The digital economy is here to stay, with Canada taking a proactive approach to the taxation of digital service businesses. The proposed Digital Services Act follows new GST and HST rules that went into effect in 2021.
In this article, we’ll cover important details about the proposed Digital Services Act, including who is subject to this tax and the expanded reporting requirements.
What is the Proposed Digital Services Tax Act?
The Government of Canada recently announced its commitment to implementing the Digital Services Tax (DST) in 2024. This tax involves two major changes: the introduction of DST and expanded reporting obligations for digital platform providers.
The current proposed DST is 3% of revenue. This tax will be assessed on an annual basis; however, the CRA is backdating the first filing season to 2022. This means that qualifying organizations will be subject to the 3% tax on revenue from January 1, 2022 through December 31, 2023.
The DST will create a new tax form that qualifying digital service providers will need to prepare. The return and payment are due by June 30 of the following year. Consolidated groups will only need to file one DST return for all members.
Who is Subject to the Digital Services Tax Act?
To be subject to DST, certain conditions must be met. First, only businesses that provide digital services surrounding the data, engagement, and content contributions of Canadian users will be subject to the tax.
Additionally, the total revenue from all sources during the fiscal year must be €750,000,000 or more. Furthermore, the organization will need to earn more than CA$20,000,000 in digital services revenue during the fiscal year.
Once these thresholds are met, the business needs to register under the Digital Services Tax Act by January 31 of the following year. The large threshold means that many digital service providers will not be subject to DST.
What are the New Reporting Obligations for Digital Platform Providers?
The second part of the proposed Digital Services Tax Act focuses on reporting requirements for platform operators. The term “platform” is broadly defined by the CRA to encompass any software or application that connects sellers with users.
Under these new provisions, digital platform providers will be required to furnish information surrounding sellers, including names, addresses, consideration received, and tax identification numbers beginning in 2024.
Furthermore, due diligence guidelines will be changing, with providers required to comply with the due diligence standards of the Model Rules for Reporting by Platform Operators. Qualifying reporting platforms are those that contract with sellers to make software and those that collect money for activities the platform facilitates.
The information collected will be reported on information returns. The CRA has discussed harsh penalties for non-compliance, with failure to file fines up to CA$25 per day, with a CA$2,500 cap.
Summary
Digital service providers need to be aware of changing legislation to stay in compliance with the Digital Services Tax Act. For more information on how these regulations impact your business, reach out to one of our team members at NRK Accounting today.