Two major Canadian tax laws introduced just last year to respond to global tax reform proposals are now set to be changed—or cancelled altogether.
The federal government announced that the Digital Services Tax Act (DSTA) would be cancelled amid ongoing U.S. trade tensions and negotiation efforts. The government also said the Global Minimum Tax Act (GMTA) would be amended to exempt U.S. parented groups.
Both laws were related to the Pillar I and Pillar II tax proposals by the Organization of Economic Co-operation and Development (OECD) that aimed at addressing tax avoidance and the modern challenges of the digital economy.
Here is a look at the implications for Canadian businesses and how this situation unfolded.
What this means for Canadian businesses
Upcoming amendments to the GMTA and the cancellation of the DSTA introduce a mix of compliance obligations and strategic opportunities for Canadian businesses:
- Increased compliance burden under the GMTA: Businesses must prepare for complex reporting under the GMTA’s GloBE rules, including jurisdictional ETR calculations, top-up tax assessments and detailed disclosures. This could require significant investment in tax technology, data systems and advisory support.
- Reduced trade risk following DSTA cancellation: The cancellation removed a major source of tension between Canada and the U.S., but uncertainty will continue until a trade deal is reached.
- Strategic tax planning: Companies may need to restructure operations, re-evaluate transfer pricing strategies and consider tax-efficient jurisdictions to mitigate the effects of the GMTA. The removal of the DSTA also allows digital businesses to refocus on growth without the burden of retroactive taxation.
- Policy uncertainty: While the DSTA was cancelled, the broader issue of digital taxation remains unresolved. Businesses should continue to monitor OECD developments and be prepared for future changes as global consensus evolves.
Background on the Global Minimum Tax Act
The GMTA is Canada’s implementation of the OECD’s Pillar II, which recommends a 15 per cent global minimum effective tax rate for large multinational enterprises (MNE).
This is intended to ensure MNEs pay a minimum level of tax in every jurisdiction where they operate, thereby reducing incentives for profit-shifting to low-tax countries.
The law took effect June 20, 2024 and is applicable to MNE groups with €750 million or more in consolidated revenue in at least two of the four preceding fiscal years with at least one Canadian entity. The GMTA specifically states threshold in euros.
The rules apply to fiscal years beginning on or after December 31, 2023, with first returns due by June 30, 2026.
The U.S. expressed concerns about the extraterritorial nature of the undertaxed payments rule (UTPR) proposed as part of Pillar II. The GMTA does not currently include the UTPR—but its inclusion was proposed.
If incorporated into the GMTA, the UTPR would apply a top-up tax where entities within an MNE group are still undertaxed relative to the minimum tax rate—acting as a backstop to other rules in the GMTA. The UTPR is effectively applicable where the home country of the MNE does not apply Pillar II, as is the case in the U.S., and considers the entire MNE group even if only a subsidiary is located in a low-tax jurisdiction.
Before it was removed from final legislation, recently enacted U.S. tax reforms included Section 899. This would have increased withholding taxes and other taxes on income earned by entities located in countries with tax measures like the UTPR in effect.
At this year’s G7 meeting, the member states agreed to a side-by-side solution excluding U.S.-parented companies from the UTPR and income inclusion rule (IIR) in exchange for the removal of that proposed U.S. legislation. The members also recognized the U.S. has existing domestic measures to ensure a minimum tax level is paid.
Amendments to the Global Minimum Tax Act
As noted above, since the UTPR was only in proposal stage, no amendments are needed to the GMTA to implement the G7 agreement. If Canada moves ahead with the UTPR inclusion, its language would omit U.S.-parented groups from its application.
However, the IIR—which is the primary rule for charging tax—is already included in the GMTA. Under the rule, a top-up tax is imposed at the level of the ultimate parent entity or intermediate parent entity for low-taxed constituent entities.
Amendments to the IIR, in line with the G7 agreement, are expected to be introduced into the GMTA in the latter part of 2025.
Background on the Digital Services Tax Act
The Digital Services Tax Act imposed a 3 per cent tax on Canadian digital services revenue earned by large corporations. The act—which contained minimum revenue thresholds for the tax to apply to a particular entity—targeted revenues from online marketplaces, social media platforms, digital advertising and the sale or licensing of user data.
Inclusion in a country’s tax base historically depended on where a taxpayer is located. This system worked well when businesses were in the same country as their customers—but with digital services, providers can be located anywhere in the world.
The OECD proposed Pillar I to address these concerns. With no global consensus on Pillar I, the DSTA was meant to be an interim measure to ensure revenue from digital services are included in Canada’s tax base.
The U.S. expressed concern that the high minimum revenue thresholds of the DSTA would capture many U.S. digital services providers while excluding many of their Canadian competitors.
Cancellation of the Digital Services Tax Act
Canada announced its intent to cancel the DTSA in late June after the U.S. briefly halted trade discussions citing the DSTA as one of the factors behind its move. Collection of the DTSA halted and legislation to formally repeal the DSTA is expected to be introduced.
The first filing deadline for the DSTA was June 30, 2025 and was inclusive of revenues earned on or after Jan. 1, 2022—meaning some entities may have already begun filing and paying the tax prior to the cancellation announcement. The CRA said no refunds will be processed until the legislation is formally repealed.
Keeping up with tax changes
These developments regarding the DSTA and GMTA mark a shift in Canada’s approach to international and digital taxation.
While amendments to GMTA introduce new compliance challenges, the cancellation of the DSTA could offer relief for digital businesses.
As the international tax landscape continues to shift, Canadian business leaders should stay informed and prepare for a more transparent and globally integrated tax environment.
