How Canada’s new digital services tax (DST) is affecting small businesses is becoming more clear each passing day. Implemented retroactively from January 2022 and officially coming to fruition this June, the 3-percent tax targets large tech firms providing digital services to Canadians. While the intention behind the tax is clear—ensuring big corporations pay their fair share—the implementation has not been easy, especially for the small and medium enterprises (SMEs) which make up over half of Canada’s GDP.
Over the last few months, reports have shown small businesses struggling to navigate their finances amid rising operational costs, with many feeling the heat of the DST’s impact already. The average cost of starting and running a business continues to go up, recently highlighted by a Shopify study stating new businesses spend about $40,000 each year, with 10.3 percent allocated to marketing, predominantly online advertising.
With giants like Google and Amazon directly passing on the costs of the DST to their advertisers, small businesses are feeling squeezed. Google started charging its advertisers a 2.5-percent surcharge, followed by Amazon instituting its own fixed digital services fee of 3 percent. For small business owners who rely heavily on digital advertising for visibility and growth, these additional costs could mean serious financial repercussions.
Take, for example, the case of a clothing boutique with annual revenues of $500,000 and operating on a 10-percent profit margin. If this boutique spends $25,000 on Google advertising to reach customers, the new tax results in $625 extra fees added to their costs. Even just this slight increase could lead to reduced advertising budgets, and this translates to tangible losses: approximately $12,458 less revenue, equaling almost 25 percent of their profits.
This is where the real challenges kick in. Small businesses aren't just fighting for their market share against massive retailers. They are also attempting to survive against the rising costs brought about by new taxes which should technically concern larger firms but, instead, land hard on the smaller ones.
The timing of this tax couldn't be worse either. Most businesses base their financial plans and budgets before the start of the fiscal year, meaning many have already committed funds and based operational expenses on previous levels. Suddenly expecting them to absorb this tax without any prior notice or adjustment time places them at increased risk of insolvency, with business bankruptcies reportedly climbing to levels not seen since the Great Recession.
Canadian Finance Minister Chrystia Freeland argues the DST is necessary to mandate equitable tax rates for global tech companies. While this may make sense on the surface, the lack of consideration for local businesses leads to growing discontent. Critics within the Canadian business community argue the government is forcing the burden of this tax onto the very enterprises it claims to support.
Organizations like the Business Council of Canada have highlighted how the DST might prompt retaliatory reactions from American trade partners. The U.S. Trade Representative, Katherine Tai, has called the DST discriminatory and suggested trade disputes might arise, which would only add more fuel to the fire for small business owners who already face significant hurdles.
Despite the government’s rationale for the DST, many believe it will curtail the very growth and stability small businesses need to thrive. It can be argued the tax system should evolve to support business owners, not stifle their development.
Small businesses throughout the country have begun raising their voices against the DST, calling for government action. They argue the best resolution would be to revoke the DST entirely, allowing space for future multilateral agreements—a meaningful consideration as short-term measures may offer little relief against the backdrop of longer-term business development.
The consequences for small businesses under the current tax regime could mean more than just higher costs. Job losses and reduced growth trajectories are serious risks as well. Affected owners fear they've become casualties of tax policies meant for larger firms. There’s increasing concern the trend toward imposing costs on small businesses for the benefit of larger tech entities will continue, threatening the very fabric of entrepreneurial spirit driving Canada’s economy.
More urgently, business owners worry about whether their voices will truly reach the government, prompting tangible policy changes. With SMEs contributing significantly to Canadian employment and economic stability, these small business owners hope the narrative surrounding the DST shifts toward more effective, equitable taxation practices—not just more taxes. If the Canadian government prioritizes these smaller enterprises, it may need to rethink not only how it implements taxes like the DST but also evaluate what support can be offered now to prevent looming economic crises.
The forthcoming months will be telling; whether the government listens to concerns on the ground remains up for debate. Meanwhile, small business owners brace for the fallout of the DST and the challenges it may continue to bring. With pressure mounting and the economy as volatile as ever, it seems small businesses are left waiting for relief.
Those affected are asking not just for any short-term band-aid solutions but for carefully considered policies reflected through multilateral agreements. After all, small businesses are truly the backbone of the Canadian economy, and they deserve policies reflective of their contributions rather than ones contriving their burdens.
