Canada sets entry-into-force date for Digital Services Tax Act

On 3 July 2024, an Order in Council (the OIC) was posted on the Canadian government's website fixing the day Canada's Digital Services Tax Act (DSTA) comes into force as 28 June 2024. The OIC was issued by the Governor General in Council, based on the recommendation of the Minister of Finance.

In a surprise to many in the industry, the coming-into-force (CIF) date came just over one week after Bill C-59, Fall Economic Statement Implementation Act, 2023, which implemented certain measures from the 2023 fall economic statement and the 2023 federal budget, including the DSTA, received Royal Assent on 20 June 2024. (For more information on the tax measures contained in Bill C-59, see EY Global Tax Alert, Canada enacts income and indirect tax measures under Bill C-59 budget bill, dated 24 June 2024.)

Notwithstanding that the DSTA became law on 20 June 2024, given the CIF date was not set by Bill C-59, many in the industry speculated on whether the CIF date would be set at a much later date (i.e., subsequent to the US election in the fall), if at all, given the political uncertainty surrounding the digital services tax. Furthermore, taxpayers that may have been subject to the legislation were wondering whether they should move forward with quantifying the potential liability and developing the necessary processes needed to comply with the CIF date.

However, the Governor in Council indicated that the OIC was issued after considering the intent of the Organisation for Economic Co-operation and Development's (OECD's) October 2021 Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy (pdf), Canada's preference for a multilateral approach to addressing the challenges stemming from the digitalization of the economy, and the status of international negotiations and implementation in respect of such an approach.

Accordingly, given that the DSTA is now law and entered into force as of 28 June 2024, consideration must be given to the potential implications of the new tax, including considering the "in-scope" revenue, developing the necessary processes to comply with the DSTA, and reviewing whether existing systems capture the information needed to calculate and report the new tax. Furthermore, consideration should be given to the quantum and the timing of the required accrual for financial reporting purposes.

Background and implications

The DSTA impacts large domestic and foreign businesses that are part of a corporate group with global consolidated revenues of at least €750m and who earn Canadian digital services revenue from providing online marketplace services, online advertising, social media services and the monetizing of user data in excess of CA$20m. If a taxpayer or its consolidated group meets the required conditions, the taxpayer(s) will be required to pay a tax equal to 3% on their taxable Canadian digital services revenue in excess of CA$20m in a calendar year. For an overview of the draft DSTA, as released by the Department of Finance on 4 August 2023, see EY Global Tax Alert, Canada moves ahead with its own digital services tax, releasing draft legislation, dated 5 September 2023.

A revised draft of the DSTA was released on 30 November 2023. One of the most notable changes to the DSTA since its iteration on 4 August 2023 was that the thresholds for global revenue (i.e., €750m or more), in-scope revenue (i.e., more than CA$20m) and registration (i.e., more than CA$10m) have now been moved from the DSTA itself and relocated to the Digital Services Tax Regulations under "Prescribed Thresholds." By doing so, the federal government will have the flexibility to lower the thresholds for taxation or registration without requiring any amendments to the legislation be passed in Parliament. For more information on the revised draft of the DSTA, see EY Global Tax Alert, Canada's Digital Service Tax Act tabled in House of Commons, dated 8 December 2023.

Businesses and consolidated groups that are above the threshold for the digital services tax should closely review the DSTA and keep the following key features in mind:

• Registration: A taxpayer or an affected member of a consolidated group is required to register under the DSTA if it earns Canadian digital services revenue, meets the €750m threshold, and earns more than CA$10m of Canadian digital services revenue. Notably, the threshold required to register (CA$10m) is lower than the threshold required for taxation (CA$20m). If a taxpayer or an affected member of a consolidated group is required to be registered, the taxpayer must apply to register by 31 January of the following calendar year.

• Returns: Returns are due annually on or before 30 June of the following calendar year.

• Payments: Payments must be paid on or before 30 June of the following calendar year. Furthermore, any payments that are CA$10,000 or more must be paid electronically unless the taxpayer cannot reasonably pay that amount electronically.

Affected taxpayers should also discuss the DTSA's potential accounting implications with their tax advisors.