Canada's Digital Services Tax: A Comprehensive Guide to DST

As the digital ecosystem booms, so do the regulations surrounding it. Enter Canada's Digital Services Tax (DST) – a recent move by the Canadian government to ensure fair taxation in the digital economy, especially when it comes to large companies that profit off of user data.

Whether you're an international tech platform or a homegrown Canadian business, this guide will unravel the complexities of this new tax regulation and keep your business compliant.

What is the Digital Services Tax in Canada?

The Digital Services Tax in Canada is a 3% levy on revenue earned from certain digital services and transactions involving Canadian users. Unlike traditional taxes that are primarily based on where a company is located, the DST zeroes in on where the users are – making big digital players pay their fair share for enjoying the Canadian market.

According to the Canada Revenue Agency, DST specifically targets:

• Certain digital services that rely on engagement, data, and content contributions of Canadian users
• Certain sales or licensing of Canadian user data

Canadian digital services revenue is earned from:

• Online marketplace services
• Online advertising services
• Social media services
• Certain sales of user data

The Canadian government passed the legislation for DST in June 2024 as part of Bill C-59.

What is the difference between DST and GST?

DST is not a consumption tax, while Goods and Services Tax (GST) is. So DST is different from Canada’s broader tax policy, the GST and HST on digital products, in a few ways.

GST and Harmonized Services Tax (HST) are applied to individual transactions and charged to the buyer. Ultimately the end consumer pays the tax to the government. This is how a typical consumption tax works.

DST, on the other hand, is applied to the total revenue of a large company. It’s more similar to an income tax than a consumption tax. The company skims 3% off their revenue and pays it directly to the government.

Why was the Digital Services Tax created?

The Canadian government wants to effectively tax the digital economy, which is tricky given the cross-border nature of most transactions. When it comes to user engagement and user data, there is a second layer of economic activity. For example, large companies generate profit from allowing users to post content on the platform (e.g. Instagram) or from analyzing and selling user data.

Whole businesses are built from this layer of digital services, and that’s exactly what DST targets. By taxing the major players who earn significant revenue from Canadian users, the government aims to capture revenue that might otherwise slip through the cracks.

Who must register for the Digital Services Tax in Canada?

As we said before, DST targets large companies, both foreign and domestic. Smaller businesses must pay attention if they are members of a consolidated group that operates internationally.

If the business meets certain revenue criteria in a single calendar year (starting from 2022), it must register for DST and start complying.

Here are the revenue criteria for DST. The business must meet all three points in order to be liable:

• The business had Canadian digital services revenue greater than nil in the calendar year
• The business had, or was a member (in the calendar year or in the prior calendar year) of a consolidated group that had, total revenue of at least €750 million during a fiscal year that ended in the prior calendar year
• The business had, or was a member (in the calendar year) of a consolidated group that had Canadian digital services revenue greater than CAN$10 million in the calendar year.

If you’re curious where your business falls, here’s how to calculate your Canadian digital services revenue.

How to register for the Digital Services Tax Canada Program

1. Gather information about your business

To get started with your registration, you'll need to collect essential information about your business:

• Legal name
• Business number (BN), if already assigned
• Date and place of incorporation along with the certificate number, if incorporated
• Physical address
• Mailing address, if different from the physical address
• Name and phone number of at least one officer or director

2. Submit your application

To apply for your DST program account, you need to use the DST account registration web form:

• If your business doesn’t have a BN, you’ll receive one via this registration process.
• If a BN already exists for your business, use the same form to request your DST program account.

When registering:

• Enter your information promptly, as the form will timeout after 30 minutes of inactivity.
• Complete the form in one session, as you cannot save information midway.
• The form cannot be used to create other program accounts.
• Use the “Previous” button within the registration form to navigate back, rather than the browser's “Back” button.

3. Keep a copy of your confirmation number

After submitting the form successfully, a confirmation number will be provided. This number serves as proof that the Canada Revenue Agency (CRA) has received your application. Be sure to keep a copy for your records.

4. Wait for a response from the CRA

The CRA may contact you for additional information or request incorporation or formation documents. Once your registration is processed, your BN and/or DST program account number will be sent either electronically or by mail, depending on your chosen method of contact during application.

Electing a designated entity under the Digital Services Tax

Businesses required to file a DST return have the option to make a designated entity election for a specific year. This means you can appoint a tax representative within your consolidated group to handle the DST obligations on your behalf for that year. This includes filing and remitting the tax on time.

Both you and the designated entity must jointly agree to this arrangement. Multiple members of your consolidated group have the flexibility to choose the same entity for their election during the same period.

Learn more about making a designation entity election.

What’s next?

Canada's Digital Services Tax represents a major evolution in how governments interact with international businesses and the digital economy. We see other tax laws trying different angles, such as VAT liability for online marketplaces in the EU and state-by-state marketplace facilitator laws in the US.

They’re not only targeting big businesses, though. Smaller companies, online creators, and low-value dropshipped goods are also liable for consumption taxes around the world. It’s important to know the laws where you’re located and also where you sell.

Check out these worldwide tax guides and if you need some help, try a tax software that automates tax compliance for you. You can start a free trial of Quaderno today.