Budget 2021’s digital service tax explained

In the 2020 Fall Economic Statement the Liberal government promised to introduce a digital services tax by January 1, 2022.

A 3% digital service tax was announced in the 2021 Budget unveiled on April 19, 2021. Along with the requirement for foreign digital companies to remit GST and HST on July 1, 2021, this new 3% digital sales tax on revenue of large tech/web platforms will signal the end of tax loopholes that have been exploited by tech giants for years.

The digital tax revenue generated by these measures will be directed toward the Government’s Consolidated Revenue Fund and not targeted to news media publishers or other sectors of the economy. The imposition of new tax measures on the web giants is in keeping with the Government’s previous announcements.

NMC members will recognize the digital tax is not a replacement for nor a fix for the licensing regime legislation publishers have requested.

Budget Specifics

  • Digital Service Tax (DST) will take effect on Jan. 1, 2022 and remain in place until negotiations currently underway through the OECD on multinational taxation are resolved. Finance estimates the new tax will bring $3.4 billion in new tax revenue over five years.
  • Program extensions of interest to NMC members:
    • The Canadian Emergency Wage Subsidy to business and the Canada Emergency Rent Subsidy and Business Account programs have all been extended to November 2021. The CEWS will be replaced as of July 4th with a Canada Recovery Hiring Program (CHRP) for employers whose businesses continue to suffer relative to before the pandemic.
    • New Business support programs to help SME beyond the recover through skills training, loans, rebates and direct investments. The government estimates spending $2.2B over 5 years to incentivize assets that drive growth – like digitization and intellectual property.  Under the program Canadian-controlled private businesses could expense up to $1.5M or over 60% of capital investments made between now and 2024.

It is important to note that a key driver of these concerns is public opinion by the Quebec government who supports France’s push for a digital services tax within the EU, ultimately losing a bid to build consensus within the Bloc and moving unilaterally to impose a digital services tax within its borders. Quebec was already critical of the web giants, referred to as the GAFA (Google, Amazon, Facebook, Apple) and the lack of taxes imposed on digital streaming services providers like Netflix. Quebec chose to impose their own sales tax on Netflix services along with other provinces like Saskatchewan, British Columbia and soon to be Manitoba. Arguably, the federal government, having had the debate over a “Netflix tax” during the 2015 election, is the laggard in moving to force foreign digital streamers and others to collect and remit GST/HST.

Previously, digital services did not have revenues taxed. This presents the next frontier in tax legislation for the tech and web platforms.  Digital advertising services from foreign-owned companies generate billions of dollars in economic activity in Canada and do not have any taxes applied to them. This allows those companies to not only avoid funding public services, it also allows digital services, like advertising, to undercut traditional advertisers like newspapers because they do not pay any corporate tax on that revenue.

Concerns are expected to be raised with the Canadian government from the US government.  Digital tax enforcement by Canada on predominantly US companies may attract attention from the Biden administration. This became a flashpoint between French Prime Minister Emmanuel Macron and former US President Donald Trump. A compromise was ultimately agreed to that saw France delay implementation of their tax. However, when they did, the US again threatened retaliation in the form of tariffs on French luxury goods. Ultimately, the US backed down.

For Canada, the application of such taxes would not seem to contravene any of the new provisions of CUSMA’s digital taxation guidelines. However, the threat of retaliatory tariffs is ever-present for Canada and, should the OECD not find agreement on a final framework for digital taxes by January 1, 2022, Canada will have to be prepared for possible US retaliation.

The issue is compounded by Section 19 of the Income Tax Act in Canada that makes digital advertising with foreign web giants like advertising duopolies Facebook and Google tax deductible for advertisers. This is not the case for foreign broadcasters or periodicals – advertisers cannot deduct costs associated with advertising on a US television network or in the New York Times. Many, including Erin O’Toole in his leadership platform and the Friends of Canadian Broadcasting, have pointed out that this loophole unfairly benefits foreign online platforms in a way that foreign broadcasters and periodicals do not benefit. Between the two, this distorts the Canadian advertising market in a way that incentivizes advertisers to choose online platforms because both the purchaser of the advertising and both Google and Facebook are not paying taxes on the advertising.