Opinion: How Canada’s digital services tax is hurting small businesses
Alison Simpson is president and chief executive at the Canadian Marketing Association.
Canadian small businesses are struggling more than ever.
The federal bankruptcy superintendent reports that business insolvencies in Canada are hitting their highest point since the Great Recession.
Starting a business in Canada isn’t getting any cheaper. A Shopify study revealed that the average business spends about $40,000 in its first year, with 10.3 per cent of its budget dedicated to marketing. Much of that is spent on online advertising.
So why is the federal government doubling down on its decision to implement the controversial Digital Services Tax (DST)?
Why would Canada do this when most other countries in the Organization for Economic Co-operation and Development are delaying the implementation of similar levies on tech giants?
The new 3-per-cent DST is levied mainly on large tech companies providing digital services to Canadians. It became law in June, 2024, but applies retroactively to revenue earned since Jan. 1, 2022.
Google announced in August that it is passing on the cost of the DST to advertisers, and the tech giant began implementing a 2.5-per-cent surcharge for ads in Canada as of the past month.
Amazon immediately followed suit with a fee of its own. Canadian advertisers on Amazon are subjected to a “fixed digital services fee” of 3 per cent, also starting in October. The government fully expected this to happen. According to an internal document prepared in March that it has disclosed online: “Some companies may try to pass on some of the cost through increased fees.”
While there has been a lot of discussion about how the DST will affect trade relations, little has been said about how the tax is hurting small businesses in Canada. Small and medium-sized businesses contribute more than half of Canada’s GDP and hire 63 per cent of all employees, and they deserve better.
Finance Minister Chrystia Freeland claims the DST is needed to ensure “the world’s largest corporations pay their fair share wherever they do business.” That is true. Multibillion-dollar digital companies should be taxed at a fair rate.
However, Canadian entrepreneurs should not bear the weight of a new tax at a time when it’s more difficult than ever to operate a business, let alone to start one.
Owing to the government’s refusal to wait for a multilateral agreement, the cost of the DST is being put on the shoulders of Canadians now and will result in job losses.
For a small business that relies on digital advertising to operate or promote its business, these additional costs are catastrophic.
Consider a clothing boutique with annual revenue of $500,000 and a 10-per-cent profit margin, that spends $25,000 on Google advertising to drive sales. The past year, their campaigns reached 200,000 potential customers, generating 5,900 sales at an average of $84.75 per transaction. This digital strategy is crucial for the boutique’s survival against fast-fashion giants.
The pass-through cost of 2.5 per cent to cover a portion of the DST on their ad spends adds $625 to their costs. To maintain the budget, that ad spend must drop to $24,375, potentially reducing the business’s reach by 5,000 customers and resulting in 147 fewer sales.
This translates to $12,458 in lost revenue, which would reduce profit by a stunning 24.9 per cent. The impact for many will be even greater since Amazon and potentially other platforms will be charging back the full 3-per-cent tax.
For small businesses like this, digital advertising isn’t optional; it’s essential for survival. The DST ultimately penalizes small Canadian businesses, hindering their growth and ability to compete in an increasingly digital marketplace.
It’s only a matter of time before other companies pass on the punitive cost of the DST to business owners. It’s unfair and unacceptable for the government to expect small business owners to pay thousands of dollars more per year for a tax intended for large corporations.
Implementing the tax well into a fiscal year when budgets are largely committed and businesses are already struggling through a tough economy – and haven’t had any time to prepare – further exacerbates the problem.
The Business Council of Canada recently called for the DST to be revoked, citing potential retaliatory measures by the United States that would harm Canadian businesses. This comes as U.S. Trade Representative Katherine Tai called the DST discriminatory and requested dispute consultations.
The DST will impede trade relations with our most important trading partner while also harming small businesses in Canada.
It’s not too late for the government to reverse course and save small businesses thousands of dollars a year.
The Canadian government should revoke the DST now and wait for a multilateral agreement to be reached.
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