In brief

What happened?

Canada’s legislation (included in Bill C-50) implementing the Digital Services Tax Act (DSTA), received royal assent on June 20, 2024. Later, on July 3, 2024, an order of the Governor in Council dated June 28, 2024, was made available on the Orders in Council website. The order fixes June 28, 2024 as the date that the DSTA comes into force. Accordingly, the Digital Services Tax will be effective for the 2024 calendar year and will apply retroactively to in-scope revenues earned since January 1, 2022.

Why is it relevant?

The Digital Services Tax (DST) will apply in respect of revenues earned as of January 1, 2022, so affected taxpayers must calculate the cumulative amount of tax payable. These taxpayers also will need to consider at what point it is appropriate to recognize a liability, according to their relevant accounting standards.

Actions to consider

Taxpayers who potentially will be affected by the DST should start taking the following steps to ensure they are ready to comply with the new rules:

• Consider whether revenues earned in 2022 and 2023 fall into any of the four categories of in‑scope DST revenues.
• Calculate global consolidated revenues for 2021 and 2022 to determine whether they meet the DST total revenue threshold for 2022 and 2023, respectively.
• Determine the consolidated revenues derived from any of the four in‑scope revenue activities associated with users in Canada for 2022, 2023, and 2024.
• For budgeting purposes, calculate the estimated DST that may become payable in 2025 for 2022, 2023, and 2024.
• Determine if or when to recognize an obligation for accounting purposes.

Canada’s Digital Services Tax (DST)

The DST is a 3% tax on Canadian‑source digital services revenue earned by large domestic and foreign taxpayers. It applies on a calendar-year basis (i.e., it is not based on the taxpayer’s fiscal year). The DST will be effective for the 2024 calendar year. It also will apply retroactively to in‑scope revenues earned since January 1, 2022. The first payment of the DST liability will include the DST on in‑scope revenues earned since January 1, 2022, and the earliest that it will be due is June 30, 2025.

In‑scope Canadian digital services revenue subject to the DST

In‑scope revenue generally will include Canadian-source digital services revenue arising from: online marketplace services, online advertising services, social media services, and the sale or licensing of user data obtained from an online marketplace, a social media platform, or an online search engine.

Canadian online marketplace services revenue

For purposes of the DST, an online marketplace is defined as a digital interface (e.g., a website or application) that allows users to interact with other users and facilitates the supply of property or services, including digital content, between those users. Digital interfaces with a single supplier, or digital interfaces with the main purpose to provide payment services, make advances, grant credit, or lend money (or facilitate supplies of financial instruments) are specifically excluded from being an online marketplace and are therefore outside the scope of the DST.

Online marketplace services revenue includes revenue received from:

• providing access to, or use of, the online marketplace (e.g., subscription fees and pay‑per‑use fees)
• facilitating a supply between users of the online marketplace (e.g., transaction commissions and payment service fees)
• providing premium services, preferential listing services, or other optional enhancements to the online marketplace service.

Revenue obtained from providing storage and shipping services is specifically excluded from being online marketplace services revenue for purposes of the DST, to the extent that the revenue reflects a reasonable rate of remuneration for the service.

Canadian online marketplace services revenue is calculated based on a formula that considers the portion of online marketplace revenue that is associated with Canadian users, as follows:

• For revenue earned in respect of supplying a service that (1) is physically performed in Canada, and (2) is in respect of real property in Canada, or of goods that are situated in Canada, all of the revenue will be sourced to Canada.
• For revenue in respect of fees for a particular transaction, such as commission fees, the portion of the revenue sourced to Canada is based on whether the users are located in Canada.
• When both the supplier and purchaser are in Canada, all of the revenue will be sourced to Canada.
• If only one of the supplier or purchaser is in Canada, half of the revenue will be sourced to Canada.
• If neither the supplier nor the purchaser is located in Canada, no revenue will be sourced to Canada.

There is also a specific formula in the DSTA to source online marketplace revenue to Canada when the revenue is non-transactional in nature (i.e., it is not in respect of a particular supply between users).

Canadian online advertising services revenue

Online advertising services revenue, for DST purposes, includes revenue earned from:

• facilitating the delivery of an online targeted advertising service through an online digital interface
• providing digital space for an online targeted advertisement.

An online targeted advertisement generally refers to any content that is prominently placed for the purpose of promotion and includes sponsored content and preferential placements; it is meant to include display advertisements, rich media, video and political campaign advertising, public notices, and promotions that are ‘targeted’ within the common meaning of the term or context in the advertising industry.

To minimize the cascading of the DST, online advertising services revenue that is earned between members of a consolidated group is specifically excluded from the calculation of online advertising services revenue.

Canadian online advertising services revenue is calculated based on a formula that considers the location of the targeted user where the revenue is directly attributable to a display of, or an interaction with, an online targeted advertisement.

When the online advertising services revenue is not directly attributable to a display of, or an interaction with, a specific user or when the revenue is generated by a specific user whose location is indeterminable, the portion of the revenue sourced to Canada is determined by a pro‑rata formula.

Canadian social media services revenue

For DST purposes, social media services revenue includes revenue earned from providing a social media platform that facilitates interactions between users, or between users and user‑generated content. This includes revenue received from:

• providing access to, or use of, the social media platform and premium services
• facilitating interactions between users, or between users and digital content generated by other users on the social media platform.

Exclusions include revenue considered to be from an online marketplace, online advertising or social media services arising from transactions between members of a consolidated group, and revenue earned by a social media platform for providing access to its own content.

Canadian social media services revenue is the portion of the total social media services revenue of a taxpayer (or its consolidated group) that is associated with Canadian users.

Canadian user data revenue

For DST purposes, user data revenue includes revenue earned from the sale or licensing of data (e.g., a user’s name, mailing or email address, preferences, or billing data) gathered from users of an online marketplace, a social media platform, or an online search engine. For a taxpayer or its consolidated group, exclusions include user data revenue that is earned from the sale or licensing of data that was not collected by the taxpayer or its consolidated group, and that is earned from transactions between members of a consolidated group.

When the user data can be traced to a single user that is located in Canada, the revenue that is earned from selling or licensing that user’s data is Canadian user data revenue for DST purposes. When the user data is collected from multiple users, and the revenue is not traceable to a specific user’s data or when the user’s location is not determinable, Canadian user data revenue is determined based on the portion of the users that are located in Canada.

US response

Upon initial indication by Canada of its legislative proposal to implement a DST, the office of the US Trade Representative (USTR) on February 22, 2022, filed a comment voicing its objections with Canada’s plan. The USTR noted that the United States objected to a measure that singles out American firms for taxation while effectively excluding national firms engaged in similar lines of business. It further noted that based on its understanding of the Canadian DST proposal, it would be substantially similar to DSTs adopted in France, Italy, Spain, Turkey, and the United Kingdom, which the United States determined to be discriminatory and burden US commerce and therefore actionable under Section 301 of the United States Trade Act of 1974. Section 301 gives the USTR the authority to act against unreasonable or discriminatory acts that burden or restrict US commerce. Furthermore, the USTR cautioned that any tax adopted by Canada would be assessed against the same standard.

An October 2023 letter signed by both the Chairman and Ranking Member of the Senate Finance Committee to the USTR urged the Biden Administration to act against Canada’s proposed DST and pledged full support to such a response. More recently, in response to Canada’s decision to move forward with the DST, Republican members of the House Ways and Means Committee sent a July 11 letter to the USTR urging the Administration to initiate an investigation under Section 301. The letter also requested USTR exercise due recourse under the United States–Mexico–Canada Agreement (USMCA).

The USMCA is a trilateral trade agreement between the United States, Mexico, and Canada that entered into force in July 2020. Article 31 of the USMCA endeavors the signatories to make every attempt to arrive at a mutually satisfactory resolution of a matter that might affect its operation or application. While the agreement does not specify a forum in which to settle the dispute, Article 31 further establishes that a signatory to the agreement may request consultations in writing and if unsuccessful, a consulting party may request the establishment of a panel to review the matter. The USMCA is stipulated to remain in full force for a 16-year period, with a joint review of its operation scheduled to occur on the sixth anniversary of its entrance into force.