The announcement that Canada would rescind its digital services tax a day before initial tax returns and payments were due leaves open questions for taxpayers who would have been subject to that tax, including the availability of refunds for any taxpayers who may have already paid, as well as about the future course of Canadian tax policy.
Since at least late 2024, there had been a suspicion that Canada's DST would never come into effect—and that the prospect of the tax was being kept alive by the Canadian government solely for use as a bargaining chip in discussions with the US government.
That possibility appears to now be coming to pass, following the government's announcement that it would "rescind" the tax in anticipation of a "mutually beneficial comprehensive trade arrangement with the United States."
While the DST's expiration wasn't a surprise, the fact and manner of its happening raises several questions.
First, the phrasing of the Canadian announcement was somewhat unusual, because Canadian tax legislation would normally be "repealed" rather than "rescinded." It is unclear if there is any special significance to the government's consistent use of the latter term.
Second, it remains unclear how and when the announced "rescission" will legally occur. While the Canadian government has ceased collecting the DST—consistent with normal Canadian practices regarding announced but not yet enacted changes in tax law—it remains part of the law of Canada, and no specific measures have yet been taken to change that.
While the announcement references bringing forward legislation in parliament to rescind the DST, the earliest that could happen would be mid-September because of Parliament's adjournment in the interim. That delay gives Canada time to change its mind if the anticipated "mutually beneficial" arrangement with US does not materialize, or if other developments make it politically untenable to concede to the US on the DST.
Instead of going through Parliament, the government could take the easier and quicker route of enacting regulations to effectively suspend the DST. The regulatory route would leave the DST legislation in place and it could be reactivated by a further regulatory action.
The route to rescission chosen by the government could affect any taxpayers who paid their DST liabilities in advance of the June 30 deadline and June 29 announcement. The Canadian tax authorities generally won't pay refunds resulting from changes in law until the legal changes are actually in force, so taxpayers expecting refunds will be eager for the quickest possible rescission.
It's unclear whether ending the DST will lead to any compensatory changes in Canadian tax policy. After being forestalled in its plans to directly tax foreign digital service providers on their Canadian-derived revenue, the Canadian government may consider expanding its efforts to collect goods and services tax/harmonized sales tax (GST/HST, the Canadian value-added tax) on Canadians' consumption of foreign-provided digital services.
Canada already has taken steps in that direction by introducing what became known colloquially as the "Netflix Tax." In reality, the levy merely imposed new compliance requirements for existing taxes.
These measures required Netflix and other non-Canadian businesses to register, collect, and remit GST/HST on sales to Canadian customers to address the low rates of compliance by Canadian consumers who failed to self-assess GST/HST on purchases of digital products from outside Canada.
The desire to recoup anticipated DST revenue may add impetus to these efforts, which remain limited by a lack of awareness of these rules among many non-Canadian businesses. There are also practical difficulties in requiring compliance by non-resident businesses that may have no connection to Canada other than making digital sales into the country.
Such measures may help increase GST/HST revenue from domestic consumption of digital products. But the government would need to take additional steps to generate GST/HST revenue from other types of revenue earned by non-Canadian businesses from Canadian consumers targeted by the DST, such as targeted ads to Canadian users or sales of Canadian market analytics data.
Although the Canadian DST has departed for now, we'll just have to wait to see the ultimate resolution of the issues it raised. The Canadian approach will no doubt be influenced by continuing developments, including the fate of similar taxes in other countries.
Originally published by Bloomberg Tax.
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