Canada And The New Digital Services Tax

Most taxation is concerned with raising revenue for government expenditure in the short term (typically within a year or so of the taxable event). A well-designed modern tax will also typically involve a withholding mechanism: think, for example, of payroll withholding on wages or the charge / input tax credit system in a typical VAT, such as Canada's GST. The Digital Services Tax as set out in the December 14, 2021 Notice of Ways and Means Motion¹ (the "DST"), departs from these principles in interesting ways. This briefing note sets out some observations on the DST and touches on who will bear the economic cost of that tax if it is ultimately implemented.

Basics of the DST

The DST is proposed to be 3% of a taxpayer's digital services revenue, which is itself made up of four categories: online marketplace services revenue, online advertising services revenue, social media services revenue, and user data revenue. There are two relevant thresholds: to be in-scope,