or who’ve been allocated a portion of the $20 million deduction would be required to file DST returns with the CRA each calendar year.
DST returns and any DST owing for a particular calendar year are due June 30 of the following year (or June 30 after the first year of implementation for retroactive calendar years back to 2022). Members of a consolidated group may elect a designated member to handle the DST reporting requirements for the consolidated group. However, each member of the consolidated group is jointly and severally liable for the unpaid DST.
Note that the prescribed DST return has yet to be released as of the date of this article.
What are the non-compliance penalties?
Entities required to register under the DST but fail to do so by January 31 of the following year could be subject to an annual penalty of $20,000.
The penalty for failing to file a DST return and remitting the payment by the June 30 deadline would be the total of:
- 5% of the unpaid DST on the June 30 deadline, and
- 1% of that unpaid tax multiplied by the number of complete months (up to 12) that the return remains outstanding (with a maximum penalty of 17% of the unpaid balance).
The penalties are higher for a repeated failure to file or where the taxpayer still fails to comply after receiving a notice. Interest penalties would also apply for overdue DST.
Additional non-compliance penalties (e.g., gross negligence penalties) may apply for failing to file or filing with false statements or omissions.
How can your business prepare?
Impacted entities may be required to register for DST as early as January 31, 2025, if the coming into force date of the DST Act is set to January 1, 2024. If your business or consolidated group earned at least €750 million in total global revenue in a particular calendar year (2021 and onwards), a detailed analysis is required to determine your DST obligations, if any, if these rules come into force.
Specifically, the Canadian in-scope digital services revenue would need to be calculated for all members in the group to determine the DST registration, tax return filing, and liability obligations. An elective simplified method for calculating this revenue may be available for 2022 and 2023 if certain conditions are met.
When estimating DST for a consolidated group member each year, remember that the $20 million deduction must be prorated between group members using a certain formula.
For help determining whether DST applies to your business, contact your local advisor or reach out to us here.
Disclaimer
The information contained herein is general in nature and is based on proposals that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice or an opinion provided by Doane Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, specific circumstances or needs and may require consideration of other factors not described herein.
