Archived - Annex 7:
Consultations on Other Tax Measures: Supplementary Information

Overview

This annex provides detailed information on the Digital Services Tax proposed in the Budget and invites input from stakeholders. It also provides information about the proposed Tax on Unproductive Use of Canadian Housing by Foreign Non-resident Owners, including plans for consultation.

The costing for the measures in this annex is presented in Table 1 – Cost of Proposed Tax Measures in Annex 6.

Digital Services Tax

Context

Digital technology has resulted in the development of new business models and ways of creating value. In the digital economy, data is a key commodity and the collection, processing and monetization of data is a key commercial activity. New business models have developed involving online platforms that attract users through certain service offerings, collect data and content contributions from the users, and then monetize that data and content in order to earn a profit. Examples of such business models include:

• social media platforms and search engines that earn revenue from advertising that they target based on data they have gathered about their users' interests; and
• intermediation platforms that create online markets for sellers and buyers of goods or services (e.g., taxi rides, short-term accommodations), exchange information across the platform about those on the other side of the market and facilitate transactions between them.

In these business models, the users are not mere customers of the platform or passive recipients of its services. The active participation of users, in interacting with the platform and providing data and content contributions, is a key contributor to the product offering of the platform. This user participation is a key input in the platform business's production process in a way similar to labour and physical capital in a more traditional business. For example:

• a search engine cannot earn advertising revenue without users to view ads and provide information allowing those ads to be targeted; and
• an accommodation platform cannot facilitate transactions without information about available apartments to share with potential renters and information about renters seeking premises to share with apartment providers.  

Current tax systems, however, were generally designed for a bricks-and-mortar economy and effectively assume that value is created only in places where physical resources, like employees, facilities and equipment, are located. Given their reliance on digital technology, businesses of this type do not require a local physical presence in order to engage with users and collect their data and content. These businesses nevertheless can reasonably be considered to be conducting this part of their value-creating activity, even if it is controlled remotely, in the location of the users. This activity, however, is not always subject to local tax under current rules.

Since user-intensive commercial activity of this kind is dominated by businesses that are multinational in scope, this issue would be best addressed multilaterally. To this end, the international community has been discussing possible approaches for a number of years. In the project on Base Erosion and Profit Shifting (BEPS) undertaken by the members of the Organisation for Economic Co-operation and Development (OECD) and the G20 from 2013 to 2015, digital economy challenges were designated as Action 1 of the 15 action items. No agreement, however, was reached under Action 1 on a common approach with respect to corporate-level tax. Intensive discussions on the challenges of digitalization re-started in 2017 through the OECD-led Inclusive Framework on BEPS (which now has 139 member jurisdictions). Due to the inability to reach consensus, however, in October 2020 the target date for agreement was deferred to mid-2021.

Canada has a strong preference for a multilateral approach and so continues to work actively toward this goal with our international partners. However, there have been delays in reaching agreement and there is uncertainty about when an eventual agreed approach will come into effect. The government therefore proposes to implement an interim measure.

Proposed Measure

As announced in the November 2020 Fall Economic Statement, Budget 2021 proposes to implement a Digital Services Tax (DST). The proposed tax is intended to ensure that revenue earned by large businesses – foreign or domestic – from engagement with online users in Canada, including through the collection, processing and monetizing of data and content contributions from those users, is subject to Canadian tax. The DST is intended to be interim in nature – it would apply as of January 1, 2022 until an acceptable multilateral approach comes into effect with respect to the implicated businesses.

The proposed tax would have the following key features.

• Rate and Base: The DST would apply at a rate of 3 per cent on revenue from certain digital services reliant on the engagement, data and content contributions of Canadian users. For greater certainty, revenue would not include any applicable value-added tax or sales tax amounts collected on the revenue transaction.
• In-Scope Revenue: The DST would apply to revenue from online business models in which the participation of users, including by the provision of data and content contributions, is a key value driver. Specifically, it would apply to revenue from:
  • Online marketplaces: Services provided through an online marketplace that helps match sellers of goods and services with potential buyers, whether or not the platform facilitates completion of the sale. Included would be optional (e.g., "premium") services that enhance the basic intermediation function or affect its commercial terms. This category would not generally include:
    • revenue in respect of the storage or shipping of tangible goods sold through the marketplace, to the extent the revenue reflects a reasonable rate of compensation for those services;
    • the sale of goods and services (including the sale, licensing or streaming of digital content such as audio, video, games, software, e-books, newspapers and magazines) by a seller on its own account; and
    • trading in financial instruments and commodities.
  • Social media: Services provided through an online interface to facilitate interaction between users or between users and user-generated content. This category would not generally include an interface of which the sole purpose is to provide communications services (such as telephone service through Voice over Internet Protocol).
  • Online advertising: Services aimed at the placing of online advertisements that are targeted based on data gathered from users of an online interface. This would include online interfaces such as online marketplaces, social media platforms, internet search engines, digital content streaming services, and online communications services. Advertisements would include preferential search listings. The scope would encompass both revenue earned by an interface operator from the display of advertising on the interface as well as revenue earned from systems for facilitating online advertising placement by third parties (including demand-side platforms, supply-side platforms, ad exchanges and advertising performance monitoring services).
  • User data: The sale or licensing of data gathered from users of an online interface, including anonymized and aggregated data.
• Taxpayers:
  • Thresholds: The DST would apply to businesses organized under various forms including corporations, trusts and partnerships. The DST would apply in a particular calendar year to an entity that meets, or is a member of a business group that meets, both of the following thresholds:
    • global revenue from all sources of €750 million or more (the threshold for country-by-country reporting under an OECD standard) in the previous calendar year; and
    • in-scope revenue associated with Canadian users of more than $20 million in the particular calendar year.

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

• Group-level calculation: Group-level calculation of thresholds is important because a firm's administrative capacity is linked to its overall size and the revenue-generating activities linked to Canadian users may be dispersed across multiple entities in a business group. It is anticipated that groups will generally be defined in the same manner as for country-by-country reporting.
• Large firms: Large firms are the focus of the proposed tax for several reasons.
  • Successful leveraging of user participation, data and content as a key value creation method in an online platform involves significant economies of scale and important network effects. Users are attracted by the presence of other users with whom they can interact, so market share tends to gravitate toward platforms that attract large user groups. Larger platforms thus tend to have a greater ability to generate value from user engagement.
  • Larger, more mature firms are more likely to be profitable and able to bear the burden of a tax on revenue, which is not sensitive to profitability. Exclusion from the tax of smaller firms, from all countries, will help ensure that smaller, less mature and growing firms, which are less likely to be profitable, are not prejudiced in their ability to compete against larger, more established firms.
  • Large firms are better able to manage the burden of compliance associated with a new tax and can absorb the relevant costs over a larger amount of revenue. The relative costs of administration for government are also proportionately smaller relative to the tax revenue for larger firms. In particular, the costs of administering a tax applicable to large numbers of smaller firms, many of which have little or no local physical presence, would be inordinate.       
• Revenue Sourcing: When revenue of an entity is contractually related to both activities within the scope of the DST and other activities, the in-scope revenue would need to be determined on a reasonable basis. In determining an entity's in-scope revenue associated with users in Canada (as opposed to users in another jurisdiction), two general methods would be used. Where it is possible to trace revenues to relevant users in Canada on the basis of transactional information, such tracing would be required. Where such tracing is not possible, a specified formulaic allocation would be required. Revenue sourcing principles would vary according to the nature of the revenue.
  • Online marketplaces: Fee revenue of online marketplaces would generally be sourced to the locations of the users who interact through the interface.
    • Transactional: Fee revenue associated with a particular transaction between users (e.g., a fee set as a percentage of the transaction price or as a fixed amount per transaction, or a fee otherwise set for a particular transaction) would generally be considered to be sourced 50:50 to the locations of the buyer and seller. This allocation recognizes that regardless of the legal arrangement for payment of the fee, the intermediation service of the marketplace is reliant on the engagement and data contributions of both parties. However, where the transaction is an arrangement for the performance of a tangible service in a particular location (e.g., accommodations, food delivery, taxi ride), the revenue would be sourced to the location where the service is performed.
    • Non-transactional: Fee revenue that is not associated with a particular transaction (e.g., interface subscription fees) and revenue from advertising goods or services listed for sale on the marketplace would be sourced to the locations of the interface users on a formulaic basis. The revenue associated with users in Canada would be considered to be equal to the total of the relevant revenue multiplied by the ratio of the number of marketplace transaction participants in Canada to the total number of transaction participants. For this purpose, the buyer and seller in a transaction would each be considered a "transaction participant" and a participant would be counted each time it participates in a transaction. This allocation reflects the fact that non-transactional interface fees are generally paid for the ultimate purpose of concluding transactions with other interface users, even if those users cannot be identified at the time the fee is paid.
  • Social media: Fee revenue of social media interfaces (e.g., interface subscription fees) would be sourced to the locations of the interface users on a formulaic basis. The revenue associated with users in Canada would be considered to be equal to the total of the relevant revenue multiplied by the ratio of the number of active users of the interface that are users in Canada to the total number of active users in all locations. This allocation reflects the fact that interface fees are generally paid for the purpose of facilitating interactions with other interface users, including those who do not pay fees.
  • Online advertising: Online advertising revenue would generally be sourced based on the location of the user who views, listens to, clicks on, or otherwise consumes the advertisement. This user would often be the same user whose data has been used to target the advertisement. As an exception, revenue of an online marketplace from advertising goods or services listed for sale on the marketplace would be sourced using the formula applicable to non-transactional marketplace fee revenue (outlined above). Outside of this exception, advertising revenue would be sourced using tracing or a formulaic basis, according to the circumstances.
    • Tracing: Advertising revenue would be required to be traced to viewers in Canada where possible. For example, this would include revenue from a series of advertisements that is shown all or substantially all (generally 90 per cent or more) to viewers in Canada and revenue from individual advertisements that are shown to viewers in Canada (e.g., where advertising fees are contractually charged on the basis of a user viewing or clicking on the advertisement or taking some other action).
    • Formula: Where under a contract advertising revenue associated with users in Canada and other jurisdictions is not separately identifiable, revenue associated with users in Canada would be considered to be equal to the total contract revenue multiplied by the ratio of the number of advertisement views by viewers in Canada to the total number of advertisement views by viewers in all locations.
  • User data: Revenue from the sale of user data would be sourced where possible to the location of the user to whom the data relates. If particular revenue relates to data in respect of both users in Canada and users in other locations, the revenue associated with users in Canada would be considered to be equal to the total of the relevant revenue multiplied by the ratio of the number of users from which the data was collected that are users in Canada to the total number of users.
• User Location:
• Ordinary location: The determination of whether a user of an interface is located in Canada or some other country for purposes of revenue sourcing would generally be based on the ordinary (i.e., usual) location of an individual user and the ordinary place of business of a business user. The determination of the ordinary location, or ordinary place of business, of a user would be based on information generally available to the digital service provider. This would include such indicators as recurring data on device geolocation or internet protocol (IP) address, billing address, delivery address (where relevant), and telephone area code.
• Real-time location: By exception, in the cases of advertising targeted based on the real-time location of a user and the sale of data based on the real-time location of a user, the real-time location of a user would be based on device geolocation if available, or other information if not.
• Consistency: Firms would be expected to use a consistent approach in determining user location, though different approaches might be used for different services depending on differences in data availability.
• Treatment for Income Tax Purposes: As with other non-income taxes, the deductibility of the DST liability of an entity in computing taxable income for Canadian income tax purposes would be determined based on general principles – e.g., whether it is incurred for the purpose of earning the entity's income subject to Canadian income tax. DST liability would not be eligible for a credit against Canadian income tax payable.
• Administration: It is proposed that firms subject to DST be required to file an annual return following the end of the reporting period, which is proposed to be the calendar year. It is contemplated that:
  • one annual payment would be required after the end of the reporting period;
  • a group would be able to designate an entity to file the DST return and pay the DST liability on behalf of the group; and
  • to facilitate enforcement, each entity in a group would be jointly and severally liable for DST payable by any other group member.

Coming Into Force

The DST would apply as of January 1, 2022.

Consultation

The government plans to engage with the provinces and territories to discuss the implications of the DST.

The government welcomes feedback from stakeholders on the proposed approach to implementing the DST. Interested parties are invited to send written representations by June 18, 2021 to the Department of Finance Canada, Tax Policy Branch at: DST-TSN@canada.ca.

It is anticipated that draft legislation for a new statute implementing the DST would be released for public comment during summer 2021, taking into account the feedback received. The legislation would subsequently be included in a bill to be introduced in Parliament.

Tax on Unproductive Use of Canadian Housing by Foreign Non-resident Owners

Budget 2021 proposes to introduce a new national 1-per-cent tax on the value of non-resident, non-Canadian owned residential real estate considered to be vacant or underused. This tax would be levied annually beginning in 2022.

Beginning in 2023, all owners of residential property in Canada, other than Canadian citizens or permanent residents of Canada, would be required to file an annual declaration for the prior calendar year with the Canada Revenue Agency in respect of each Canadian residential property they own. The requirement to file this declaration would apply irrespective of whether the owner is subject to tax in respect of the property for the year.

In a declaration in respect of a property, the owner would be required to report information such as the property address, the property value and the owner's interest in the property. The owner may also be eligible to claim in their declaration an exemption from the tax in respect of a property for the year. An exemption may be available, for instance, where a property is leased to one or more qualified tenants in relation to the owner for a minimum period in a calendar year. Where an exemption in respect of a property for the year is not available, the owner would be required to calculate the amount of tax owing and report and remit it to the Canada Revenue Agency by the filing due date.

The failure to file a declaration with respect to a property for a calendar year as and when required could result in the loss of any available exemptions in respect of the property for the calendar year. Penalties and interest would also be applicable and the assessment period would be unlimited.

In the coming months, the government will release a backgrounder to provide stakeholders with an opportunity to comment on further parameters of the proposed tax. These parameters would include, for example, the definition of residential property, the value on which the tax would apply, how the tax would apply where a property is owned by multiple individuals and/or non-individuals, potential exemptions and compliance and enforcement mechanisms. Additionally, the consultation will consider whether, how and when the proposed tax would apply in smaller, resort and tourism communities.

Notices of Ways and Means Motions

• Notice of Ways and Means Motion to introduce an Act to implement a Digital Services Tax
• Notice of Ways and Means Motion to introduce an Act to implement a Tax on Unproductive Use of Canadian Housing by Foreign Non-resident Owners