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5 reasons why the Digital Service Tax will create major trouble for Canadian consumers and businesses 

5 reasons why the Digital Service Tax will create major trouble for Canadian consumers and businesses 

Your next online purchase, ride share, meal delivery, or vacation could soon cost even more if the Digital Service Tax...

Your next online purchase, ride share, meal delivery, or vacation could soon cost even more if the Digital Service Tax (DST) is implemented on January 1, 2024.

The new service tax will tax revenue earned by large foreign and domestic businesses on online services, including marketplaces, advertising, and social media, but its effects will be felt by Canadian consumers like you in both the short- and long-term.

The timing couldn’t be worse: affordability is top of mind for nearly all Canadians right now, and cost-related concerns are six of the top 10 business obstacles expected in the next three months according to the Q3 2023 Canadian Survey on Business Conditions Report released by the Business Data Lab.

While it may not come into effect until 2024, the Digital Service Tax is a retroactive tax which means that it will apply to revenue earned by businesses in 2022 and 2023 as well. That’s like having the CRA send you a letter telling you to review your last two years of tax filings and pay more now for a tax that didn’t exist back then. Normally, a retroactive tax like this happens only in exceptional circumstances but the government has yet to explain why the DST is such a circumstance.

If this new service tax isn’t abandoned, it will negatively affect your daily life and the Canadian economy.

Here’s How

1. Daily digital services will cost more

Businesses may be the ones paying the tax, but you’ll feel the pain too. The true cost of this tax would ultimately be passed on to consumers in the form of higher prices for daily digital services. For example, your online purchases or your long weekend cottage rental could cost more starting in 2024. And the warning isn’t without foundation — France’s DST caused an estimated 2-3 per cent price increase in services for consumers.

2. Customer-loyalty programs will do less

Businesses with digital-based loyalty programs would almost certainly fall under the scope of this new service tax, so even as you pay more for goods and services, the retail, grocery and travel points you earn while doing so will decrease in value to account for the tax. For illustration purposes only, let’s say 1,000 points got you a $10 discount before the DST. After the DST, 1,000 points will get you a $5 discount.

With an additional tax cutting into revenue, businesses wouldn’t have the same incentive to innovate their loyalty programs and reward frequent shoppers, potentially reducing long-term loyalty among consumers.

3. Business growth and innovation will decrease

Since the new service tax is retroactive, implementing and complying with the DST will create a massive administrative headache for businesses, especially those that also operate in countries outside of Canada. Instead of investing their time and money in innovation or growth to provide better digital services to you, businesses will need to divert those precious resources to making sure they’re paying the right amount of tax.

4. Startups and small businesses will be the most affected

This service tax could disproportionately affect startups and small businesses (one to 99 paid employees). Since the DST taxes revenue rather than profit, these organizations will have less to invest back into their businesses and will have to divert resources to complying with the tax as mentioned previously. In the case of startups, particularly tech, the tax could penalize them for creating innovative digital services, significantly stall their growth and discourage dynamism in the industry.

Considering that the Conference Board of Canada’s latest Innovation Report Card ranks us 11th out of 16 peer countries, we can’t afford to deter our startups and small businesses from innovating anymore than current policies and lack of incentives already do.

5. Canadian trade relationships will take a hit

The United States, our biggest trading partner, is strongly opposed to unilateral digital taxes like the DST. In fact, upon the Canadian government announcing its intention to implement the tax, Washington expressed its concerns and raised the possibility of responding with retaliatory measures and retribution.

Carrying through on the service tax risks damaging Canada’s beneficial and lucrative trade relationship with the United States. To put it into perspective, our trade with the United States was valued at $960.9 billion in 2022, with $2 billion worth of trade crossing our land border every day. Whereas the most generous estimate for how much the DST will earn is less than $1 billion per year over the next five years.

Canada’s insistence on implementing the tax next year will sour diplomatic and economic relations with the United States, as well as other countries who have put their potential digital service taxes on hold or consider such a tax discriminatory.

There are more concerns around the DST that have been raised —the risk of double taxation since some digital transactions and revenues are already taxed, the confusion and complexity around what counts as a taxable service, the potential damage to Canada’s reputation for cooperation — but they all lead to the same conclusion: this new digital service tax will create trouble for Canadian consumers and businesses at a time of heightened concern around affordability.

In the short-term, you’ll feel the pinch as the cost of your daily digital services increase and the value of your rewards programs decrease. In the long-term, the Digital Service Tax will hinder Canada’s ability to innovate, grow and remain competitive in international markets. And that’s something none of us can afford.

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As the unified voice of Canadian business, we represent our members’ interests on policies, regulations and decisions that are critical to creating a favourable environment for business success and the future of Canada. To see more of our advocacy work click here.

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