Canada: Details of proposed digital services tax (3%)

A proposal to implement a 3% digital services tax on “large businesses” that earn revenue from certain digital services would, if enacted, be effective for certain revenue earned as of 1 January 2022.

The digital services tax would generally apply for businesses that have global group revenue from all sources of €750 million or more in their fiscal period ending in the previous calendar year, as well as more than $20 million of “in-scope” revenue related to Canadian users for the particular calendar year. However, businesses with $10 million* of “in-scope” revenue for a particular calendar year would also be required to register under the proposal.

The Department of Finance announced that although the proposed digital services tax would apply to certain revenue earned from online marketplaces, social media, online advertising and user data as of 1 January 2022, the new tax would not be imposed earlier than 1 January 2024, and only if an international multilateral treaty to implement other tax measures has not come into force by that time (i.e., Pillar One of the OECD’s two-pillar approach to tax reform).

Canada’s proposal—released with the 2021 fall economic statement on 14 December 2021—includes additional details about how taxpayers would calculate their in-scope revenue and outlines what would be a taxpayer’s obligations.

Finance indicated that it will accept comments on the proposals until 22 February 2022. 

Under the proposal, the new 3% digital services tax generally would apply to domestic and foreign “large businesses” that meet two separate revenue thresholds (when a taxpayer is a member of a consolidated group, these thresholds would be calculated on a group basis).

• Under the first threshold, a taxpayer (or its consolidated group) must earn a total revenue from all sources of €750 million or more in a fiscal year of the taxpayer or group that ends in the previous calendar year. In addition, a taxpayer (or the taxpayer’s consolidated group) must meet an “in-scope revenue” threshold of more than $20 million in the particular calendar year associated with users in Canada.
• The new digital services tax would apply to in-scope revenue that exceeds the $20 million threshold.

Finance announced that the digital services tax liability would not be eligible for a credit against Canadian income tax payable, but could be deductible in computing taxable income in certain circumstances, based on general principles.

The proposal provides additional detail on how taxpayers can determine their in-scope revenue. Specifically, taxpayers would be required to calculate their revenue under the following categories associated with users in Canada, each of which has distinct sourcing rules:

• Online marketplace services revenue
• Online advertising services revenue
• Social media services revenue
• User data revenue

When calculating this revenue, taxpayers would be required also to determine whether a user is located in Canada based on available data (such as billing, delivery or shipping address, phone number area code, global satellite positioning data, and internet protocol address data). In most cases, “user location” is where the user is normally located, although some users’ real-time locations would be determined at the particular time an advertisement is displayed or data is collected for purposes of the digital services tax.

A taxpayer that is a member of a consolidated group would be required to share a pro-rata portion of the $20 million deduction among other entities of its consolidated group. When the membership of the group changes during the year, that year would be split into intervals, and a pro-rata allocation of the deduction would apply.

The proposal would also allow members of consolidated groups to designate an entity in the group to fulfill their filing obligations, pay the digital services tax liability, and otherwise comply with the administrative requirements. In addition, each entity in a consolidated group would be jointly and severally liable for digital services tax liability payable by any other group member under these proposals. 

Taxpayers that meet the two thresholds would be required to:

• Register under the digital services tax liability rules
• File annual digital services tax liability returns
• Remit any digital services tax liability payable on or before 30 June of the calendar year following the calendar year for which the return must be filed

In addition, taxpayers that earn a total revenue from all sources of €750 million or more in a fiscal year ending in the previous calendar year and have in-scope revenue of more than $10 million would be required to register under the new rules by 31 January of the following year. Penalties and interest may apply to taxpayers that do not comply with these requirements.

Read a December 2021 report [PDF 204 KB] prepared by the KPMG member firm in Canada