The Government of Canada is taking notable strides towards transforming the taxation landscape for the digital economy. After implementing new GST/HST rules in 2021, the Government of Canada proposed two new key changes: the introduction of a digital services tax through a new act and the implementation of new reporting obligations for digital platform operators via amendments to the Income Tax Act.

Canada’s current proposed Digital Services Tax Act (DSTA)

Recently, the Government of Canada reaffirmed its commitment to implementing a Digital Services Tax (DST) in 2024 if pillar one of the OECD’s two-pillar plan has not come into force by the end of 2023.

If enacted as proposed, the DST will apply at a rate of 3% on revenue earned by large business from certain digital services reliant on the engagement, data and content contributions of Canadian users. The DST will be applicable on a calendar year basis, beginning with the year that includes the day that the DSTA comes into force. However, for the first year of its application (which should be 2024), the DST liability will be calculated by reference to taxable revenues earned from January 1, 2022, up to and including that first year (i.e., 2024). It should be noted that the DST is proposed to apply only to Canadian annual digital services revenue in excess of CA$20 million (such deduction is to be shared among members of the consolidated group).

The DST will apply to foreign and domestic businesses that meet both of the following thresholds:

• Total Revenue Threshold – If a taxpayer or, its consolidated group, earns total revenue from all sources of €750,000,000 or more in a fiscal year of the taxpayer or group that ends in a particular calendar year, the taxpayer or group would meet this threshold for the subsequent calendar year.
• Canadian In-Scope Revenue Threshold - A taxpayer would meet this threshold of Canadian digital services revenue for a calendar year if the taxpayer (or the taxpayer’s consolidated group, if applicable) earns greater than CA$20,000,000 of Canadian in-scope revenue in the calendar year.

The DST will generally apply to the following types of revenues:

• Online marketplace services revenue would consist of revenue earned from providing an online marketplace that helps match sellers of goods and services with potential buyers.
• Online advertising services revenue would consist of revenue earned from services aimed at the placing of online targeted advertisements.
• Social media services revenue would consist of revenue earned from providing a social media platform that facilitates interactions between users, or between users and user-generated content.
• User data revenue would consist of revenue earned from the sale or licensing of data gathered from users of an online marketplace, a social media platform, or an online search engine.

Taxpayers who meet the specified liabilities thresholds mentioned above, but after replacing the CA$20,000,000 by CA$10,000,000, will be required to register under the DSTA by January 31 of the subsequent year.

DST returns and payment would be due on or before June 30 of the calendar year following the calendar year for which the return would be required to be filed.

Members of consolidated groups would be allowed to designate an entity in the group to fulfill their filing obligations, pay the DST liability, and otherwise comply with the administrative requirements of the DSTA.

Penalties and interest would apply where taxpayers do not comply with the requirements of the DSTA.

Proposed reporting obligations for digital platform operators

On November 3, 2022, the Department of Finance released draft legislation that would add a new part (Part XX) to the Income Tax Act. This new part would implement the reporting and due diligence standards of the Model Rules for Reporting by Platform Operators developed by the Organisation for Economic Co-operation and Development.

If implemented, the legislation will require platform operators, except if specifically exempt, to report certain information regarding sellers (including names, addresses, tax identification numbers and consideration received) to the CRA and to follow certain due diligence procedures starting in 2024.

Reporting platform operators will be entities that are engaged in the following activities:

• Contracting directly or indirectly with sellers to make the software that runs a platform available for the sellers to be connected to other users; or
• Collecting compensation for the relevant activities facilitated through the platform.

A “platform” is any software, including websites and applications, including mobile applications, that connects sellers with users for the provision of relevant services or the sale of goods. It does not include software that exclusively facilitates the processing of payments in relation to relevant activities, the mere listing or advertising of relevant activities (or the transfer of users to another platform) provided in each case that there is no further intervention in the provision of relevant activities. For example, this would generally exclude pure payment processors, classified ads boards and online aggregators.

The new legislation will generally apply to platform operators that are:

• Resident in Canada for tax purposes;
• Resident, incorporated or managed in a partner jurisdiction and that facilitate the provision of relevant activities by sellers resident in Canada or with respect to rental of immovable property located in Canada and that elect to be reporting platform operators; or
• Not resident in Canada or a partner jurisdiction (i.e., generally other jurisdictions that have implemented similar rules), but that facilitate the provision of relevant activities by sellers resident in Canada or with respect to rental of immovable property located in Canada.

The new legislation would apply to the following:

• The sale of goods,
• The rental of either immovable property (residential or commercial) for both short- and long-term rentals,
• The rental of a means of transport, and
• Personal services involving time or task-based work performed (including transportation and delivery services, manual labour, tutoring, copywriting, data manipulation as well as clerical, legal or accounting tasks, provided they are carried out following a specific request of a particular user or set of users).

Reporting platform operators will be required to file specific information returns. If they fail to file these returns, then they may be subject to a penalty equal to CA$25 per day, subject to a CA$100 minimum and a CA$2,500 maximum for each failure to file.

These two proposed changes hold significant implications for digital service providers, and it is essential for businesses in this sector to stay informed and adequately prepared for potential impacts on their operations starting in 2024.

For more information on this topic, please contact the authors, Mark Jadd, Manon Jubinville or Gergely Hegedus.