TAXATION

The issue: In the mid-1980s, when Canada’s GST was still a twinkle in then prime minister Brian Mulroney’s eye, the World Wide Web had not yet been invented and Google’s founders were still pre-teen boys. Since then, digital technologies have advanced at breakneck speeds and companies like Google — not to mention Facebook, Apple, Microsoft and Amazon — have become essential to how Canadians spend their time and money.

They have also been reaping billions in profits. Tax codes, meanwhile, have evolved more slowly and governments are now grappling with how to bring their taxation systems into the digital age.

“There is a missed opportunity for taxing these companies,” says Rosalie Wyonch, a policy analyst with the C.D. Howe Institute. “Digital technology has been outpacing our ability to regulate (and) tax.”

Traditionally, tax systems were dependent on the idea of “permanent establishment,” Wyonch explains — this assumes a company has a physical presence within a country, or relates to physical goods crossing borders. But “our tax code hasn’t been updated to deal with intangibles,” she says.

Yet as digital services become more popular, the potential losses in sales tax revenue grow bigger, says University of Ottawa law professor Michael Geist, the Canada Research Chair in Internet and E-commerce Law. (In 2017, Wyonch wrote that if Netflix alone were to collect and remit GST/HST, this would inject $50 million per year into Canada’s tax coffers).

Meanwhile, domestic companies — which do have to collect and remit sales taxes — argue they are left at a competitive disadvantage, Geist adds.

When it comes to taxing corporate income, global discussions are now underway to figure out how this should be handled when it comes to big tech. “That is a very complex international system that we’re waiting for consensus on,” according to Wyonch.

There are major challenges when it comes to simply defining the income of digital companies, she says. Say a foreign company does a digital marketing campaign for a Canadian company. “Did they earn that income where they’re located, or did they earn that income in Canada, if they never entered Canada (or) hosted any of its content on Canadian servers?” Wyonch asks. “We don’t have a clear way to define, in a black and white way, what would — and would not — be considered Canadian income.” What others are doing: The G20 and Organisation for Economic Co-operation and Development (OECD) have set a 2020 deadline for fighting tax avoidance (which tech giants are frequently accused of) and developing international standards for taxing big tech. But several countries — like the U.K., France, Spain, Australia and New Zealand — are already considering interim measures, raising concerns of creating a hodgepodge of different approaches around the world. The European Union has also unveiled plans for a digital tax of 3 per cent of revenues, an idea that has received blowback, including from some member states. What Canada is doing: Finance Minister Bill Morneau told reporters last October that Ottawa is studying whether a new regulatory landscape is needed for the digital economy and he is pushing the G20 to speed up its timeline for establishing new rules. But Morneau says Canada’s goal is to wait for an international consensus before taking action. Quebec and Saskatchewan, however, have forged ahead on the sales tax issue and this year, both started applying provincial sales taxes to foreign digital companies. In Quebec, more than 80 international companies — including Amazon, Apple, Google and Netflix — were registered as of Feb. 18 to collect and remit provincial sales tax in that province.