Costing You More… 5 Ways the Digital Services Tax Will Impact You

Your next online purchase, ride share, meal delivery, or vacation could soon cost even more now that the Digital Service Tax (DST) is implemented.

The DST may tax revenue earned by large foreign and domestic businesses on online services, including marketplaces, advertising, and social media, but its effects will also 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 Q2 2024 Canadian Survey on Business Conditions Report released by the Business Data Lab.

The Digital Service Tax is now in effect and it’s 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 to 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 reversed, it will negatively affect your daily life and the Canadian economy.

Here’s how this tax will impact you:

1. Products and services you rely on 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 products and services that rely on digital platforms we’ve all come to depend on. For example, your online purchases, takeout after a long work week, ride share, virtual health appointment or your long weekend cottage rental could cost more this year. And the warning isn’t without foundation — France’s DST caused an estimated 2-3% price increase in services for consumers.

2. Customer-loyalty programs will do less

Businesses with digital-based loyalty programs such as travel points, gas rewards and more are likely to be affected by 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. Government overhead will increase

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 creating new jobs for Canadians or providing better products and services to you, businesses will need to divert those resources to making sure they’re paying the right amount of tax to the Canadian government.

But it’s not just businesses who will feel the impact of this new red tape, it’s taxpayers, too. The new tax is complicated and because it’s retroactive to January 1, 2022, that means businesses and the Canada Revenue Agency will have to sort through millions if not billions of digital ads and transactions to determine whether the tax applies. This is costly and time consuming for government, diverting resources away from serving Canadians like you.

4. Canadian exports will be at risk

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.

When France implemented a DST, the United States announced they would impose 25% tariffs on products unrelated to digital services, ranging from champagne and cheese to handbags and perfumes, starting in January 2021. If imposed, similar retaliatory tariffs in Canada could result in huge price increases for Canadian goods that are exported to the United States, our main trading partner, and empty shelves in Canada as businesses with cross-border manufacturing and supply chains struggle to produce products amid the tariffs.

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 $1.5 billion per year over the next five years. At such a sensitive time in our trade relationship, Canada should be looking to minimize trade irritants with the United States, not increase them.

Canada’s implementation of this tax is souring diplomatic and economic relations with the United States, as well as affecting our relationships with other countries who have signed onto the multinational agreement that Canada is now undercutting.

5. The world will get less Canada

This service tax could disproportionately affect startups and small businesses (one to 99 paid employees). While the tax has a threshold, smaller businesses are not immune from its impacts. From the Canadian maker selling their handmade products online to the tech company looking to grow in Canada, this tax is going to make it more difficult for Canadian businesses to scale and succeed in the digital economy.  In the case of startups, particularly tech, the tax could disincentivize the creation of new and 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 15^th out of 20 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.

Canada’s Digital Services Tax is not in Canadians’ best interests

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 and economic growth.

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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