James Pendergast is an Associate Lawyer at Rosen Kirshen Tax Law. James is entering his third and final year at the University of Toronto Faculty of Law. Outside of academics, James is a chair of the Faculty of Law’s Health and Wellness Committee, volunteers with the Law in Action Within Schools (LAWS) program and was an Associate Editor with the University of Toronto Law Review. This year, James competed for the University of Toronto at the 2019 Donald G. H. Bowman National Tax Moot.
Kendal Steele is of counsel at Rosen Kirshen Tax Law. Kendal assists senior counsel in all aspects of domestic and international taxation issues. At Rosen Kirshen Tax Law, Kendal helps clients navigate the Canada Revenue Agency’s dispute resolution process and proceedings before the Tax Court of Canada. He has worked on matters including complex tax shelter structures, residency issues, audits, appeals, and small business tax issues, among various others. He also assists clients with corporate matters and tax-related criminal issues.
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The Canada Digital Services Tax
On April 19th, 2021, the Deputy Prime Minister and Minister of Finance, the Honourable Chrystia Freeland presented “Budget 2021”, the first budget seen from Parliament in nearly two years. One of the standout new additions to the Canadian income tax regime is the Digital Services Tax (DST). The DST will be an entirely new tax implemented to garner previously uncaptured tax revenue from major tech players with a Canadian consumer base.
Following our previous blog entry that covered “Budget 2021” in broad strokes, this article will examine in greater detail the implications of the DST for consumers, corporations and stakeholders alike.
What is the Digital Services Tax (DST)?
The DST is a new tax implemented in response to the exponential growth of tech industries in Canada. The tax will target the revenue of large corporations who offer digital services currently offered and offered in the future within Canada’s borders. This will allow the federal government to capitalize on the revenue earned by major tech companies from the consumption of digital products and services where previously no taxes were levied. The DST will be levied at a flat rate of 3% on all revenue that exceeds Parliament’s prescribed revenue benchmarks.
The federal government’s consultations with stakeholders ran from April 19th to June 18th, 2021 and provided an opportunity for stakeholders to submit their written observations and insights regarding the new DST. Consultations have now ended, and the DST is scheduled to take effect as of January 1st, 2022. The DST is part of a broader initiative from the international community to collect taxes on major players in the digital services sector.
Who Will be Charged the Digital Services Tax (DST)?
Companies that will be charged DST beginning in 2021 are from a wide range of larger digital service providers who have both domestic and international reach. Only companies that have:
will be subject to the DST on their revenue from products and services to sold to Canadian consumers.
In order to be subject to the DST, tech companies will also have to fall into one of Parliament’s prescribed tech business models to fall under the purview of the DST. These business models will include social media corporations, online marketplaces and advertisers and companies that compile the data of users of major digital platforms.
Consumers may be affected by the implementation of this tax, as it is likely that companies such as Uber and Amazon will be subject to paying substantial Digital Services Taxes on their revenues. Corporations may wish to offset these revenue losses by increasing the costs to consumers.
Why Implement the Digital Services Tax (DST) at All?
With consumption of digital services on a steady incline and with no signs of stopping, the DST is projected to net the federal government billions in tax revenues in the coming years ($2.72 billion – $3.4 billion CAD is the current projection for 2022-2027).
Additionally, the DST is in line with the ambitions of the Organization for Economic Cooperation and Development (OECD) to better capture taxes that have traditionally been hard to garner due to the international reach of major tech conglomerates. The DST will allow for revenue to be collected prior to the enactment of cooperative international agreements between member nations of the OECD.
What Challenges will be Faced by the Digital Services Tax (DST)?
Whenever there are novel implementation of new taxes or modifications to existing elements of a taxation regime, tax planning is typically one avenue of frustrating the intentions of Parliament to collect revenues. It is possible that companies near the threshold could organize their affairs in such a way to limit the impact of the DST on their revenue streams. However, with the tax levied being just 3% and only on earnings exceeding high values, the effectiveness of corporate tax planning around the DST will be circumstantial.
Any time international organizations attempt to implement cooperative legislative measures, the context of international politics and the complexities surrounding enforcement of said legislation come into play. As of now, the DST is domestic legislation, but when agreements are signed between OECD member nations, new challenges pertaining to the enforcement of the DST could become apparent.
If you would like to know more about the DST or corporate tax planning in general, contact a tax professional at Rosen Kirshen Tax Law today!
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.