Canada's Digital Service Tax Act tabled in House of Commons

Canada is one step closer to enacting the Digital Services Tax Act (DSTA), which was included in Bill C-59, Fall Economic Statement Implementation Act, 2023, tabled in the House of Commons on 30 November 2023.1

This latest draft of the DSTA is a follow-up to the Department of Finance's revised draft legislative proposals released for public consultation on 4 August 2023. The DSTA continues to impact large Canadian domestic and foreign businesses that have a corporate group global consolidated revenues of at least €750m and that earn in excess of CA$10m in Canadian digital services revenue from providing online marketplace services, online advertising, social media services and the monetizing of user data. For an overview of the proposed legislation released on 4 August 2023, see EY Global Tax Alert, Canada moves ahead with its own digital services tax, releasing draft legislation, dated 5 September 2023

The most notable changes to the DSTA since its iteration in August are:

• The thresholds for global revenue (i.e., €750m or more), in-scope revenue (i.e., CA$20m), and registration (i.e., CA$10m) have been moved from the DSTA to the Digital Services Tax Regulations under "Prescribed Thresholds." This relocation of the thresholds allows the federal government the flexibility to lower the thresholds for taxation or registration without requiring any legislative amendments to be passed in Parliament, thereby giving the cabinet the ability to increase tax revenues from the digital services tax without needing to seek parliamentary approval.
  
  
• The provision dealing with security (section 44 of the DSTA) has been removed; thus, a taxpayer will not be required to maintain security for the purposes of payment.
  
  
• Section 96 has been added, which allows for a due diligence defense for offenses under section 91 (failure to file or comply) or section 95 (general offense).

The earliest that the DSTA may come into force is 1 January 2024. However, the date of enactment will now be based on a date fixed by order of the Governor in Council. While Canada's Deputy Prime Minister and Minister of Finance, Chrystia Freeland, continues to give every indication that the legislation will be declared in force on 1 January 2024, by having the legislation come into effect on a date set by the federal cabinet, the government retains the flexibility to change or delay the implementation depending upon measures that other governments may take (most notably the United States) in reaction to Canada's passage of the DSTA.

Implications

With the tabling of Bill C-59, businesses and consolidated groups (both Canadian and foreign) that satisfy the €750m threshold are well advised to closely review the draft legislation and determine whether each revenue stream earned by the group is within the scope of the digital services tax. Certain provisions are broadly worded, and even businesses with a primary focus that is not digital or online services may find themselves within scope.

Key points to keep in mind include:

• Registration: A taxpayer or an affected member of a consolidated group is required to register under the DSTA if it earns Canadian digital services revenue, it meets the €750m threshold, and it earns more than CA$10m of Canadian digital services revenue. Notably, the threshold required to register (CA$10m) is lower than the threshold required for taxation (CA$20m). If a taxpayer or an affected member of a consolidated group is required to be registered, the taxpayer must apply to register by 31 January of the following calendar year.
  
  
• Returns: Returns are due annually on or before 30 June of the following calendar year.
  
  
• Payments: Payments must be made on or before 30 June of the following calendar year. Any payments of CA$10k or more must be paid electronically unless the taxpayer cannot reasonably pay that amount electronically.

For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP Canada (Toronto)
 

• David D. Robertson
  
  
• Selena Ing
  
  
• Tariq Nasir

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor

For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.