Your Online Ad Costs Are About To Go Up

Can you still maintain your profitability?

Author

Varun Sehgal
August 08, 2024

The government of Canada recently put out a new tax, called Digital Services Tax (DST) on large global corporations who earn significant digital revenues from Canada.

Now, you may think that I’m not a large global corporation! So this should not apply to me, correct? Not so fast … because like all other taxes, ultimately, the consumers pay the price.

Let’s dive in, but first, to put things in context, here is an screenshot from Google’s recent email about adding a 2.5% surcharge, basically to cover their cost of DST. Other platforms like Meta, TikTok etc. should follow soon.

What is Canada's Digital Services Tax (DST)?

Canada's Digital Services Tax (DST) is a new tax measure that came into effect on June 28, 2024, following the passage of Bill C-59 on June 20, 2024. The DST is a 3% tax on certain digital services revenues attributable to Canada. It applies to large businesses, both domestic and foreign, that meet specific revenue thresholds.

Who is subject to the DST?

The DST targets large businesses that are part of a corporate group with global consolidated revenues of at least €750 million and Canadian digital services revenues exceeding CAD 20 million in a calendar year. If your business or its consolidated group meets these thresholds, you are required to pay the DST.

What types of revenues are taxed under the DST?

The DST applies to four main categories of digital services revenues:

  1. Online marketplace services

  2. Online advertising services

  3. Social media services

  4. Revenues from the monetization of user data

If any revenue falls into multiple categories, it will only be taxed once under the DST.

When did the DST come into effect?

Although Bill C-59 received royal assent on June 20, 2024, the DST Act officially came into force on June 28, 2024. The tax applies retroactively to revenues earned from January 1, 2022.

How is the DST calculated?

The DST is calculated at a rate of 3% on taxable Canadian digital services revenues exceeding CAD 20 million in a calendar year. Businesses must file annual tax returns and pay any tax due by June 30 of the year following the calendar year in which the revenues were earned.

How does this impact Canadian businesses?

Canadian businesses today are operating at ever-thin margins. In E-Commerce industry especially, online advertising accounts for anywhere between 30%-40% of topline revenue.

Online ads is not just something that SAAS or E-Commerce businesses run. Most industries today have paid advertising as one of the major ways of acquiring customers.

As we can see from Google’s email, this additional tax will ultimately trickle down to consumers and small businesses and be borne by them.

For small businesses, with proper financial guidance, they should monitor the impact of this additional cost and update their sales prices accordingly.

In this high inflation and recessionary environment topped up with multiple levels of taxation, we strongly advise our clients to have a good hold on your numbers and understand your margins well, so that if required, you can increase your prices and/or reduce some of the discretionary costs.

Thank You For Reading. See You Next Time!

Think Team🙏