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Explanatory Notes for the Draft Digital Services Tax Act

Published by

The Honourable Chrystia Freeland, P.C., M.P.
Deputy Prime Minister and Minister of Finance

February 2022

Preface

These explanatory notes are provided to assist in an understanding of Parts 1 to 4 of the proposed Digital Services Tax Act (the "Act"). These explanatory notes describe the first twenty-three sections of the proposed Act for the assistance of Members of Parliament, taxpayers and professional advisors. Further explanatory notes will be published at a later date.

The Honourable Chrystia Freeland, P.C., M.P.
Deputy Prime Minister and Minister of Finance

These notes are intended for information purposes only and should not be construed as an official interpretation of the provisions they describe.

Table of Contents

Overview

Short Title

Part 1
Interpretation and Rules of Application

Part 2
Liability for Tax

Part 3
Canadian Digital Services Revenue

Division A
Canadian Online Marketplace Services Revenue

Division B
Canadian Online Advertising Services Revenue

Division C
Canadian Social Media Services Revenue

Division D
Canadian User Data Revenue

Division E
Rules Relating to the Computation of Canadian Digital Services Revenue

Part 4
Taxable Canadian Digital Services Revenue

Overview

These legislative proposals would implement the Digital Services Tax Act (the "DSTA" or "Act"). The Act would impose a tax of 3% on revenues derived by residents and non-residents of Canada from certain digital services they provide. The targeted revenues are generally those that arise in connection with the digital service providers' engagement with online users in Canada. These revenues include certain revenue relating to online marketplaces, online targeted advertising, social media platforms and the sale or licensing of user data. The tax is aimed at large businesses with annual revenues of €750,000,000 or more and Canadian digital services revenue (as defined in the legislation) of more than $20,000,000.

The DSTA will come into force on a day to be fixed by order of the Governor in Council, but not earlier than January 1, 2024. The tax will apply on a calendar year basis, beginning with the year that includes the day that the DSTA comes into force. For the first year that the tax applies, tax liability will be calculated by reference to certain Canadian digital services revenue earned from January 1, 2022, up to and including that first year.

Short Title

Section 1 – Short title

Section 1 of the Act sets out its short title as the Digital Services Tax Act.

Part 1
Interpretation and Rules of Application

Part 1 of the Act provides a number of definitions and rules of application.  

Section 2 – Definitions

Section 2 of the Act sets out a number of definitions that apply for the purposes of the entire Act. Other definitions with a more limited scope appear elsewhere in the Act, closer to where they are relevant.

"acceptable accounting principles"

The definition "acceptable accounting principles" sets out the types of accounting principles that are considered acceptable for purposes of the DSTA. It essentially means International Financial Reporting Standards ("IFRS") and other country-specific generally accepted accounting principles (for example, U.S. GAAP) that are relevant for corporations that are traded on a public securities exchange outside Canada and that require two or more entities to prepare consolidated financial statements in a manner similar to IFRS.

This definition is relevant for the definitions "consolidated group", "total consolidated group revenue" and "ultimate parent entity", and for the meaning of the term "revenue" as set out in section 4.

"assessment"

The definition "assessment" provides that the term refers both to an assessment and a reassessment under the Act. One implication of this is that all references to a notice of assessment include a notice of reassessment.

"Canadian digital services revenue"

The definition "Canadian digital services revenue" is a pointer to indicate that it is determined in accordance with Part 3.

"consolidated financial statements"

The definition "consolidated financial statements" specifies that the term refers to financial statements in which the assets, liabilities, income, expenses and cash flows of the members of a group are presented as those of a single economic entity.

This definition is relevant for the definitions "acceptable accounting principles", "consolidated group", "constituent entity", "total consolidated group revenue" and "ultimate parent entity".   

"consolidated group"

The definition "consolidated group" provides that the term refers to two or more entities that are required, under acceptable accounting principles, to report their financial results using consolidated financial statements, or that would be required to do so if any of the entities were a publicly traded company.

This definition is relevant for a number of definitions and other provisions of the Act. It is also subject to a continuity rule, in section 6.

"constituent entity"

The definition "constituent entity" provides that the term refers to an entity of a consolidated group that is included in the consolidated financial statements of the group for financial reporting purposes. If a group does not prepare consolidated financial statements, a "constituent entity" of the group means an entity that would be required to be included in such financial statements if equity interests in any of the entities of the group were traded on a public securities exchange. For example, if the ultimate parent entity of a group is a private corporation, and is not required to prepare consolidated financial statements, but would be required to do so if it were public, members of the group that would be included in such financial statements are constituent entities for the purposes of the Act.

An entity is also a constituent entity of a consolidated group if it is excluded from the group's consolidated financial statements solely for size or materiality reasons.

Entities that have their net income or loss included in a group's consolidated financial statements under the equity method of accounting are not considered to be "included in the consolidated financial statements" of the group. As such, they are not "constituent entities" of the group.

"digital content"

The definition "digital content" essentially provides that the term refers to anything that is digitally encoded and electronically transmittable. Paragraphs (a) and (b) of this definition specify that digital content includes: a digitally encoded text, video, image or sound recording, and a computer program, respectively. However, by virtue of paragraph (c), this list is non-exhaustive as digital content also includes any other digitally encoded and electronically transmittable thing.

This definition is relevant for the definitions "digital interface", "online marketplace", "online search engine", "online targeted advertisement" and "social media platform".

"digital interface"

The definition "digital interface" essentially provides that the term refers to any electronic medium through which data or digital content is collected, viewed, consumed, delivered or interacted with. A website and an application are specifically included.

This definition is key to the definitions "online marketplace", "online search engine", "online targeted advertisement", "social media platform", "user" and "user data".  

Connected web pages, or parts of an application, which together constitute one business enterprise, such as an online marketplace, social media platform or online search engine, are considered to be one digital interface. The specific inclusions of "website" and "application" are intended to express this concept. If a taxpayer engages in more than one business enterprise, it is possible for the taxpayer to have more than one digital interface. Such a taxpayer would delineate the scope of each of its digital interfaces by grouping the components (for example web pages or parts of applications) with a common business purpose taking into account relevant considerations such as the kinds of revenue earned, the users, and whether or not particular components can be operated, in a business sense, independently from the others.

"entity"

The definition "entity" provides that any person, other than a natural person, is an "entity". This definition is relevant for the identification of consolidated groups, members of consolidated groups, taxpayers and users. See below for commentary on the definition of the term "person".

"financial instrument"

The term "financial instrument" is defined as including the various items set out in paragraphs (a) to (k). Among other things, it includes certain securities, money, certain digital representations of value and commodities.

This definition is relevant for the definition "online marketplace", as discussed below.

"first year of application"

The definition "first year of application" is relevant for the tax payable provisions of section 10, the registration provisions of section 30 and the filing provisions of section 35. It refers to the calendar year that includes the day on which the Act comes into force and is necessary because those rules work differently in the first year than the subsequent years. See below for a discussion of the coming-into-force provisions of this Act.

"fiscal year"

The definition "fiscal year" varies depending on the context within the Act. Where the Act refers to a "fiscal year of the taxpayer", the fiscal year is an annual accounting period with respect to which the taxpayer prepares its financial statements. Where the Act refers to a "fiscal year of a consolidated group", the fiscal year is an annual accounting period with respect to which the ultimate parent entity of the consolidated group prepares its financial statements.

This definition is primarily relevant for the purposes of the €750,000,000 threshold for liability under the Act, as set out in Part 2.

"Minister"

The definition "Minister" provides that the term refers to the Minister of National Revenue. The Minister of National Revenue is responsible for the administration and enforcement of this Act.

"online marketplace"

The definition "online marketplace" provides that an online marketplace has three elements:

If a digital interface does not provide for interaction between buyers and sellers then it is not an online marketplace. Similarly, if a digital interface does not facilitate the supply of property or services, for example if it merely advertises items for sale without a mechanism either for the buyer to communicate with the seller or for purchasing the items, then it is not an online marketplace.

The term "facilitate" has a broad meaning. An online marketplace need not provide payment services or shipping services to "facilitate" transactions. Allowing a buyer and seller to find each other and communicate for the purposes of concluding a sale, even if the sale is concluded in person, is sufficient to constitute facilitation.

Paragraph (a) of this definition excludes a digital interface with a single supplier. For example, the website of a traditional retailer that sells its products directly to customers would have a single supplier and thus would not be an online marketplace.

Paragraph (b) of this definition excludes digital interfaces that have as their main purpose:

This would exclude, for example, credit card processors, credit providers and investment trading platforms. (See the notes above on the definition "financial instrument".)

This definition is relevant in determining if a taxpayer has online marketplace services revenue, under Division A of Part 3, and for determining whether the taxpayer earns user data revenue, under Division D of Part 3.

Example 1: A taxpayer owns and operates a website that allows users to post items that they are listing for sale. Other users can also access the site and purchase these items. As this website is a digital interface that allows users to interact with each other (by making direct purchases), and facilitates the supply of property between those users, it meets the definition of an "online marketplace".

Example 2: A taxpayer provides website hosting services to many entrepreneurs. The taxpayer's business model involves providing pre-made website templates which can be tailored by entrepreneurs into personalized online stores. Since the various websites provided by the taxpayer are each for an unconnected business purpose, that is, the business of each entrepreneur, each one would be a separate digital interface. Additionally, a prospective purchaser visiting the website of one such entrepreneur would not be connected to the websites of the other entrepreneurs since the websites operate independently. Each of these digital interfaces would only have one supplier; as such, they would not meet the definition of "online marketplace."

"online search engine"

The definition "online search engine" provides that the term refers to a digital interface that allows users to search the digital content of multiple unrelated websites via the World Wide Web (the Web). This definition is relevant in determining whether a taxpayer earns user data revenue, under Division D of Part 3.

For the purposes of this definition, to search unrelated websites means that the search is not limited to specific pre-selected websites. For example, a web facility that allows users to search one or a limited number of closely-related websites (e.g., the inventory of one retailer or an academic database) is not intended to be within the scope of this definition.

"online targeted advertisement"

The definition "online targeted advertisement" provides that the term refers to an advertisement that

For greater certainty, it is specified that "online targeted advertisements" include sponsored content and preferential listings. These examples are not exhaustive. The term "advertisement" is intended to have its common meaning and would also include (but is not limited to):

This definition is relevant in determining if a taxpayer has online advertising services revenue, under Division B of Part 3.

"person"

The definition "person" provides that the term includes an individual, trust, partnership, corporation, and any other body of persons.

"property"

The definition "property" provides that the term refers to any property, whether it is real or personal, movable or immovable, tangible or intangible, or corporeal or incorporeal. Also included is a right or interest of any kind, a share and a chose in action.

"regulation"

The definition "regulation" provides that the term refer to a regulation made by the Governor in Council under this Act.

"reporting period"

A "reporting period" of a taxpayer is defined in respect of a calendar year and is a period within the calendar year that varies depending on the condition under which the taxpayer meets the €750,000,000 threshold, in paragraph 10(1)(a), in respect of the calendar year. For taxpayers that met the €750,000,000 threshold on their own, or as part of a group during the preceding calendar year, the reporting period is the calendar year (as per paragraphs (a) and (b) of this definition, respectively). For taxpayers that did not meet the €750,000,000 threshold on their own, or as part of a group, during the preceding calendar year, but that join a group in the current calendar year that met the €750,000,000 threshold for the preceding calendar year, the reporting period is the period of time that extends from the first day they join such a group to December 31 of the current calendar year (as per paragraph (c) of this definition).

Taxpayers that do not meet the threshold conditions in paragraph 10(1)(a) in respect of a calendar year will not have a reporting period for that calendar year.

This definition is relevant for establishing the period of time within a calendar year for which a taxpayer is required to determine its Canadian digital services revenue.

Example: Entity A and Entity B were members of the same consolidated group during the current and immediately preceding calendar years. The consolidated group has consistently had more than €750,000,000 of total consolidated group revenue. During the current calendar year, Entity A and Entity B are merged to form Mergeco.

Under paragraph (b) of the definition "reporting period", Entity A and Entity B will both have a reporting period equal to the calendar year, as they were, in the immediately preceding calendar year, constituent entities of a group that met the €750,000,000 threshold. However, under paragraph 7(a), Mergeco is deemed to be a separate person from Entity A and Entity B, so Entity A and Entity B would only earn Canadian digital services revenue up to the date of the merger.

Under paragraph (c) of the definition "reporting period", Mergeco would have a reporting period that begins on the date of the merger and ends on December 31. This is the case because Mergeco would have become a constituent entity of the group on the date of the merger and the group would meet the €750,000,000 threshold. Canadian digital services revenue earned by Mergeco from the date of the merger to December 31 would be considered to be its Canadian digital services revenue for this reporting period.

"social media platform"

The definition "social media platform" provides that the term refers to a digital interface the main purpose of which is to allow users to find and interact with other users or with user-generated digital content.

The main purpose of a digital interface is key to determining if it meets this definition. If an incidental component of a digital interface allows users to find and interact with other users, or with user-generated digital content, but this incidental component cannot be said to be the main purpose of the digital interface, then the digital interface is not a social media platform. For example, many online gaming platforms with an interactive component allow users to find and interact with other users or with user-generated digital content, but often such features of the game are incidental to the main purpose (i.e., the service of providing a gameworld). However, if the interactive component of an online game is the game's main purpose, the game would be a social media platform.

Another example of a digital interface that allows users to find and interact with other users or with user-generated digital content, but that might have a different main purpose, is a document management system. Such a system allows users to upload files that can then be accessed by other users. If the ability to share content is incidental, and the main purpose of the system is rather to provide software tools that improve work productivity and provide cloud storage, the digital interface would not be a social media platform.

An ancestry website may or may not meet the definition of a social media platform depending on whether the main purpose of the website is genealogical research or finding and interacting with other users (potential relatives or other researchers).

This definition is relevant in determining if a taxpayer has social media services revenue under Division C of Part 3.

"supply"

The definition "supply" provides that the term refers to the provision of property or a service in any manner. This includes, but is not limited to, a sale, transfer, barter, exchange, licence, rental, lease, gift or disposition. This definition is relevant for describing transactions between users of an online marketplace.  

"taxable Canadian digital services revenue"

The definition "taxable Canadian digital services revenue" is a pointer to indicate that it is determined in accordance with Part 4. This term is used in Part 2 for determining a taxpayer's liability to pay digital services tax.

"taxpayer"

The definition "taxpayer" provides that any entity is a "taxpayer", other than certain Crown-owned entities. For the purposes of this definition, it is not relevant whether the entity is liable to pay tax under this Act, meets the revenue thresholds in Part 2 of the Act, or earns Canadian digital services revenue.  

"total consolidated group revenue"

The definition "total consolidated group revenue", of a consolidated group for a fiscal year, refers to the revenue reported in the consolidated financial statements of the group for the year. As discussed above, the definition "consolidated financial statements" refers to financial statements prepared in accordance with "acceptable accounting principles" (which is also a defined term that is discussed above).

If a consolidated group does not prepare financial statements in accordance with acceptable accounting principles, or does not prepare any consolidated financial statements, then the "total consolidated group revenue" of the group is the revenue that would be reported if the group had prepared consolidated financial statements in accordance with International Financial Reporting Standards.

This definition is relevant for the €750,000,000 threshold for tax liability set out in Part 2.

"ultimate parent entity"

An "ultimate parent entity" of a consolidated group is, in general terms, the constituent entity of the group that is at the top of the group's ownership chain such that it is the entity in respect of which consolidated financial statements are required to be prepared under acceptable accounting principles (or would be so required if its equity interests were traded on a public securities exchange).

This definition, along with sections 6 and 7, is relevant for identifying a "consolidated group" and for the definition "fiscal year" of a group (see the commentary on these terms above). These terms are primarily relevant for applying the €750,000,000 threshold for tax liability set out in Part 2.  

"user"

The definition "user" provides that the term generally refers to an individual or an entity that interacts, directly or indirectly in any manner whatever, with a digital interface. If an individual is acting in the course of an entity's business then the entity, not the individual, is the user. Accordingly, a business user consists of all the business' employees. For these purposes, it is intended that two or more employees of the same business, performing their employment activities, be considered a single user (i.e.,  the business). 

There are certain exclusions. Specifically, the term "user" does not include the operator of a digital interface, a constituent entity in the same consolidated group as the operator of the digital interface, or an employee of either the operator or such a constituent entity.

The inclusion of "directly or indirectly in any manner whatever" is intended to ensure that the term "interacts" within this definition has a broad meaning. A user can interact with an interface directly (e.g., logging into a social media platform), indirectly (e.g., connecting to a social media platform through a third party) or by passive means, such as carrying a smartphone while allowing an interface to collect global satellite positioning data. Whenever an individual's or an entity's actions have an impact on an interface, it is intended that it constitute an interaction for the purposes of this definition.

"user data"

When a user interacts, directly or indirectly in any manner whatever, with a digital interface, any representations of information or concepts generated by, or collected from, this interaction, is "user data" for the purposes of this Act. For example, it is intended that user data include:

User data retains its character regardless of whether it is owned by the operator of the digital interface through which it was generated, or collected, or whether it has been acquired by an entity other than the operator of the interface.

The inclusion of "directly or indirectly in any manner whatever" is intended to ensure that the term "interaction" within this definition has a broad meaning (see the comments under the "user" definition for examples).

This definition is relevant for the definition "online targeted advertisement", for determining the location of a user under section 11, and for determining if a taxpayer has user data revenue, under Division D of Part 3.

Section 3 – Negative or undefined results

Section 3 provides that if the application of any algebraic formula under this Act results in a negative number, or if the result is mathematically undefined (i.e., where an amount is required to be divided by zero), the result is deemed to be nil.  

Subsection 4(1) – Meaning of revenue

Subsection 4(1) provides the meaning of revenue for the purposes of the DSTA. Under paragraph 4(1)(a), references to the "revenue" of a taxpayer or a consolidated group means the revenue reported in the financial statements presented in accordance with "acceptable accounting principles" to the shareholders, unit holders, or members of the taxpayer, or the consolidated group. Generally, this would be any amount that is required to be included in a "revenue" line item on a taxpayer's financial statements under acceptable accounting principles. For further details, refer to the published accounting standard being used.

Under paragraph 4(1)(b), if such financial statements are not prepared in accordance with acceptable accounting principles, or no financial statements are prepared, "revenue" means the revenue that would be reported in financial statements prepared in accordance with IFRS.

This paragraph is intended to provide meaning to "revenue" for:

Under the DSTA, "revenue" has meaning at the consolidated group level for the purposes of the €750,000,000 threshold in paragraph 10(1)(a), and at the individual entity level (without consolidated accounting principles) for all other purposes. At the entity level, "revenue" is used to refer to either the revenue reported (or that would be reported) in the financial statements or the amounts that would be included in determining such reported revenue, as the context requires. For example, Canadian digital services revenue is comprised of amounts that would be included in determining the reported revenue.

"Acceptable accounting principles" is defined in section 2.

Subsection 4(2) – Timing of revenue recognition

Subsection 4(2) provides that for the purposes of the DSTA the time at which revenue is earned is to be determined in accordance with the accounting principles that are used for preparing the financial statements referred to in subsection 4(1). More specifically, they would be the accounting principles that specify the timing of revenue recognition.

Subsection 4(3) – Currency of revenue

Subsection 4(3) provides that for the purposes of Part 3 of the DSTA (relating to the computation of Canadian digital services revenue), where revenue is recorded in a currency other than Canadian dollars, it is to be converted into Canadian dollars using a rate of exchange that is acceptable to the Minister of National Revenue.

Section 5 – Short fiscal year: €750 million threshold

Section 5 provides an interpretive rule for short fiscal years. Where a fiscal year is shorter than twelve months, the €750,000,000 threshold referenced throughout the DSTA must be prorated according to the number of days in that short fiscal year.

Example: A taxpayer has a fiscal year from March 1 to December 17, for a total of 292 days. According to the formula in Section 5, a reference to "€750,000,000", in respect of that year, is prorated as follows:

€750,000,000 × 292/365 days = €600,000,000

Section 6 – Continuity of consolidated group

Section 6 provides for the continuity of a consolidated group from year to year by identifying groups based on their ultimate parent entity. For example, when a taxpayer joins a consolidated group in the current calendar year, for the purposes of applying the €750,000,000 threshold for tax liability to the fiscal year of the consolidated group that ended in the immediately preceding calendar year, the relevant consolidated group is the group with the same ultimate parent entity as the taxpayer's current group, provided that at all times between the end of that fiscal year and the time the taxpayer joins the group the parent did not change. 

Section 7 – Mergers

Section 7 provides rules for applying the DSTA when two or more corporations merge or combine.

Paragraph (a) specifies that for the purposes of the Act (except if paragraph (b) or (c) applies) a new corporation that forms from a merger or combination is deemed to be a separate person from each predecessor corporation. This ensures that each predecessor corporation, and the new corporation, are all separate taxpayers. 

Paragraph (b) specifies that for the purposes of Part 6, which contains the administrative provisions of the Act, a new corporation that forms from a merger or combination is deemed to be the same corporation as, and a continuation of, each predecessor corporation. This ensures that the administrative obligations of the predecessor corporations become obligations of the new corporation.

Paragraph (c) provides rules for applying section 6 when a merger or combination has occurred and one or more of the predecessor corporations is an ultimate parent entity of a consolidated group. These rules ensure that consolidated groups remain identifiable following such a merger or combination. Subparagraph (i) addresses mergers and combinations where only one of the predecessor corporations is an ultimate parent entity. In this case, the new corporation is deemed to be a continuation of the ultimate parent entity. Subparagraph (ii) addresses mergers and combinations where two or more of the predecessor corporations are each an ultimate parent entity. In this case, the new corporation is deemed to be a continuation of the ultimate parent entity of the consolidated group that had the greatest amount of total consolidated group revenue in the last fiscal year of the group that ended in the immediately preceding calendar year. This ensures, for example, that if any of the predecessor corporations is an ultimate parent entity of a group that meets the €750,000,000 threshold then the new corporation is likely to meet the €750,000,000 threshold as well.

Subsection 8(1) – Arm's length

Subsection 8(1) sets out two rules in respect of the meaning of "arm's length" for the purposes of the Act. Under paragraph (a), related persons are deemed not to deal with each other at arm's length. Paragraph (b) provides that for unrelated persons, it is a question of fact whether they are dealing with each other at arm's length.

The "arm's length" and "non-arm's length" concepts are relevant for joint liability when property is transferred not at arm's length (section 44) and garnishment (section 103).

Subsection 8(2) – Related persons

Subsection 8(2) provides that for the purposes of the DSTA, persons are related to each other if they are related persons within the meaning of subsection 6(2) of the Excise Act, 2001 which, in turn, refers to section 251 of the Income Tax Act but with certain changes in respect of partnerships.

Section 9 – Her Majesty

Section 9 provides that the DSTA is binding on her Majesty in right of Canada or a province, which means that all the requirements of the Act, including requirements under regulations made under the Act, apply to federal, provincial, and territorial governments. This requirement is needed for various obligations in Part 6, such as compliance with garnishment orders. However, note that pursuant to the definition "taxpayer", certain Crown-owned entities are not themselves subject to the digital services tax (DST). 

Part 2

Liability for Tax

Part 2 of the Act contains the main rules for computing a taxpayer's DST liability. In particular, it specifies which taxpayers must pay DST, the rate of the tax and the tax base.

Subsection 10(1) – Tax payable

Section 10 is the main charging provision of the Act, and contains two subsections. Subsection 10(1) addresses the calculation of the DST for years after the first year of application, while subsection 10(2) addresses the calculation of the DST for the first year of application. The term "first year of application" is defined in Section 2 as the calendar year that includes the day that the Act comes into force.

Subsection 10(1) provides that taxpayers that meet both a total revenue threshold of €750,000,000 and a "Canadian digital services revenue" threshold of $20,000,000 are required to pay a tax of 3 per cent on their "taxable Canadian digital services revenue". "Canadian digital services revenue" is computed under Part 3. "Taxable Canadian digital services revenue" is computed under Part 4.

Paragraph 10(1)(a) sets out the conditions for a taxpayer to meet the €750,000,000 revenue threshold. A taxpayer meets this threshold if any of the following three conditions is satisfied:

The first two conditions, in subparagraphs 10(1)(a)(i) and (ii), relate to the situation of the taxpayer or the taxpayer's group, respectively, in the preceding calendar year, whereas the condition in subparagraph 10(1)(a)(iii) relates to the situation of the taxpayer in the current calendar year.

It should also be noted that under section 5 the €750,000,000 threshold is prorated for short fiscal years.

Paragraph 10(1)(b) sets out the conditions for a taxpayer to meet the $20,000,000 Canadian digital services revenue threshold. A taxpayer meets this threshold if any of the following two conditions is satisfied:

It should be noted that the $20,000,000 threshold in Part 2 differs from the $20,000,000 deduction in Part 4. Although the deduction in Part 4 is a deduction of $20,000,000 that, in some cases, is shared among members of a consolidated group, there may be situations where a taxpayer's taxable Canadian digital services revenue is nil, such that the taxpayer is not required to pay digital services tax, even though the taxpayer meets one or more conditions in paragraph 10(1)(a) and one or both conditions in paragraph 10(1)(b). This is because the deduction takes into account the periods of time during which entities are members of the group, and the threshold does not. Examples illustrating the computation of the deduction can be found in the commentary below in respect of Part 4 of the DSTA.

Example 1:

A taxpayer had revenue of more than €750,000,000 during its fiscal year that ended in the preceding calendar year. The taxpayer has never been a member of a consolidated group. During its current reporting period (which is the current calendar year as per paragraph (a) of the definition "reporting period"), it earned $130,000,000 of Canadian digital services revenue. The current calendar year is not the Act's "first year of application".

As the taxpayer meets both the €750,000,000 threshold (under 10(1)(a)(i)) and the $20,000,000 threshold (under 10(1)(b)(i)), it is subject to tax under section 10(1) on its taxable Canadian digital services revenue, as determined under Part 4.

Example 2:

A taxpayer is a member of a consolidated group throughout the preceding and current calendar years. The group earned more than €750,000,000 in total consolidated group revenue in its fiscal year that ended in the preceding calendar year. The taxpayer is the only member of its group that earns Canadian digital services revenue. During its reporting period (which is the current calendar year as per paragraph (b) of the definition "reporting period"), the taxpayer earned $8,000,000 of Canadian digital services revenue. The current calendar year is not the Act's "first year of application".

Since the taxpayer does not meet the $20,000,000 threshold under either subparagraphs 10(1)(b)(i) or (ii), the taxpayer is not subject to the DST for the current calendar year.

Example 3:

A consolidated group earned more than €750,000,000 in total consolidated group revenue in its fiscal year that ended in the preceding calendar year. There are two entities in the group that earn Canadian digital services revenue – Entity A and Entity B. The current calendar year is not the Act's "first year of application".

Entity A joined the group on May 27 of the current calendar year and was not previously a member of a consolidated group. Entity A earned total revenue of less than €750,000,000 for its fiscal year that ended in the preceding calendar year. As such, its reporting period is the period of time commencing on May 27 and ending on December 31 (as per paragraph (c) of the definition "reporting period"). Entity A earned $40,000,000 of Canadian digital services revenue in that period of time.

Entity B was a member of the group throughout both the preceding and current calendar years, and earned $5,000,000 of Canadian digital services revenue in its reporting period in the current calendar year (which is the entire current calendar year, as per paragraph (b) of the definition "reporting period").

Entity A meets the €750,000,000 threshold under 10(1)(a)(iii) since it was a member of the large group for part of the current calendar year. It meets the $20,000,000 threshold under both 10(1)(b)(i) and (ii) since it earned over $20,000,000 of Canadian digital services revenue during its reporting period in the current calendar year (i.e., after it joined the large group) and the entities in its group earn more than $20,000,000 of Canadian digital services revenue for their reporting periods in the current calendar year (Entity A earned $40,000,000 and Entity B earned $5,000,000). 

Entity B meets the €750,000,000 threshold under both 10(1)(a)(ii) and(iii) since it was a member of the large group during both the preceding and current calendar years. It also meets the $20,000,000 threshold under 10(1)(b)(ii) since the entities in its group earn more than $20,000,000 in Canadian digital services revenue for their reporting periods in the current calendar year (Entity A earns $40,000,000 and Entity B earns $5,000,000). 

Accordingly, both Entity A and Entity B are subject to tax under subsection 10(1) on their taxable Canadian digital services revenue, as determined in Part 4.

For an example that illustrates the calculation of taxable Canadian digital services revenue for these entities, see Example 3 under the commentary on Section 23.

Example 4:

There are two consolidated groups that each earned more than €750,000,000 in total consolidated group revenue in their fiscal years that ended in the preceding calendar year – Group 1 and Group 2. Entity A was a member of Group 1 throughout the preceding calendar year and first half of the current calendar year, and it joined Group 2 for the second half of the current calendar year. The current calendar year is not the Act's "first year of application". As per paragraph (b) of the definition "reporting period", Entity A's reporting period is the calendar year. Note that paragraph (c) of that definition does not apply as it gives precedence to paragraph (b).

Entity A earned $37,000,000 of Canadian digital services revenue in the current calendar year, with $19,000,000 earned while it was a member of Group 1, and $18,000,000 earned while it was a member of Group 2.

Entity A meets the €750,000,000 threshold under both subparagraph 10(1)(a)(ii) and (iii) since it was part of a large group in the preceding and current calendar years. It also meets the $20,000,000 threshold under subparagraph 10(1)(b)(i) since it earns over $20,000,000 in Canadian digital services revenue during its reporting period (which is the calendar year). Accordingly, Entity A is subject to tax under subsection 10(1) on its taxable Canadian digital services revenue, as determined under Part 4.

This example illustrates that the $20,000,000 threshold may be met by aggregating revenue earned by an entity while it is a member of different groups.

Example 5:

A consolidated group earned more than €750,000,000 in total consolidated group revenue in its fiscal year that ended in the preceding calendar year (Year 0) and in its fiscal year that ended in the current calendar year (Year 1). Neither of these years was the Act's "first year of application". Entity A was a constituent entity of the consolidated group in Year 0, and left the group on February 15 of the following calendar year (Year 1). Entity A did not join another group after leaving the group. Entity A earns €100,000,000 of total revenue, and $30,000,000 of Canadian digital services revenue, each year.

In Year 1, Entity A meets the revenue thresholds and is subject to tax under subsection 10(1) on its taxable Canadian digital services revenue, as determined under Part 4. It meets the €750,000,000 threshold under both subparagraphs 10(1)(a)(ii) and (iii) (since it was part of a large group in the preceding and current calendar years). Entity A's reporting period is the calendar year (as per paragraph (b) of the definition "reporting period"); thus, it also meets the $20,000,000 threshold under subparagraph 10(1)(b)(i) since it earned $30,000,000 of Canadian digital services revenue in its reporting period. 

In Year 2, Entity A again meets the revenue thresholds and is subject to tax under subsection 10(1) on its taxable Canadian digital services revenue, as determined under Part 4, even though it is no longer part of a large group. It meets the €750,000,000 threshold under subparagraph 10(1)(a)(ii) since it was part of a large group for part of the preceding calendar year. Entity A's reporting period is, again, the calendar year (as per paragraph (b) of the definition "reporting period); thus, it also meets the $20,000,000 threshold since it earned $30,000,000 of Canadian digital services revenue in its reporting period.

In Year 3, Entity A is no longer subject to tax under subsection 10(1), as it does not meet the €750,000,000 threshold under any subparagraph of paragraph 10(1)(a).

For an example that illustrates the calculation of taxable Canadian digital services revenue for Entity A, see Example 4 under the commentary on Section 23.

Subsection 10(2) – Tax payable for first year of application

Subsection 10(2) sets out the method for computing a taxpayer's DST for the "first year of application" (as defined in section 2). Since the "first year of application" can be no earlier than 2024, it provides that a taxpayer's tax base in respect of the first year of application is calculated by aggregating the taxpayer's taxable Canadian digital services revenue for its reporting periods for 2022, 2023 and any other calendar year up to and including the first year of application. However, the taxable Canadian digital services revenue in respect of any one of these calendar years is only included in the tax base if the taxpayer meets the thresholds in paragraphs 10(1)(a) and (b) in respect of that year. For example, if the first year of application is 2024, and the taxpayer meets the thresholds for 2022 and 2024, but not 2023, the taxpayer will only include its taxable Canadian digital services revenue in respect of 2022 and 2024 in its tax base for 2024. 

Part 3

Canadian Digital Services Revenue

Part 3 of the Act sets out the rules for determining a taxpayer's Canadian digital services revenue. It first sets out, in section 11, definitions that apply for all of Part 3 in respect of the determination of user location, the main concept for sourcing such revenue. Section 12 then specifies that Canadian digital services revenue is the total revenue associated with Canadian users from each revenue stream set out in Divisions A to D. Each such Division represents a distinct revenue stream and specifies the revenue that is within the scope of that revenue stream. A portion of such revenue is then sourced to Canada based on its association with Canadian users.

Section 11 – Definitions

The definitions in section 11 apply to Part 3 of the Act.

"user located in Canada"

The definition "user located in Canada" is based on a reasonableness test. A user is considered to be located in Canada if it is reasonable to conclude (based on data available to the taxpayer in the normal course of its business) that the user is in Canada. Such data might include any address on file for the user, telephone area code, global satellite positioning data or Internet Protocol address data. This list is non-exhaustive and it may be reasonable to use other data points. For example, an online marketplace could use the address of a user's financial institution as an indicator of the user's location if that is the only data point available.

Under paragraph (a), for online advertising services revenue and user data revenue based on the real-time location of users, a user's location at the precise time is sought. That is, for a user to be "located in Canada" the data should indicate that the user is, at that point in time, located in Canada (i.e., real-time location). For example, a user's smartphone may display an advertisement for a restaurant when the smartphone's global satellite positioning data indicates that the user is within the vicinity of the restaurant. Revenue from facilitating such an advertisement would be based on the real-time location of the user.

Under paragraph (b), for revenue other than that described in paragraph (a), a user is "located in Canada" if the user is normally located in Canada around that time, not specifically at that precise time. Different data, gathered over different periods of time, may be relevant for this determination.  Thus, data such as the user's current billing address or phone number area code may be used to establish the user's normal location (which will typically be the jurisdiction where the user resides) as opposed to, for example, a location the user visits temporarily on a vacation.

"user located outside Canada"

The definition "user located outside Canada" is the same as the definition "user located in Canada", except that the references in the latter to "in Canada" are replaced with references to "outside Canada". However, if a user could fall into both definitions, it will default to being a "user located in Canada".

"user of determinable location"

A user is a "user of determinable location" if it meets either the definition of "user located in Canada" or "user located outside Canada". It should be noted that it is possible for a user not to be a user of determinable location, for example if the taxpayer has insufficient data to reasonably assess location.

Example 1:

An online advertisement is shown on a website to users interested in hockey. The targeting is not based on real-time location, but rather uses an algorithm to locate users likely to be interested in hockey. One of the users who views the advertisement is a user with an IP address and device location data indicating a Canadian location. As real-time location targeting is not used, paragraph (b) of the definition of "user located in Canada" applies. Since the only available user data indicates a Canadian location, it is reasonable to conclude that this user is normally located in Canada. As such, this user would be considered both a user located in Canada and a user of determinable location.

Example 2:

A social media platform has a user who uses a privacy filter that prevents any personal information from being collected by the interface. Additionally, the content posted by the user on the social media platform does not indicate the user's location. As the social media platform has no data by which to determine location, this user is not considered located in Canada or outside of Canada. As such, the user is not a user of determinable location.

Example 3:

An online marketplace has a user that participated in multiple transactions on the marketplace. Their shipping address is in Canada and their billing address is outside Canada. In such a case, it may be reasonable to conclude that the user is in Canada and outside Canada. Because of the default rule, such a user would be considered a user located in Canada (and a user of determinable location).

Section 12 – Basic rule

Section 12 provides that a taxpayer's Canadian digital services revenue is the sum of the taxpayer's:

It should be noted that revenue cannot be included in more than one revenue stream. This is accomplished through the exclusions in paragraphs 15(2)(a), 17(2)(a) and 19(2)(a). Through these exclusions, income that could be included in multiple revenue streams is limited to a single revenue stream, with priority going first to online marketplace services revenue, then to online advertising services revenue, social media services revenue and, finally, to user data revenue.

Division A

Canadian Online Marketplace Services Revenue

Division A of Part 3 sets out the rules for determining a taxpayer's online marketplace services revenue, and for sourcing a portion of that revenue to Canada.  

Subsection 13(1) – Definition – online marketplace services revenue

Section 13 provides the definition of "online marketplace services revenue". This definition is relevant for determining a taxpayer's Canadian online marketplace services revenue under section 14.

If a taxpayer runs an online marketplace (or if the taxpayer is in a consolidated group and another constituent entity of the group runs an online marketplace), then any revenue earned by the taxpayer that is in respect of the online marketplace and is described in paragraphs 13(1)(a) to (d) is online marketplace services revenue. "Online marketplace" is defined in section 2 of the Act and that definition contains specific exclusions.

Paragraph 13(1)(a) includes revenue received from the provision of access to, or the use of, the online marketplace. This would include, for example, subscription fees and pay-per-use fees.

Paragraph 13(1)(b) includes revenue received from facilitating a supply between users of the online marketplace, such as transaction commissions and payment service fees. This paragraph also specifies that revenue from services ancillary to the supply are included. This ensures, for example, that if for a particular transaction there is a commission fee and a fee for the use of a payment system, the revenue included under this paragraph will not be affected by whether the fees are bundled or unbundled.

Paragraph 13(1)(c) includes revenue received from providing premium services, preferential listing services and other optional enhancements to the online marketplace service. It also includes revenue from the provision of optional changes to the standard commercial terms of the services provided in respect of the online marketplace. For example, revenue from loyalty reward programs or from the provision of access to special deals would be included under paragraph 13(1)(c).

Paragraph 13(1)(d) includes revenue received from sources prescribed by regulation. Such sources would be limited, by virtue of the preamble of this subsection, to sources of revenue that are "in respect of" an online marketplace. This paragraph, and similar paragraphs in Divisions B, C and D, would allow for updates in the future, by way of regulations, in order to take into account new business models that are within the intended scope of this revenue stream. No such regulations are being proposed at the time of issuance of the draft legislation.    

It should be noted that revenue earned by the online marketplace provider from selling its own inventory is not included. This is the case for two reasons: first, the definition of "user" in Part 1 excludes the individual or entity that operates the digital interface and, second, proceeds from the sale of inventory are not included in any of paragraphs 13(1)(a) through (d).

Subsection 13(2) – Definition – revenue exclusion

Paragraphs 13(2)(a) to (c) provide exclusions for the purposes of the "online marketplace services revenue" definition in subsection 13(1).   

Paragraph 13(2)(a) excludes revenue from providing storage or shipping services, to the extent that the revenue reflects a reasonable rate of compensation for the service. For example, if a taxpayer earns $100 for shipping a good, but the current market rate for third party shipping services of the particular kind does not exceed $40, then only $40 of the shipping cost will be excluded from online marketplace services revenue.

If a taxpayer earns revenue in respect of an online marketplace while it is a constituent entity of a consolidated group, and the revenue is earned from another entity of the group, paragraph 13(2)(b) excludes this revenue from online marketplace services revenue of the taxpayer.

Paragraph 13(2)(c) excludes any revenue earned from sources prescribed by regulation. No such regulations are being proposed at the time of issuance of the draft legislation. This exclusion is limited to those sources that would otherwise be included under subsection 13(1).

Example 1: An entity operates a digital interface that earns revenue through multiple business models: an online marketplace that connects buyers of particular products with various sellers, an online retail business that purchases inventory and resells it at margin, and a streaming service that permits subscribers to access digital content. The entity's revenue streams include commission fees from facilitating transactions between users, shipping fees, revenue from inventory sales, and subscription fees. Subscribers receive loyalty rewards on the marketplace, and access to the streaming service.

To determine the taxpayer's "online marketplace services revenue", each of the taxpayer's revenue streams must be compared with the inclusions and exclusions in Section 13:

Example 2: An advertising technology company operates a digital interface that connects marketers with publishers of advertising content. The company receives a commission-type fee for advertisement displays facilitated by its interface. This digital interface would meet the definition of an "online marketplace", and the commission fees would be included in "online marketplace services revenue" under paragraph 13(1)(a).

Although the commission fees might also qualify as "online advertising services revenue", as described in Division B of Part 3, the exclusion in paragraph 15(2)(a) for revenue described in paragraphs 13(1)(a) to (d) ensures that these fees are only included in "online marketplace services revenue".

Section 14 – Canadian online marketplace services revenue

Section 14 provides the rules for calculating a taxpayer's "Canadian online marketplace services revenue".  It is a sum of specific amounts of "online marketplace services revenue" (defined in section 13) that are associated with Canadian users. "Canadian online marketplace services revenue" is included in the taxpayer's Canadian digital services revenue under variable A of the formula in Section 12.

Under section 14, a taxpayer's Canadian online marketplace services revenue for a reporting period is the sum of variables A, B and C. Each of these variables contains rules for a specific type of online marketplace services revenue.

Variable A

Variable A includes any "online marketplace services revenue" that is in respect of a supply of a service delivered in physical form within Canada. This variable deals with revenue from online marketplaces that facilitate physical services, that is, services that must be delivered in person. Such marketplaces would include, for example, short-term accommodation platforms, applications for obtaining a car ride and applications for food delivery. Any revenue earned by such marketplaces for services delivered in Canada (for example, if the accommodation is in Canada, the ride is in Canada or the food is delivered in Canada) is fully included in variable A.  

It is intended that, for these purposes, a service would be considered delivered in Canada if any part of the service is performed in Canada. For example, if a driver transports a user to or from a location in Canada, regardless of whether part of the trip took place outside Canada, the ride would be a service delivered in Canada.

Example 1: A taxpayer runs an online marketplace that specializes in connecting property owners with tourists who wish to rent the property owners' apartments for short periods of time. The marketplace charges a commission fee to property owners for each successful connection to a renter. The marketplace earned $100,000 in total revenue during the reporting period. Of this revenue, $2,000 was earned in respect of properties located in Canada (regardless of the normal locations of the owners of those properties or of the renters). This taxpayer's variable A is $2,000.

Example 2: A taxpayer runs an online marketplace that specializes in connecting drivers with passengers for specific trips. The marketplace charges a $1 fee to drivers for each successful connection to a passenger. The marketplace facilitated 1,000,000 such connections during the reporting period. Of these connections, 100,000 trips began and/or ended in Canada. This taxpayer's variable A is $100,000.

Variable B

Variable B deals with "online marketplace services revenue" in respect of a particular supply (other than revenue dealt with by variable A in respect of services delivered in physical form). Revenue in respect of a particular supply includes fees relating to specific transactions, for example, commission fees.

Variable B sets out a formula for determining the portion of the taxpayer's revenue in respect of particular supplies that is associated with Canadian users. Variable B is the sum of all the amounts that result from the application of the formula D x E/2 (that is, an amount for every transaction with a user in Canada). D is an amount of revenue in respect of a particular supply and, assuming that a transaction has two parties, E is the number of parties to the transaction that are located in Canada (as determined in accordance with section 11) at the time of the transaction. For a particular supply, this formula will produce one of three results:

Since "supply" is defined (in section 2) as including a licence or lease, the terms "supplier" and "purchaser" are intended to include a licensor or lessor, and a licensee or lessee, respectively. 

Certain marketplaces may allow multiple purchasers to pool their resources and purchase from a supplier in a single transaction. For the purposes of section 14, it is intended that any transaction of this type be considered multiple supplies (one for each purchaser). Revenue in respect of the overall transaction should be reasonably allocated between each supply.

Example 3: An online marketplace facilitated three supplies during a reporting period, and earned a commission fee of $2 from each supply. For supply 1, both the supplier and the purchaser were located outside of Canada. For supply 2, only the purchaser was located in Canada. For supply 3, both the supplier and purchaser were located in Canada. The formula

D x E/2 is applied to each supply as follows:

Variable B is the total of all amounts resulting from the application of D x E/2, that is: $0 + $1 + $ 2 = $3.

Variable C

Variable C deals with "online marketplace services revenue" that is not in respect of a particular supply (i.e., not revenue described in variables A and B). Such non-transactional revenue would include, for example, subscription fees for the use of an online marketplace.

Variable C sets out a formula for determining the portion of non-transactional online marketplace services revenue that is associated with Canadian users. This formula measures the level of Canadian activity on an online marketplace. The formula is F x G/H where F is the total amount of non-transactional revenue for a particular online marketplace, G is the number of times a user located in Canada participates in a transaction on the marketplace, and H is the number of times a user of determinable location participates in a transaction on the marketplace. The formula assumes that every transaction has two participants (relevant users): the supplier and the purchaser. Thus, if for a particular transaction both the supplier and the purchaser are located in Canada, this supply would increase G by 2. If only the supplier or only the purchaser is located in Canada, this supply would increase G by 1. Similarly, H would be increased by 2 for every transaction where both the supplier and the purchaser are of determinable location, and by 1 for every transaction where only the supplier, or only the purchaser, is of determinable location. A transaction with no Canadian participants would not increase G, and a transaction with no participants of determinable location would not increase H.

Since the calculation only includes users of determinable location, any revenue that would otherwise be associated with the participation of users that are not of determinable location is partly sourced to Canada following the same ratio as the sourcing of revenue associated with the participation of users of determinable location. This takes into account that a portion of these users that are not of determinable location are likely Canadian.

Variable C is the sum of all the amounts that result from the application of F x G/H. The number of times F x G/H is applied will equal the number of online marketplaces run by the taxpayer (or by another constituent entity in the same group as the taxpayer). If the taxpayer (or any relevant constituent entity) only runs one online marketplace, then F x G/H will be applied only once. 

Example 4: A taxpayer operates a single online marketplace, alongside a streaming service. It earns $2,000,000 in subscription fees during the reporting period. These fees are considered to be 50 per cent attributable to the streaming service, and 50 per cent attributable to loyalty rewards on the marketplace. Accordingly, $1,000,000 is "online marketplace services revenue" under the definition in subsection 13(1).

The subscription fees are not associated with any specific supplies on the online marketplace, and thus produce revenue that falls under variable C of section 14. The online marketplace facilitated 10,000,000 supplies during the reporting period, for a total of 20,000,000 participants. Users located in Canada participated in a supply on the online marketplace a total of 1,000,000 times (for 500,000 transactions either the supplier or the purchaser, but not both, was located in Canada, and for 250,000 transactions both the supplier and the purchaser were located in Canada). Users not of determinable location participated in a supply on the online marketplace 100,000 times and users of determinable location participated in transactions on the online marketplace 19,900,000 times.

Therefore, variable C = F x G/H = $1,000,000 X 1,000,000 / 19,900,000 = $50,251.

Division B
Canadian Online Advertising Services Revenue

Division B of Part 3 sets out the rules for determining a taxpayer's online advertising services revenue, and for sourcing a portion of that revenue to Canada. 

Subsection 15(1) – Definition – online advertising services revenue

Section 15 provides the definition of "online advertising services revenue". This definition is relevant for determining a taxpayer's Canadian online advertising services revenue under section 16. Under section 15, the online advertising services revenue of a taxpayer is the revenue described in paragraphs 15(1)(a) to (c), subject to the exclusions in subsection 15(2).

Under paragraph 15(1)(a), revenue earned from facilitating, through a digital interface, the delivery of an online targeted advertisement is online advertising services revenue. This would include, for example, revenue earned by advertising technology intermediaries such as supply side platforms, demand side platforms, advertising exchanges and advertising servers.

Under paragraph 15(1)(b), revenue earned from providing digital space for an online targeted advertisement is online advertising services revenue. For example, the owner of a website might earn advertising revenue from allowing targeted advertisements to appear on the website.

Paragraph 15(1)(c) includes revenue earned from sources prescribed by regulation in respect of online targeted advertisements. This paragraph, and similar paragraphs in Divisions A, C and D, would allow for updates in the future, by way of regulations, in order to take into account new business models that are within the intended scope this revenue stream. No such regulations are being proposed at the time of issuance of the draft legislation.  

It should be noted that "online targeted advertisement" is defined in section 2 of the Act.

The revenue included in paragraphs 15(1)(a) to (c) is not limited in any way by the revenue model through which it is earned and would include, for example, pay-per-click and pay-per-performance advertising, cost-per-million revenue and flat-rate advertising fees.

Subsection 15(2) – Definition – revenue exclusion

Paragraphs 15(2)(a) to (d) provide exclusions for the purposes of the "online advertising services revenue" definition in subsection 15(1).

Paragraph 15(2)(a) excludes revenue described in any of paragraphs 13(1)(a) to (d). This exclusion ensures that if any revenue could be both online marketplace services revenue and online advertising services revenue, it will only be online marketplace services revenue for the purposes of the Act, and thus cannot be taxed twice under the Act.

Paragraph 15(2)(b) prevents taxation of the same revenue multiple times in the hands of different entities (cascading) since there may be many intermediaries between the publisher of an advertisement and the marketer. This paragraph excludes from online advertising services revenue the portion of such revenue that is paid on to another entity and is online advertising services revenue of the other entity (i.e., the taxpayer only includes the portion of such revenue that remains with the taxpayer). This exclusion is illustrated in Example 2 below.

If a taxpayer earns revenue in respect of online advertising while it is a constituent entity of a consolidated group, and the revenue is earned from another entity of the group, paragraph 15(2)(c) excludes this revenue from online advertising services revenue of the taxpayer.

Paragraph 15(2)(d) excludes any revenue earned from sources prescribed by regulation. No such regulations are being proposed at the time of issuance of the draft legislation. This exclusion is limited to those sources that would otherwise be included under subsection 15(1).

It should be noted that there is an interaction between subparagraph 15(2)(b)(ii) and paragraph 15(2)(c). If a taxpayer pays a portion of its advertising revenue onwards to another entity of the same group, the payment is not included in the recipient entity's "online advertising services revenue" due to the exclusion in paragraph 15(2)(c). As such, the amount paid to the other entity is not excluded from the taxpayer's online advertising services revenue under 15(2)(b), as it does not meet the condition in 15(2)(b)(ii). Thus, if revenue in respect of a particular online targeted advertisement is paid through multiple entities of a consolidated group, it will only be included in the "online advertising services revenue" of the first such entity to receive the revenue.

Example 1: A social media platform allows marketers to target advertisements at the users of the platform based on various aspects of the users' data (location, interests, gender, etc.). When a user views or clicks on an advertisement, the marketer pays the social media platform a fee. As the social media platform provides digital space for advertisements, this revenue will be included in "online advertising services revenue" under paragraph 15(1)(b).

Example 2: An advertising technology company known as an "advertising server" allows small website owners to install an application on their websites that shows a different targeted advertisement to each viewer (i.e., user) of a website based on data about that viewer. The inventory of the advertising server is made up of advertisements from a large number of marketers. The advertising server pulls advertisements from this inventory for placement on the websites of the small website owners. When an advertisement is displayed to a viewer, the advertising server receives a fee from the marketer. A percentage of this fee is remitted to the website owner, while the advertising server retains the remainder. The fee received by the advertising server is revenue from facilitating the placement of an online targeted advertisement via a digital interface and thus would be "online advertising services revenue" under paragraph 15(1)(a). However, due to the exclusion in paragraph 15(2)(b), only the portion of this fee that is not remitted to the website owner is included. The portion remitted to the website owner is online advertising services revenue of the website owner under paragraph 15(1)(b).   

Because the website owners and marketers do not interact (they each interact only with the advertising server), this arrangement does not meet the definition of an "online marketplace" and the advertising server's revenue is not excluded under paragraph 15(2)(a).

Section 16 – Canadian online advertising services revenue

Section 16 provides the rules for calculating a taxpayer's "Canadian online advertising services revenue". It is a sum of specific amounts of "online advertising services revenue" (defined in section 15) that are associated with Canadian users. "Canadian online advertising services revenue" is included in the taxpayer's Canadian digital services revenue under variable B of the formula in Section 12.

Under section 16, a taxpayer's Canadian online advertising services revenue for a reporting period is the sum of variables A and B. Each of these variables contains rules for a specific type of online advertising services revenue.

Variable A

Variable A includes "online advertising services revenue" that is generated by a specific instance of display of an online targeted advertisement, or revenue generated by a specific interaction with an online targeted advertisement, where the targeted user is located in Canada (as determined in accordance with section 11) at the time of the display or interaction. Such revenue would include, for example, click-ad revenue.  

Example 1: A search engine shows preferential listings as banner advertisements integrated into search results. Every time a particular preferential listing is shown to a user located in Toronto, the search engine is paid a $0.001 fee. If the advertisement is displayed to 100,000 Toronto-based users, $100 is received, and this $100 is included in the taxpayer's variable A.

Variable B

Variable B deals with "online advertising services revenue" that relates to a specific online targeted advertisement where the revenue is not generated by a display to, or an interaction with, a specific user (i.e., not traceable). For example, revenue earned in a lump sum for displaying an advertisement to many users (sometimes referred to as flat-rate pricing) would be addressed by variable B. It also deals with revenue that is generated by a specific user if that user is not of determinable location.

The portion of the revenue dealt with by variable B that is associated with Canadian users is determined by a formula. The formula is C x D/E where C is the total revenue in respect of the online targeted advertisement, D is the number of times the advertisement is displayed to users located in Canada, and E is the number of times the advertisement is displayed to users of determinable location.

Since the calculation only includes users of determinable location, any revenue that would otherwise be associated with users that are not of determinable location is partly sourced to Canada following the same ratio as the sourcing of revenue associated with users of determinable location. This takes into account that a portion of these users that are not of determinable location are likely Canadian.

Variable B is the sum of all the amounts that result from the application of C x D/E. The number of times C x D/E is applied will be equal to the number of online targeted advertisements that the taxpayer earns revenue from (where that revenue is not dealt with entirely by variable A).

Example 2: A social media platform receives a lump sum amount of $100,000 for an advertisement shown to 1,000,000 users. Of these users, 400,000 were users located in Canada, and 2,000 users had unknown locations. As such:

Therefore, the inclusion in variable B = C x D/E = $100,000 X 400,000 / 998,000 = $40,080.

Division C
Canadian Social Media Services Revenue

Division C of Part 3 sets out the rules for determining a taxpayer's social media services revenue, and for sourcing a portion of that revenue to Canada. 

Subsection 17(1) – Definition – social media services revenue

Section 17 provides the definition of "social media services revenue". This definition is relevant for determining a taxpayer's Canadian social media services revenue under section 18.

If a taxpayer runs a social media platform (or if the taxpayer is in a consolidated group and another constituent entity of the group runs a social media platform), then any revenue earned by the taxpayer that is in respect of the social media platform and is described in paragraphs 17(1)(a) to (d) is social media services revenue. "Social media platform" is defined in section 2 of the Act.

Paragraph 17(1)(a) includes revenue received from the provision of access to, or the use of, the social media platform. This would include, for example, subscription fees and pay-per-use fees.  

Paragraph 17(1)(b) includes revenue from the provision of premium services and other optional enhancements to the basic function of the social media service. It also includes revenue from the provision of optional changes to the standard commercial terms of the services provided in respect of the social media platform. For example, if a professional networking website provides a premium membership that allows premium members to see who has viewed their profiles, revenue from such premium memberships would be included under paragraph 17(1)(b).

Paragraph 17(1)(c) includes revenue from facilitating an interaction between users, or between users and user-generated content, on a social media platform. For example, if a user has posted content that can only be accessed by other users when a fee is paid, and the platform receives a percentage of that fee, that amount would be included as social media services revenue under paragraph 17(1)(c).

Paragraph 17(1)(d) includes revenue received from sources prescribed by regulation. Such sources would be limited, by virtue of the preamble of this subsection, to sources of revenue that are "in respect of" a social media platform. This paragraph, and similar paragraphs in Divisions A, B and D, would allow for updates in the future, by way of regulations, in order to take into account new business models that are intended to be within the scope of this revenue stream. No such regulations are being proposed at the time of issuance of the draft legislation.   

It should be noted that if a social media platform earns revenue from providing access to its own digital content (rather than user-generated content), then such revenue would not be included in social media services revenue. This is because the definition of "user" does not include the operator of a platform and because this revenue type is not described in any of paragraphs 17(1)(a) to (d).

Subsection 17(2) – Definition – revenue exclusion

Paragraphs 17(2)(a) to (d) provide exclusions for the purposes of the "social media services revenue" definition in subsection 17(1).

Paragraph 17(2)(a) excludes revenue described in any of paragraphs 13(1)(a) to (d) and 15(1)(a) to (c). This exclusion ensures that if any revenue could be both online marketplace services revenue and social media services revenue, or both online advertising services revenue and social media services revenue, or all three, it will only fall into one stream and thus cannot be taxed more than once under the Act.

Paragraph 17(2)(b) excludes revenue from the provision of private communication services consisting of video calls, voice calls, emails and instant messaging, if the sole purpose of the platform is to provide such services. This exclusion is for platforms that provide communication services without the "media" aspect. "Media" entails mass communication that is not expected to be viewed and/or read by all potential recipients.

If a taxpayer earns revenue in respect of social media services while it is a constituent entity of a consolidated group, and the revenue is earned from another entity of the group, paragraph 17(2)(c) excludes this revenue from social media services revenue of the taxpayer.

Paragraph 17(2)(d) excludes any revenue earned from sources prescribed by regulation. No such regulations are being proposed at the time of issuance of the draft legislation. This exclusion is limited to those sources that would otherwise be included under subsection 17(1).

Example 1: A taxpayer operates a dating website which allows users to pay a subscription fee, create a profile, and connect with potential matches. The subscription fee revenue would be included in "social media services revenue" under paragraph 17(1)(a).

Example 2: A taxpayer operates a website which allows users to create profiles, search for their friends, connect with them and access content posted by them (e.g., photos, status updates, recommended links, etc.). The website allows users to pay a premium fee for an ad-free experience. This premium fee would be included in "social media services revenue" under paragraph 17(1)(b).

Example 3: A taxpayer operates a website which allows users to create profiles, upload videos and other user-generated content, and share this content with followers. High-profile users can create and post "exclusive content" that followers can access by paying a premium fee. While most of this revenue goes to the user, the website operator takes a percentage as a facilitation fee. This facilitation fee would be included in "social media services revenue" under paragraph 17(1)(c), provided the interface does not meet the definition of an "online marketplace", in which case the fee would instead be included in "online marketplace services revenue", and excluded from social media services revenue under paragraph 17(2)(a).

Section 18 – Canadian social media services revenue

Section 18 provides the rules for calculating a taxpayer's "Canadian social media services revenue". It is the portion of the taxpayer's "social media services revenue" (defined in section 17) that is associated with Canadian users. "Canadian social media services revenue" is included in the taxpayer's Canadian digital services revenue under variable C of the formula in Section 12.

Section 18 sets out a formula for determining the portion of the taxpayer's revenue in respect of a social media platform that is associated with Canadian users. The formula measures the level of Canadian activity on a social media platform. The formula is A x B/C, where A is the total revenue in respect of a particular social media platform, B is the number of social media accounts that are accessed by users located in Canada (as determined in accordance with section 11), and C is the number of social media accounts accessed by users of determinable location.

Since the calculation only includes users of determinable location, any revenue that would otherwise be associated with the participation of users that are not of determinable location is partly sourced to Canada following the same ratio as the sourcing of revenue associated with the participation of users of determinable location. This takes into account that a portion of these users that are not of determinable location are likely Canadian.

Under section 18, the taxpayer's Canadian social media services revenue is the sum of all the amounts that result from the application of A x B/C. The number of times A x B/C is applied will equal the number of social media platforms run by the taxpayer (or by another constituent entity in the same group as the taxpayer). If the taxpayer only runs one social media platform, then A x B/C will be applied only once. 

Example: A taxpayer operates a single social media platform that earned $100,000 of social media services revenue during the reporting period. The platform has 1,000,000 accounts that were accessed by users during the period. Of these users, 98,000 were located in Canada, and 2,000 are users with unknown locations. As such:

Canadian social media services revenue = A x B/C = $100,000 X 98,000/998,000 = $9,820

Division D
Canadian User Data Revenue

Division D of Part 3 sets out the rules for determining a taxpayer's user data revenue, and for sourcing a portion of that revenue to Canada. 

Subsection 19(1) – Definition – user data revenue

Section 19 provides the definition of "user data revenue". This definition is relevant for determining a taxpayer's Canadian user data revenue under section 20.

If a taxpayer collects user data (or if the taxpayer is in a consolidated group and another constituent entity of the group collects user data) from an online marketplace, a social media platform or an online search engine (all of which are defined in section 2 of the Act), then paragraph 19(1)(a) includes in user data revenue any revenue from the sale of the user data or the granting of access to the user data (e.g., licensing use of the data). If a taxpayer earns revenue from the sale or use of data that the taxpayer (or another group member) did not collect, the taxpayer would not be taxed on this revenue. Limiting "user data revenue" to revenue in respect of user data collected by the taxpayer or another group entity prevents cascading DST when data is sold and then resold. Revenue from services reliant on user data such as consulting or business advisory services is not included and would be segregated from revenue from any sale of the underlying data. "User data" and "user" are defined in section 2 of the Act.

Paragraph 19(1)(b) includes revenue received from sources prescribed by regulation. Such sources would be limited, by virtue of the preamble of this subsection, to sources of revenue that are "in respect of" user data collected from a user. This paragraph, and similar paragraphs in Divisions A, B and C, would allow for updates in the future, by way of regulations, in order to take into account new business models that are within the intended scope of this revenue stream. No such regulations are being proposed at the time of issuance of the draft legislation.    

Subsection 19(2) – Definition – revenue exclusion

Paragraphs 19(2)(a) to (c) provide exclusions for the purposes of the "user data revenue" definition in subsection 19(1).

Paragraph 19(2)(a) excludes revenue described in any of paragraphs 13(1)(a) to (d), 15(1)(a) to (c) and 17(1)(a) to (d). This exclusion ensures that if any revenue could be both online marketplace services revenue and user data revenue, online advertising services revenue and user data revenue, or social media services revenue and user data revenue, or all four, it will only fall into one stream, and thus cannot be taxed more than once under the Act.

If a taxpayer earns user data revenue while it is a constituent entity of a consolidated group, and the revenue is earned from another entity of the group, paragraph 19(2)(b) excludes this revenue from user data revenue of the taxpayer.

Paragraph 19(2)(c) excludes any revenue earned from sources prescribed by regulation. No such regulations are being proposed at the time of issuance of the draft legislation. This exclusion is limited to those sources that would otherwise be included under subsection 19(1).

Example 1: A taxpayer operates a social media platform. The users of the social media platform consent to their data being used by third parties for marketing purposes. The taxpayer collects data about these users, compiles it into an aggregate format, and sells it to advertising technology companies for use in targeted advertising campaigns. As the user data was collected by the taxpayer from a social media platform, and is sold to a third party, the revenue from this sale would meet the definition of "user data revenue" under paragraph 19(1)(a)(i). This revenue does not relate to any specific online targeted advertisement, and so would not meet the definition of "online advertising services revenue" under 15(1)(a). Thus, the exclusion in 19(2)(a) would not apply.

Section 20 – Canadian user data revenue

Section 20 provides the rules for calculating a taxpayer's "Canadian user data revenue". It is a sum of specific amounts of "user data revenue" (defined in section 19) that are associated with Canadian users. "Canadian user data revenue" is included in the taxpayer's Canadian digital services revenue under variable D of the formula in Section 12.

Under section 20, a taxpayer's Canadian user data revenue for a reporting period is the sum of variables A and B. Each of these variables contains rules for a specific type of user data revenue.

Variable A

Variable A includes "user data revenue" that is in respect of the user data of a single user that is, at the time the user data is collected, a user located in Canada (as determined in accordance with section 11). If a set of user data is sold, and the value attributable to the data of each user is determinable, then the revenue relating to user data of users located in Canada is included under variable A.

Variable B

Variable B deals with "user data revenue" that is in respect of a set of user data of multiple users where the value of specific data entries in the set is not known. That is, revenue that is not traceable to specific users' data. It also includes revenue that can be traced to a specific user's data where the user is not of determinable location (provided that this revenue is for a set of user data where one or more users to which the user data relates are located in Canada).

Variable B sets out a formula for determining the portion of the taxpayer's user data revenue in respect of a set of user data of multiple users that is associated with Canadian users. The formula is C x D/E, where C is the total revenue in respect of a set of user data (other than any revenue dealt with in variable A, that is, revenue that can be traced to specific user data of users of determinable location), D is the number of users to which the user data relates that are located in Canada, and E is the number of users to which the user data relates that are of determinable location.

Since the calculation only includes users of determinable location, any revenue in respect of the set of user data that would otherwise be associated with users that are not of determinable location is partly sourced to Canada following the same ratio as the sourcing of revenue associated with users of determinable location. This takes into account that a portion of these users that are not of determinable location are likely Canadian.

Variable B is the sum of all the amounts that result from the application of C x D/E. The number of times C x D/E is applied will equal the number of data sets that the taxpayer sells or provides access to (other than data sets with no Canadian user data or data sets dealt with entirely by variable A, that is, where the revenue is entirely traceable to user data of users of determinable location).  

Example 1: A taxpayer sells a set of user data for a lump sum of $100,000, and the revenue meets the definition of "user data revenue". The user data relates to 1,000,000 users and the value per user is not known. Of these users, 150,000 are users located in Canada, and 950,000 are users of determinable location. Under section 20, the amount allocated under variable B would be: $100,000 X 150,000 / 950,000 = $15,789.

Example 2: A taxpayer sells user data of a variety of its users at a rate of $0.10 per user. The taxpayer sells a set of user data of 100,000 users, and the revenue meets the definition of "user data revenue". Of these users, 1,500 are users located in Canada, and only 99,500 are users of determinable location. As the revenue for each user is a known quantity, the revenue associated with users located in Canada would be allocated to Canada under variable A: $0.10 X 1,500 = $150. The revenue associated with users that are not of determinable location is $0.10 X 500 = $50, and variable B would include $50 X 1,500/99,500 = $1.

Division E
Rules Relating to the Computation of Canadian Digital Services Revenue

Division E of Part 3 sets out rules that are relevant for computing the components of Canadian digital services revenue in Divisions A through D. 

Section 21 – Attribution of activity

Section 21 provides that where one constituent entity of a consolidated group provides a service or sells, or grants access to, user data, and another constituent entity of the group receives or records the associated revenue, the constituent entity that receives or records the revenue is deemed to have provided the service, made the sale or granted the access. This provision ensures that, for the purposes of the Act, the relevant revenue and activities are aligned.

Part 4
Taxable Canadian Digital Services Revenue

Part 4 of the Act sets out the rules for computing a taxpayer's taxable Canadian digital services revenue. The only difference between "Canadian digital services revenue", as determined under Part 3, and "taxable Canadian digital services revenue", as determined under Part 4, is that the latter allows for a deduction of up to $20,000,000. Most of the rules in Part 4 revolve around allocating the $20,000,000 deduction among members of a consolidated group, where a taxpayer is a member of such a group.

Section 22 – Definitions

The definitions in section 22 apply to Part 4 of the Act.

"relevant interval"

The definition "relevant interval" is used to divide a taxpayer's reporting period into segments during which it is either (i) in a consolidated group the membership of which does not change throughout the segment , or (ii) not in any consolidated group. This segmentation is needed for the application of section 23, where the $20,000,000 deduction is shared among taxpayers that are constituent entities of the same consolidated group.

Relevant intervals are identified by reference to "relevant times" (discussed below). A relevant interval is any period that starts at one relevant time and ends at the next relevant time. As such, relevant intervals cannot overlap.

"relevant time"

The definition "relevant time" specifies particular points in time during a taxpayer's reporting period in a calendar year which are "relevant times" for the purposes of identifying "relevant intervals" (discussed above). A relevant time occurs at each of the following times (as set out in paragraphs (a) through (d) of the definition):

Section 23 – Computation – taxable Canadian digital services revenue

Section 23 provides a formula for calculating a taxpayer's "taxable Canadian digital services revenue" for a reporting period in a particular calendar year. The formula is A – B where variable A is the taxpayer's "Canadian digital services revenue" for the reporting period, as calculated in Part 3, and variable B is the taxpayer's portion of the $20,000,000 deduction.

A taxpayer's deduction will vary depending on two factors:

Paragraphs (a) and (b) of Variable B specify the deduction for taxpayers in different situations with regard to these factors. The maximum possible deduction for a taxpayer is $20,000,000.

Under paragraph (a) of Variable B, if the taxpayer is not a member of a consolidated group at any time in the calendar year, the deduction is $20,000,000.

Under paragraph (b) of Variable B, if a taxpayer is a member of one or more consolidated groups during the calendar year, the taxpayer must calculate the deductible amount or amounts allocated to the taxpayer while it is a member of each such group. Essentially, the $20,000,000 is prorated among group members based on how much Canadian digital services revenue they each earn. However, since entities can join or leave a group, four steps are necessary:

To simplify compliance with this Act, it is not necessary to determine each entity's Canadian digital service revenue earned duringa relevant interval. Rather, for the purposes of allocating deductible amounts, the calculations assume that the Canadian digital services revenue of an entity is earned evenly throughout the calendar year. In addition, if an entity's reporting period is shorter than a calendar year, the calculations assume that the Canadian digital services revenue of the entity for its reporting period is earned evenly throughout the calendar year.

The first step, set out above, is accomplished by applying the definitions "relevant time" and "relevant interval".

The second and third steps are accomplished by applying the formula $20,000,000 X C/365 X D/E to each of a taxpayer's relevant intervals.

Variable C of the formula is the number of days in the relevant interval. Thus, multiplying $20,000,000 by "C/365" prorates the annual $20,000,000 deduction for the length of the relevant interval, satisfying the second step. For example, if a taxpayer has a relevant interval that covers the first 146 days of the year, 40% of the deduction (being $8,000,000) would be attributable to that period of time. For the purposes of these comments, the prorated portion of the $20,000,000 is referred to as the "relevant interval's deduction".

Variable D is the taxpayer's Canadian digital services revenue for its reporting period in the calendar year, and variable E is the sum of all of the Canadian digital services revenues of the entities that are in the same group as the taxpayer during the relevant interval (for each of these entities' reporting periods in the calendar year). Thus, "D/E" computes the portion of the relevant interval's deduction that is allocated to the taxpayer, satisfying the third step. If the taxpayer is not a member of a consolidated group for a particular relevant interval (such as when they have not yet joined a group or have just left a group), "D/E" will be "D/D" as per subparagraph (ii) of variable E, in which case the entire amount of that relevant interval's deduction will be attributable to the taxpayer. Similarly, if the taxpayer is in a group but only the taxpayer is earning Canadian digital services revenue, then variable E will equal variable D.

As per step four, the taxpayer's deduction is the sum of all the amounts resulting from step three.

Example 1: A taxpayer meets the revenue thresholds in section 10 and earns $50,000,000 in Canadian digital services revenue (as determined under Part 3) during its reporting period in the current calendar year. The taxpayer was not a member of a consolidated group during the current calendar year. As such, it is subject to paragraph (a) of variable B, and would receive a $20,000,000 deduction. Its taxable Canadian digital services revenue under section 23 would be $50,000,000 - $20,000,000 = $30,000,000.

Example 2: A consolidated group earned more than €750,000,000 of total consolidated group revenue for its fiscal year that ended in the preceding calendar year. The group contains three constituent entities that earn Canadian digital services revenue. All three entities were members of the group throughout both the preceding and current calendar years, and therefore have calendar year reporting periods (under paragraph (b) of the definition "reporting period"). No entities left or joined the group. The Canadian digital services revenue of each entity for the current calendar year is as follows:

These entities fall under paragraph (b) of variable B. First, the "relevant intervals" must be identified – in this case, as no entities entered or left the group, the only "relevant times" are January 1 (the first day of the reporting period) and December 31, for a single relevant interval that spans the entire calendar year. Therefore, only one calculation is required for paragraph (b) of variable B. The entities would receive a pro-rata share of the deduction, as follows:

Therefore, under section 23, the taxable Canadian digital services revenue of each entity is:

Example 3: This example is a continuation of Example 3 in Part 2. A consolidated group earned more than €750,000,000 in total consolidated group revenue in its fiscal year that ended in the preceding calendar year. There are two entities in the group that earn Canadian digital services revenue – Entity A which joined the group on May 27 of the current calendar year, and earned $40,000,000 of Canadian digital services revenue in its reporting period for the current calendar year, and Entity B which was a member throughout both the preceding and current calendar years, and earned $5,000,000 of Canadian digital services revenue in the current calendar year.

As noted in Example 3 in Part 2, both entities are subject to tax under section 10.

These entities fall under paragraph (b) of variable B of section 23. First, the "relevant intervals" must be identified for each taxpayer.

Entity A has only two "relevant times" – the first moment of its reporting period on May 27, and the last moment of December 31. Entity A therefore only has one relevant interval which spans from May 27 to December 31 (219 days).

Entity B, however, has three "relevant times":

Entity B therefore has two "relevant intervals", one interval from January 1 to May 26 (146 days) during which it was the sole Canadian digital services revenue-earning member of the group, and a second interval from May 27 to December 31 (219 days) for which it must share a pro-rated portion of the $20,000,000 deduction with Entity A. The amount deductible must be calculated for each interval, and totalled.

Under the formula for variable B, entities A and B will receive a pro-rated deduction, as follows: 

Therefore, under section 23, the taxable Canadian digital services revenue of each entity is:

Example 4: This example is a continuation of Example 5 in Part 2. A consolidated group earned more than €750,000,000 in total consolidated group revenue in its fiscal year that ended in the preceding calendar year (Year 0). Entity A was a constituent entity of the consolidated group in Year 0, and left the group on February 15 of the following calendar year (Year 1). Entity A did not join another group after leaving the group. Entity A earns $100,000,000 of total revenue, and $30,000,000 of Canadian digital services revenue, each year.

As noted in Example 5 of Part 2, Entity A is subject to tax in Year 1 and Year 2, but not Year 3.

In Year 1, Entity A would need to identify its relevant intervals. There would be at least two, one for the period of time when it was part of the group, and one when it was not, plus any additional intervals that might be created by other entities entering or exiting the group before February 15. For Year 1, it would receive a pro-rated deduction for the interval or intervals where it was part of the group depending on the amount of Canadian digital services revenue earned by other members of the group. For the interval from February 15 until December 31 (320 days), it would receive a deduction of $20,000,000 x 320/365 = $17,534,246.

In Year 2, Entity A would fall under paragraph (a) of variable B, since it was at no time during the year a constituent entity of a consolidated group, and its deduction would be $20,000,000. 
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