Canada’s New Digital Services Tax: Updates and Comments

  • January 12, 2022
  • Ravish Gupta

On December 14th, 2021, the Department of Finance released draft legislation[1] for the Digital Services Tax Act (Act) alongside the Economic and Fiscal Update 2021.[2] The Act imposes a digital services tax (DST) of 3% on annual revenues from large businesses providing certain digital services. The DST is slated to apply to certain revenues earned as of January 1st, 2022, but businesses will not be liable for the tax earlier than January 1st, 2024.


A Canadian DST was first announced in the 2020 Fall Economic Statement and subsequently confirmed in Budget 2021 released in April.

On October 8th, 2021, the OECD/G20 Inclusive Framework on BEPS released a statement that sets out a two-pillar multilateral approach (Pillar One and Pillar Two) to the taxation of digital services, which 137 member jurisdictions have agreed to as of November 4th, 2021.[3] This multilateral approach addresses the increasing tax challenges imposed by the digitalization of the economy, with many multinational enterprises (MNEs) being able to escape or heavily minimize their tax liability due to their lack of physical presence in a jurisdiction. Pillar One reallocates taxing rights of MNEs from their home countries to market jurisdictions, where the profit-earning activities take place, regardless of physical presence in that jurisdiction. This would apply to MNEs with global revenues above €20 billion and profitability above 10%. Pillar Two introduces a global minimum corporate tax rate of 15% that applies to MNEs with revenue above €750 million.

One aspect of Pillar One is that countries would remove their own unilateral DSTs and relevant similar measures in favour of the multilateral approach. The Department of Finance stated that they would still go forward with the DST, which would be imposed no earlier than January 1st, 2024 and only if an acceptable multilateral approach (i.e., Pillar One) has not yet come into force.[4]  If the DST comes into effect in 2024, taxpayers caught under the Act will be retroactively liable for tax on revenues earned starting from January 1st, 2022.