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LIEKLY APPLICABLE TO LARGE PUBLIC CORPORATIONS 2024!
Canada is ushering in a new era of taxation with the introduction of the Canadian Digital Services Tax (DST), set to take effect from January 1, 2024, with retroactive implications to tax years commencing January 1, 2022. This groundbreaking tax legislation is poised to impact large Canadian and non-Canadian businesses engaged in the digital services sector, marking a significant shift in how digital revenues are taxed within the country. We at SDG Accountant decided to summarize some key information regarding this new tax below.
Canadian Digital Services Tax (DST) in Context
The UHT, introduced under the Underused Housing Tax Act, is an annual 1% tax on certain vacant or underused housing in Canada, applied to properties owned as of December 31 of the relevant calendar year. At SDG Accountant, we understand that navigating the UHT requires a clear understanding of the Act and its implications, especially for residential property owners.
The Thresholds: Who Does DST Apply To?
DST is designed to apply to large multinational corporations with a significant digital services presence in Canada. To determine whether a business is subject to DST, two key thresholds must be met:
- Total Revenue Threshold: The taxpayer, or a consolidated group it is part of, must have earned revenues totalling €750,000,000 or more from all sources in the preceding reporting calendar year.
- Canadian In-Scope Revenue Threshold: The taxpayer, or a consolidated group it is part of, must have earned Canadian in-scope revenues totaling CAD 20,000,000 or more in the calendar year. In-scope revenues encompass digital services revenues in specific categories:
- Online Marketplace Services Revenue
- Online Advertising Services Revenue
- Social Media Services Revenue
- Canadian User Data Revenue
Canadian Digital Services Tax (DST) Application
Once a business surpasses both thresholds, the DST applies at a rate of 3% on Canadian in-scope revenues. However, the application of the DST is nuanced and depends on the nature of the revenues earned:
- Online Marketplace Services Revenue: Revenues from physical services provided in Canada are entirely sourced to Canada. For services facilitating other services, sourcing depends on the location of the users.
- Online Advertising Services Revenue: Revenues from advertisements traceable to specific users in Canada are entirely sourced to Canada.
- Social Media Services Revenue: Sourcing is based on the percentage of a platform’s user base in Canada.
- Canadian User Data Revenue: Sourcing depends on the data collected and the reasonable conclusion that a user is physically located in Canada.
Administration and Compliance
The DST is applied to Canadian in-scope revenues exceeding a base $20,000,000 deduction. In cases where taxpayers are part of consolidated groups, this deduction is distributed among group members in proportion to their share of total Canadian-sourced in-scope revenues.
Members of consolidated groups can designate a single entity to file and pay DST on behalf of the group, with joint and several liability for DST obligations shared among group members.
To ensure enforcement and monitoring, the registration threshold for Canadian in-scope revenues is set at $10,000,000, with registration due by January 31 of the following calendar year. DST returns are expected by June 30 of the subsequent year.
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The Road Ahead
As Canada gears up for the DST’s full implementation in 2024, businesses need to adapt to the changing tax landscape. Large multinational corporations with substantial sales to Canadian customers should be diligent in understanding their DST obligations, including:
- Identifying and allocating Canadian revenues across the different categories of Canadian in-scope revenue.
- Recognizing that registration is required if in-scope revenues exceed $10,000,000, while taxation triggers at $20,000,000.
- Meeting deadlines for registration, filing, and payment to avoid penalties.
The Canadian Digital Services Tax is a landmark development in the taxation of digital services and reflects Canada’s commitment to addressing the challenges of the digital economy. Understanding the intricacies of this tax is crucial for businesses, and staying informed and proactive is key to compliance. Tax professionals and advisory services are available to assist entities in navigating this new tax landscape as Canada takes a pioneering step in the taxation of digital services. Although, our Toronto based accounting firm focuses on small businesses and high-net worth individuals we do stay up to date with new tax changes in Canada that will affect our economy!
The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situations.
— Sami Ghaith
CPA, CGA, MBA