Budget 2021 updates: Tax and the digital economy

The Canadian federal budget tabled on April 19, 2021 provides further detail on the sweeping changes to the taxation of the digital economy that were announced in the Fall Economic Statement 2020 released on November 30, 2020 (the “2020 Statement”). We discussed these changes in a previous article available here.

In particular, Budget 2021 provides further detail on the proposed new federal digital services tax (“DST”) and the changes to Canada’s VAT, the federal goods and services tax/harmonized sales tax (“GST/HST”).

Digital services tax

For years, Canada has been working with its international partners in a process led by the Organization for Economic Cooperation and Development (“OECD”) to develop a multilateral consensus-based solution to address the tax challenges arising from the digitalization of the economy. The OECD previously sought to deliver a solution by the end of 2020, but due to delays caused by the COVID-19 outbreak, is now aiming for mid-2021.

Apparently tired of waiting, the Canadian federal government announced in the 2020 Statement that it intended to move forward unilaterally and introduce a new DST as of January 1, 2022 – which it described as a temporary measure until an acceptable multilateral approach comes into effect. However, it did not provide any detail on the DST at the time.

Budget 2021 provides these highly anticipated details. The key features of the DST, which will apply as of January 1, 2022, are as follows:

• DST will apply to taxpayers who, in any particular calendar year, have both:
  • in-scope revenue associated with Canadian users of more than CDN$20 million in that calendar year; and
  • global revenue from all sources of €750 million or more in the previous calendar year
• DST will apply at a rate of 3% to in-scope revenue associated with Canadian users – but only to revenue above the CDN $20 million threshold
• In-scope revenue from digital services will include revenue from:
  • Online marketplaces - services provided through an online marketplace that helps match sellers of goods and services with potential buyers
  • Social media - services provided through an online interface to facilitate interaction between users or between users and user-generated content
  • Online advertising - services aimed at placing online advertisements that are targeted based on data gathered from users of an online interface
  • User data - sale or licensing of data gathered from users of an online interface, including anonymized and aggregated data
• Taxpayers who are subject to DST will be required to file an annual return, and DST will be payable once per year, at the end of the reporting period
• Where a taxpayer is a member of a business group, the group may designate one member to file the DST return and pay the DST on behalf of the group, and each group member will be jointly and severally liable for the DST payable by any group member
• Special rules will apply to enable the CRA to target in-scope revenue associated with Canadian users, and exclude revenue associated with users located outside Canada
• Taxpayers may be entitled to a deduction of their DST liability for income tax purposes if they can establish that the DST expense was incurred for the purpose of earning taxable income in Canada

The government will accept written feedback from stakeholders on the implementation of the DST until June 18, 2021, and expects to release draft legislation for a new statute implementing the DST in Summer 2021 – what we in the National Tax Group like to call a “beach read.”

Further updates will follow once the draft legislation is released. In the meantime, more information on the DST is available here.

GST/HST (VAT) changes

Budget 2021 also provided details on the new GST/HST rules applicable to cross-border e-commerce transactions, which were first announced in the 2020 Statement. A full summary of these rules has been published by the Department of Finance, but here are a few highlights:

Liability for platform operators

The 2020 Statement included a provision requiring platform operators to collect and remit GST/HST on supplies through the platform by non-registered third parties. Budget 2021 amends this requirement and imposes joint and several liability on the platform operator and the third party supplier if the supplier provides false information to the operator. The operator’s liability will also be limited if it reasonably relied on the information provided by the supplier.

Deductions for non-residents

The 2020 Statement provided for a simplified GST/HST registration and remittance system for non-residents, but did not permit the non-residents to claim input tax credits. Budget 2021 provides some limited relief, permitting deductions for bad debts and certain provincial HST point-of-sale rebates, including rebates that apply to the sale of audio books.

Supply threshold

The 2020 Statement specified a $30,000 threshold for registration - annual taxable supplies would need to exceed $30,000 before registration would be required for a non-resident vendor or distribution platform operator selling digital products and services to Canadian consumers. Budget 2021 clarifies that zero-rated sales are not included in calculating the threshold.

Filing requirements

The 2020 Statement required the filing of an annual information return by all platform operators that facilitate the supply of short-term accommodation in Canada or the sale by a non-registered vendor of goods from a fulfillment warehouse in Canada. Budget 2021 amends the requirement to apply only to platform operators that are registered or are required to be registered for GST/HST.

If you have any questions about these proposals, please contact any member of our National Tax Group.

This article provides only general information about legal issues and developments, and is not intended to provide specific legal advice. Please see our disclaimer for more details.