Canada's Digital Services Tax Act Comes into Force with Retroactive Application

On June 20, 2024, Bill C-59, which includes the legislation to implement the DSTA, received royal assent. Despite the DSTA becoming law, it requires an order from the Governor in Council to come into force. 

On July 3, 2024, an order of the Governor in Council dated June 28, 2024, was published on the Orders in Council website, setting June 28, 2024, as the enactment date for the Digital Services Tax Act (DSTA). Consequently, the Digital Services Tax (DST) will take effect for the 2024 calendar year and retroactively apply to relevant revenues earned since January 1, 2022.

BACKGROUND

The Canadian government has long supported the OECD's Pillar One solution, which aims to reallocate some profits of large multinational enterprises (MNEs) to countries where their customers are located. Canada prefers a multilateral approach but indicated that the DSTA would be implemented as early as January 1, 2024, if an MLC for Pillar One was not in place by the end of 2023. Canada rejected the OECD/G20’s July 11, 2023 Outcome Statement and the proposed one-year moratorium on new digital services taxes.

DETAILS OF THE DIGITAL SERVICES TAX (DST)

Scope: The DST is a 3% tax on Canadian-source digital services revenue earned by large domestic and foreign taxpayers, effective the later of the 2024 calendar year or the year the DSTA comes into force. It will also apply retroactively to revenues since January 1, 2022. The first DST payment would be due by June 30, 2025.

Taxpayers Subject to the DST: Taxpayers are subject to the DST if they meet these revenue thresholds on a consolidated group basis:

• Global revenue from all sources of €750 million or more in the previous fiscal year.
• Canadian digital services revenue of over CAD$20 million in the calendar year.

The 3% tax applies to the portion of Canadian digital services revenue exceeding CAD$20 million. Taxpayers meeting the global revenue threshold but with Canadian digital services revenue of CAD$20 million or less must register for the DST and file an annual DST return if their revenue exceeds CAD$10 million in a year.

REVENUE CATEGORIES UNDER DST

• Online Marketplace Services: Revenue from digital interfaces allowing user interactions for property or service supply, excluding storage and shipping services.
• Online Advertising Services: Revenue from delivering targeted advertisements, with intra-group revenue excluded.
• Social Media Services: Revenue from platforms facilitating user interactions, excluding intra-group transactions.
• User Data Revenue: Revenue from selling or licensing user data from online platforms, excluding intra-group transactions.

Administration, Reporting, and Compliance: Taxpayers obligated to pay the 3% DST must file annual tax returns and pay any tax by June 30 of the following year. The Canada Revenue Agency will issue forms and additional guidance upon the DSTA’s enactment.

SOURCES/RECOMMENDED READ:

• Orders In Council - Search (canada.ca)
• Tax Insights: Canada’s Digital Services Tax Act is now law ─ What is next and how can you prepare? | PwC Canada