In the recently released Budget 2021, Canada's federal government announced its plan to continue with the development of a Digital Services Tax (DST) to be imposed on certain large taxpayers. The DST is proposed to apply at a rate of 3 percent on revenue exceeding $20 million from certain digital services that rely on the engagement, data and content contributions from Canadian users. While draft legislation has not yet been released, Budget 2021 laid out the intended parameters of the new rules and suggested that they are intended to apply beginning on January 1, 2022. However, given the fundamental nature of these proposed changes, the government has signaled that it wishes to hear from affected taxpayers and stakeholders, and has invited the submission of written representations on these proposals by June 18, 2021.


With the explosion of digital technologies and internet-based business models, Canada has been working with the Organisation for Economic Co-operation and Development (OECD), the G20 and members of the so-called Inclusive Framework on BEPS to reach a multi-lateral agreement taxing multinational corporations providing digital services. However, a viable agreement has been delayed by factors ranging from political and technical issues to the COVID-19 pandemic. As a result, Canada—as well as countries such as France, Italy, Spain and Austria—has announced its intention to unilaterally impose a tax aimed at businesses whose revenues are significantly derived from users within its borders. Ultimately, the Canadian government announced that the DST is intended to be an interim measure that will become effective on January 1, 2022, but will be eliminated once a multilateral agreement on the issue can be reached.


The DST will be focused on larger, more mature firms passing the following two thresholds:

  • global group revenue from all sources of €750 million or more in the previous calendar year (the threshold for country-by-country reporting under the OECD standard); and
  • revenue within the scope of the DST associated with Canadian users of more than $20 million in the particular calendar year.

For entities that meet this threshold, the DST would only apply to in-scope revenue associated with Canadian users in excess of the $20-million threshold.

Budget 2021 identified the following list of services provided by online business models as within the scope of the DST:

  • Online marketplaces: This includes services provided through an online marketplace matching sellers with potential buyers, whether or not the platform facilitates completion of the sale. It also covers services that enhance the basic intermediation function of the sale or affect its commercial terms. Presumably, this is aimed at businesses such as Uber, Airbnb and eBay.
  • Social media: This includes services provided through online social media platforms that facilitate interactions between users or between users and user-generated content. This appears to be aimed at companies like LinkedIn and TikTok. Notably, this category excludes platforms for which the sole purpose is to provide communications services (presumably, businesses such as Zoom).
  • Online advertisers: This category is geared towards services involving targeted online advertisements based on user data. It includes interfaces such as online marketplaces, social media platforms, search engines, digital streaming services and online communications services. It would encompass both revenue earned by an interface operator from the display of advertisements along with revenue earned from systems that facilitate online advertising placement by third parties.
  • User data: This category includes the sale or licensing of anonymized or aggregated data gathered from users of an online interface.

The Canadian government intends to facilitate enforcement by imposing joint and several liability on each member of the group for which any member incurs a DST liability. This means that if a U.S.-resident company was assessed under the DST, the CRA could seek to collect outstanding amounts from a Canadian-resident entity within the same corporate group.

In order to determine the source of revenue for the purposes of the DST, Budget 2021 proposes tracing Canadian transactional information where possible. Otherwise, the government is expected to release a specified formulaic apportionment method.

Potential Objections

There are numerous potential objections to taxes such as the proposed DST on policy grounds. In addition, while it is unclear precisely how the Canadian DST will operate, there are a number of potential technical or treaty-based objections to the proposal that may be raised.

First, such rules could conflict with one of Canada's bilateral tax treaties, depending on the residency of the entity subject to the DST. A number of Canada's tax treaties are implemented by legislation that enables the treaty to supersede other Canadian law in the event of a conflict. The question then arises as to whether the DST would conflict with any relevant treaty provision, such as the "business profits" article in the case of the Canada-U.S. Tax Treaty, Article VII.

Alternatively, there may be an argument that the DST conflicts with a treaty's "non-discrimination" article. Article XXV, Paragraph 1 of the Canada-U.S. Tax Treaty, for example, states that nationals of one state (e.g., the United States) shall not be subjected in the other state (e.g., Canada) to any taxation that is more burdensome than the taxation to which nationals of that other state in the same circumstances may be subjected. If the DST is found to discriminate against firms on the basis of nationality, then it may be challenged under Article XXV. However, despite the fact that the DST is clearly aimed principally at foreign firms, Budget 2021 states that it will apply equally to Canadian entities. Additionally, to the extent that the DST can be characterized as discrimination on the basis of a taxpayer's residence, the anti-discrimination provisions may not be applicable as discrimination on the basis of residency has been found to be permitted.

The DST may also be susceptible to the sharp criticisms leveled at the similar French DST by a U.S. Executive Branch Section 301 Investigation. The 301 Investigation found that the French DST unfairly discriminates against U.S.-based companies because it primarily applies to services where those companies are dominant, namely online marketing and Internet advertising. The 301 Investigation also found that the French DST contravenes prevailing international tax principles by imposing tax based on revenue rather than income and without any territorial connection. Further, the OECD has cautioned against imposing a special tax regime particular to digital companies because of the difficulties in defining exactly how to fence off "digital companies" when digitalization is a process that occurs at varying degrees across the economy. It also warned that such unilaterally imposed taxes may also increase tax competition among jurisdictions.

Finally, the application of joint and several liability to all group members for any potential DST liability of one group member seems likely to give rise to strenuous objections and challenges. Such a provision goes well beyond what Canada's tax rules normally provide and seems to effectively ignore the separate legal personality of group members.

Public Consultation

The Department of Finance, Tax Policy Branch will be holding a public consultation regarding the DST and is soliciting feedback from stakeholders at until June 18, 2021.

The taxation of the digital economy is a rapidly expanding area that the international community has struggled to gain a handle on. Changes in policy both in Canada and abroad have created uncertainty for taxpayers as to their future tax liabilities.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.