The DST Burden: Another tax on SMEs is a bad idea for Innovation in Canada

By Startup Canada  |  

Startup Canada recently hosted a closed-door roundtable with founders and small and medium enterprises (SMEs) to better understand the impact of the digital services tax (DST), and the findings were startling. The DST, otherwise coined by some as the “silent tax,” has an indirect negative trickle-down impact on SMEs, stifling their ability to grow, scale, and innovate in this country. The Canadian entrepreneurship ecosystem and economic growth at large have already been impacted. Startup Canada supports founders in asking the federal government to abolish this tax.

About Startup Canada

Startup Canada is a national non-profit organization that is the gateway to Canada’s entrepreneurial ecosystem. We connect entrepreneurs with the support, community, and tools they need to build successful businesses in Canada. Since launching in 2012, Startup Canada has grown to support more than 130,000 entrepreneurs annually and has a growing community of ecosystem partners from coast to coast to coast.

Conversations like the one we recently had regarding the DST are vital for the well-being of founders and innovation at large in this country; that is why Startup Gov, one of Startup Canada’s flagship programs, is so meaningful.

Startup Gov aims to connect the perspectives of entrepreneurs, industry executives and government representatives to create opportunities for ideas, information and thoughtful exchange to occur. Startup Gov was launched during the pandemic with the goal of creating opportunities for founders to bring their recommendations, thoughts and concerns directly to the government so that solutions can be co-created by those impacted the most by policies and programs the government tables. 

Context

Bill C-59, Canada’s Fall Economic Statement; including a section implementing a digital services tax, was enacted on June 20, 2024. The DST entered into force on June 28. The DST applies a 3 percent tax on revenues relating to online marketplaces, online targeted advertising, social media platforms and user data. The tax applies to companies or groups with annual global revenues of €750 million euros or more and Canadian digital services revenue of more than CA $20 million. Canada expects to collect about $875 million per year from the DST. The DST is retroactive to January 1, 2022, and companies will start paying the tax on June 30, 2025.

While there has been a significant focus on companies with large revenues having to pay the price, Startup Canada, the Interactive Advertising Bureau of Canada, and the Canadian Chamber of Commerce joined forces to better understand the indirect impact this tax will have on SMEs and founders in Canada.

We proposed the following three questions to the founders and SMEs:1) How will DSTs impact your business and the SMEs that you work with?; 2) How will DSTs impact your business planning and annual budgets?; and 3) What key recommendation do you have for the federal government regarding the tax?

Here are the results:

  • The government doesn’t seem to recognize the negative impact and trickle-down effect that this tax has already had and will continue to have on founders. Everyone will have to pay more, including consumers, large firms and SMEs.  Some founders will have to pay an excess of over 100k because of the retroactive nature of this tax. Retroactivity sets a dangerous precedent for tax legislation. 
  • The unpredictability of the DST is cause for concern and impacts innovators and founders who want to stay in Canada. While these founders want to continue to contribute to Canada’s GDP, they feel the government does not have their best interest at heart. It is another obstacle in their path to create companies and stimulate the economy. 
  • Entrepreneurs feel they are not rewarded for staying in Canada and see many appealing opportunities in the USA. The DST and capital gains taxes are examples of additional hurdles the government is placing on founders. SMEs starting out have small margins, and their budgets are now being eroded by more taxes. 
  • Some SMEs are still recovering from lost revenue from the COVID-19 pandemic and are in recovery mode, and this tax affects and impacts their profitability and ability to scale. 
  • The government needs to foster more options for entrepreneurs to succeed and provide clearer communication channels, as many founders are unaware of this tax and its implications. 
  • There is a 2x negative effect. Firstly, large companies having to pay more affects their budgets and willingness to take risks with early stage companies for partnership, impacting the ability for early stage founders to innovate and create new companies. Secondly, because larger companies are now charging more, founders with professional services in the marketing and digital space will have to charge more to their clients, many of whom are early stage founders, charities and non-profit organizations. 
  • The confusion around this tax has created hours of additional work for SMEs. They have to re-negotiate contracts to account for extra costs, and the risk of contracts being lost due to increased costs for digital marketing is a reality for many.

In summary, the DST impacts entrepreneurs’ ability to stimulate the Canadian economy and deters them from wanting to stay in the country. We echo the concerns of the founders and SMEs consulted and urge the government to rethink this tax and to consult with founders moving forward when new taxes are being considered. Entrepreneurs’ voices matter, and they feel the government has not considered the negative repercussions this tax will have on them.