On September 23rd, the government of Canada delivered its updated throne speech for the 43rd Parliament, including some of their strongest language yet on the taxation of digital companies. “The government will…identify additional ways to tax extreme wealth inequality, including by…addressing corporate tax avoidance by digital giants.” “Web giants are taking Canadians’ money while imposing their own priorities. Things must change and will change.

Some readers may be wondering what a digital giant or web giant is, and what this promise means for Canadians and Canadian tax legislation.

Others may be thinking of the 2015 election, when campaign promises included strong vows not to impose a digital tax (then called the Netflix Tax). Or the 2018 budget, which sparked renewed promises not to increase the cost of any internet services for Canadians. Fast forward to today, when taxing digital giants is considered a must, and one might easily be confused. How and why has the approach changed so drastically?

On these questions, this article seeks to clarify what a tax on digital giants or web giants might look like in Canada. It also seeks to clarify the government’s shifting position on digital taxes over the years. In doing so, it references the subtle difference between corporate taxes and taxes on goods and services; as well as the impact of new provincial legislation, the results of the legislative review of the federal Broadcasting and Telecommunications Act, and changes in the global digital tax environment.

What are Digital Giants and Web Giants and How are They Different from Digital Companies or Digital Services?

In a previous article published in March 2020, ICTC explains the meaning of the terms “digital companies” and “digital services” and reviews different national and subnational approaches to digital tax. This article won’t include the same in-depth explanation as the previous one, however, generally:

Digital companies are companies that operate online, delivering a variety of products and services to consumers via the internet. Examples include ride-sharing, content-streaming, social media, and advertising;

Digital services, in contrast, are any services delivered to clients and/or consumers via the internet. Digital services can be provided by companies, governments, and even not-for-profits.

The terms “digital giant” and “web giant” have generally been used to refer to large, multinational companies that fall into the scope of the definitions above, either by virtue of their operations or the types of services they provide. Digital giants and web giants are themselves digital companies, however the substituted word, giant, denotes a specific focus on the largest of these companies.

What is a Digital Tax and How is it Different from Other Taxes?

Generally, there are two kinds of private sector taxes in Canada: corporate taxes for companies, which are applied to a company’s profits; and goods and services taxes, which are applied to the sale of goods and services (typically collected from buyers at the point of sale). With that in mind, imposing a digital tax is less about creating a brand-new tax for digital companies or digital services, and more about bringing digital companies and services under the scope of the existing tax law.

Why aren’t they already under the scope of our existing tax law? Under international agreements, governments can only tax the corporate profits of a non-resident company if that company has a permanent, physical presence in their country. A non-resident company is one that is incorporated or registered in a foreign country, and a permanent, physical presence is usually a brick-and-mortar office, factory, or store (there are exceptions). To provide an example, an American or British company would not be required to pay taxes on their business profits in Canada if they did not have a permanent, physical presence in Canada.

Similarly, in most countries, non-resident companies aren’t required to collect and remit sales taxes for digital services unless they have a permanent and physical domestic presence. This norm was originally established to prevent excessive regulatory burden for governments and multinational companies alike.

In Canada, for example, companies aren’t required to collect and remit federal sales taxes on their digital services if they don’t physically carry out business in Canada (which many digital service companies don’t). Consumers, like you and I, are instead expected to declare any unpaid taxes by submitting a “GST/HST Return Form” at the end of each month (which many consumers don’t). In other words, if we’re Spotify listeners, Netflix watchers, or iCloud users, under the current regime it’s our responsibility to determine the amount of GST we owe at the end of each month.

The subtle differences between these kinds of taxes are one reason why it seems Canada’s position on digital tax has wavered more than it really has. When political parties and governments spoke of a “Netflix Tax” back in 2015, they were really referring to a goods and services tax on the services that companies like Netflix provide: paid streaming. Though there has been public support for such a tax in recent months, the tax mentioned in the recent throne speech was actually a corporate tax.

To Make Matters More Complex, the Meaning of the Term “Netflix Tax” Has Become Blurred Over the Years

In 2015, the term “Netflix Tax” referred exclusively to a goods and services tax that would be applied to digital services like content streaming. In recent years, however, similar terms have been adopted by some individuals to refer to the inclusion of new types of content providers in Canada’s “Canadian Content” or “CANCON” framework.

Currently, Canadian broadcasters and television providers are required to contribute a percentage of their revenues to made-in-Canada television content. Similar types of contributions support made-in-Canada film as well, but the legislative framework that invokes these requirements was originally designed in 1991 and, for that reason, fails to include new types of content providers like Hulu or Netflix, which operate direct-to-consumer over the internet.

A legislative review of this framework took place last year, for which the final report was produced in January. The report called on the federal government to amend the associated rules to include “foreign providers of electronic communications services” (read: companies like YouTube, Amazon Prime TV, and Netflix) under the scope of the act, even if they do not have a place of business in Canada.

It is important to note that “corporate tax avoidance” wasn’t the only thing mentioned about web giants in the throne speech. The government also promised that it would ensure that the revenues of web giants are “shared more fairly with [Canada’s] creators and media” while also requiring them “to contribute to the creation, production, and distribution of our stories, on screen, in lyrics, in music, and in writing.” For example, a streaming service’s Canadian-based profits could be used to help fund the next Schitt’s Creek or Kim’s Convenience.

So, What Might Taxing Digital Giants and Web Giants Look Like in Canada?

1. A Goods and Services Tax on digital services

A Canada-wide tax on digital services technically already exists, however, as discussed, the onus is on you and me as consumers to declare any unpaid taxes. Normally, for companies with a physical location in Canada, this tax is collected and paid by the company.

In response to this trend, some provinces have already made changes to their provincial tax legislation, which governs provincial sales taxes (PST), or in Québec, the QST.

  • In Québec, the legislation explicitly mentions the need for companies to collect and remit QST on the sale of intangible goods and services, including software, video games, digital movies, and cloud computing services.
  • In Saskatchewan, the legislation now requires businesses to collect and remit PST on the sale of computer services, which include computer programs, software, or streaming services.
  • In 2020, BC passed new legislation to govern the taxation of telecommunications services/digital services but has not yet published a legal definition or guidelines for the tax.

If the federal government decides to change the way federal sales taxes are collected on digital services in Canada, as they have hinted that they might do, it will likely look similar to what the provinces have done and will be sure to comply with the relevant OECD guidelines. The tax would look more or less the same to consumers as any other sales tax that they see on their bill when buying things like books or clothes.

2. A corporate tax on the profits of digital companies.

A corporate tax on the profits of digital companies would be a slightly more complex endeavour. This tax would be applied to the corporate earnings of companies that, despite not being physically located in Canada, nonetheless generate wealth in Canada through the involvement of Canadians in their product offerings. Companies create this kind of wealth by providing digital services like search engines or social media platforms to Canadians for free, yet in exchange for their personal data and advertising opportunity. The OECD is currently studying this issue at the international level, and it is most likely that the federal government will wait for consensus among the OECD countries before moving forward with a corporate tax here in Canada.

3. A required “contribution” to support Canadian-made content, applied to digital content providers.

Requiring “Canadian content” contributions from digital content providers will mean bringing digital content providers under the purview of our current broadcasting and telecommunications regulatory framework. Digital content providers that are not located in Canada but nonetheless provide content streaming services in Canada, would likely be required to allocate a certain percentage of their Canadian-based revenue to the production of content in Canada, by Canadians, and Canadian content by independent producers. For more information on this topic, readers can refer to the legislative review of the framework, which took place last year.

It is important to note that the throne speech mentioned support for Canadian stories in writing, in addition to on screen. It is therefore likely that the government will get more serious about addressing difficulties experienced in the news and journalism sector due to the trend of media digitization.

The government of Australia is among the most recent to propose new regulations in this space — their proposal concerns local news content shared on digital platforms, including search engines and social media platforms. If passed, the legislation would require platforms to pay royalty-type fees for any locally-sourced and locally-funded Australian content shared on their sites. In response, some digital platforms have said that they’ll prevent Australians from being able to share any news content on their sites in the future.

While there are significant trends toward the construct of digital taxation, careful reflection of the merits and unintended consequence are warranted, especially in a world that is increasingly shaped by data and digital trade.

Back to Top