Canada’s venture capital (VC) industry group is pushing the federal government to pause the collection of the Digital Services Tax (DST) as it anticipates a costly US policy retaliation.
Matt Cohen
“I think it would devastate not just us, and I think it has to be resolved.”
Ripple Ventures
The Canadian Venture Capital and Private Equity Association (CVCA) has co-authored a letter, titled Industry-Wide Opposition to the Digital Services Tax, with five other business groups and sent it to Prime Minister Mark Carney on June 12.
The DST imposes a three-percent tax on large businesses, both foreign and domestic, on certain kinds of digital transactions, including online marketplace sales, online advertising, social media, and sales of user data.
The letter urges Carney to rethink the DST due to the “unintended consequence” of the United States (US) proposing a tax hike for Canadian investors in retaliation for what it calls “unfair foreign taxes,” including the DST. The letter calls for Carney to hit pause on the DST ahead of June 30, the first deadline for companies to file a return.
Other signatories to the letter included the Canadian Chamber of Commerce, Canadian Life and Health Insurance Association, Retail Council of Canada, Future Borders Coalition, and Canadian Bankers Association.
The DST, became law last year, applies to digital service providers with over $20 million in revenue. The Canadian government originally introduced it as a way to tax big tech companies, which are mostly based in the US. The first DST tax return applies retroactively to 2022, so companies are expected to pay the DST on 2022-2024 income.
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The policy has become a point of contention between the US and Canadian governments amid an ongoing trade war. The US administration’s “One Big Beautiful Bill Act,” which has yet to become law, includes a section allowing the U.S. Treasury to increase the withholding tax rates on payments to residents of countries it says have issued “unfair” taxes such as the DST. This would apply to income resulting from American assets held by Canadians, or the American operations of companies headquartered in Canada.
US President Donald Trump has repeatedly railed against digital services taxes imposed on US technology companies and threatened trade retaliation in response. If Canada is included, the change would result in a five-percent rate hike in the first year, increasing by five percent each year to a maximum of 20 percent for income tax and up to 50 percent for withholding tax, the letter said. According to the Securities and Investment Management Association, the tax change could cost Canadian investors up to $81 billion in extra taxes over seven years.
A tax treaty between the US and Canada currently subjects Canadian corporations to a small five-percent withholding tax rate on dividends from US operations. The new legislation, if it becomes law, would override this and increase it by five percent per year until it reaches 20 percent on income tax.
“The negative impact of this measure cannot be understated for the Canadian economy,” the letter reads, adding that funds with American holdings, such as pension funds, retirement funds, and investment funds would all be affected.
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The potential tax hike on Canadian investors comes as the nation’s VC industry grapples with middling returns and a fundraising crunch related to economic uncertainty and a stalled exit market.
Matt Cohen, founder and managing partner of early-stage VC firm Ripple Ventures, told BetaKit that he’s “definitely worried” about the possibility of US tax changes, but it would have more severe impacts on large asset managers such as financial institutions than Canadian VC firms.
Cohen added that the potential tax hikes create a lot of uncertainty for cross-border companies.
“I think it would devastate not just us, and I think it has to be resolved,” Cohen said.
Benjamin Bergen, president of tech lobby group the Council of Canadian Innovators (CCI), wrote in a LinkedIn post that “a unilateral hike in U.S. withholding taxes would divert capital away from Canada, and hurt our ability to scale globally competitive firms.”
However, Bergen added that CCI thinks “large multinational tech companies must pay their fair share of taxes in the jurisdictions where they generate value.”
The DST was originally proposed by the Canadian government in an effort to claw back revenue from large foreign tech companies profiting from the engagement, data, and content contributions of Canadian users. Some tech companies retaliated: in response to the DST, tech giant Google implemented a 2.5-percent surcharge for ads displayed in Canada.
Feature image courtesy CVCA.