Digital Tax in Canada: What You Need to Know
Digital goods and services make up a large portion of modern-day consumers’ life. From Netflix to complex enterprise software, we are all using digital products more than ever before. As the focus shifts from traditional, physical goods and services, businesses have to adapt. Naturally, the government has to adapt to this new environment as well.
One major pain point for governments everywhere has been the question of taxation. When it came to physical goods and services, there was already an enormous body of work present. Digital goods and services cannot always be taxed in the same way as physical goods.
Despite the fact that governments and strategic blocs everywhere, from the OECD to the G20 agree that these services must be taxed, finding consensus on what this tax would look like has been next to impossible. For any tax regime to be successful, especially one that carries so many global implications, it must be applied universally, or at least as close to universally as possible.
So, what should countries do as they wait for the stand-off to end? Canada, like a few other countries, has decided to act independently until the world community can come up with a solution. Having introduced a tax on digital goods and services at the corporate and excise tax levels, Canada joins a growing list of nations to have acted in this regard. This article will focus on Canada’s digital tax.
The Turning Point
Matters were never going to continue as they had been, for too long. We suspect that other countries will follow suit as well. The problem that the Canadian government faced was one that almost all countries will face to some degree.
Without a digital tax, the government will be hemorrhaging money that it should at least try to keep in the economy. If the service is based in another country, and Canada doesn’t tax it, then they’re essentially getting the right to do business in Canada for free.
This is even more unusual when you consider that it hurts the local industry. There are digital solutions companies in Canada as well. Canadian interests are obviously aligned with their businesses, but the tax policies prior to the digital tax did not reflect this ideology. Plenty of unfair competition existed between Canadian companies and foreign corporations.
The announcement was made in the Fall Economic Statement of 2020. The new tax regime would mean General Sales Tax and Harmonized Sales Tax are levied on foreign digital goods and service providers. The Finance minister later went on to add that Canada’s digital tax would be at a rate of 3%.
Canada’s Digital Tax Explained
Let’s take a look at the two levels at which this tax is going to be implemented – the excise tax level and the corporate tax level.
Vendors who are selling digital services and products from overseas to consumers in Canada will be required to register with the Canadian Revenue Agency. These sellers will also include online platforms. Furthermore, the scheme attempts to protect smaller businesses by setting a lower limit on taxable supplies. If taxable supplies exceed 30,000 Canadian dollars over a year-long timeframe, the business will have to register and pay taxes on that income.
Two things are worth mentioning here; the tax is only applicable to business to consumer services and goods and focuses on both digital goods and services. This is in contrast to other nations that have gone in different directions. The Canadian Revenue Agency is tasked with developing an online portal to facilitate this entire process. Considering the payment will be made by foreign businesses, the ability to accept payments in the same is expected.
The HST and GST rates vary depending on various factors. One of the prime determinants is residence in Canada. As a general rule, two of the following must be true for an individual to be considered a Canadian resident:
- IP address in Canada
- Home or billing address in Canada
- Possesses Canadian subscriber module card
- Bank or Payment in Canada
The rates of HST and GST will vary based on location. Here is a breakdown of the location-based rates:
- Ontario: 13% HST
- Nova Scotia, Newfoundland, and Labrador, Prince Edward Island, New Brunswick: 15% HST
- Quebec, Manitoba, Saskatchewan, Alberta, British Columbia, Northwest Territories, Yukon, Nunavut: 13% HST
Canada’s digital tax is fairly straightforward when it comes to registration. Current provisions require for carrying on business determinations which are often tricky and arduous in nature. Most businesses would welcome a simplified approach to the whole thing.
In accordance with the OECD’s guidelines, Canada’s digital tax will be applicable to both local and foreign corporations. Any digital business that relies on consumer participation for commercial success will be asked to pay the DST. The DST will be applied to earnings from social media platforms, digital ads, collecting user data, and online marketplaces.
It’s clear that the intention of the tax is to target large corporations that operate in the digital space. Popular names such as Netflix and Facebook come to mind. This is clear because of the conditions for the tax to be levied:
- More than 20 million CAD in annual revenue from sales of digital services to Canadian users.
- Global turnover in excess of EUR 750 million in the year prior.
This was a quick look at Canada’s digital tax. We believe it is the first step of many in the process of finally taxing the digital heavyweights of the world. As more countries will join in, the easier it will get to apply pressure on such large businesses to pay their fair share. Learn more about doing business in Canada here.