Canada pulls back on Digital Services Tax to advance US trade talks
The Canadian government has rescinded a 3 per cent Digital Service Tax (DST) on revenue received by foreign and domestic large businesses from Canadian online traffic.
The move comes following the abrupt end of trade negotiations with the US last week, coinciding with the implementation of the tax and the first payments from major tech firms becoming due.
The Digital Services Tax Act, a long-debated bill in the House of Commons, was designed to ensure that large online platforms pay their share of tax on revenues earned from Canadian users. The tax imposes a three per cent levy on the revenues of companies such as Google, Amazon, Meta (Facebook), and Uber, specifically targeting online marketplaces, digital advertising, social media platforms, and the sale of user data.
Passed by Parliament in 2024, it was designed to address the growing concern that global tech giants have been paying relatively little tax in Canada despite generating significant revenues here. The tax applies to companies with global revenues exceeding approximately $820 million and Canadian digital revenues exceeding $20 million. The act reaches back to revenue earned since January 1, 2022. This means that affected companies are now facing tax bills covering more than two years of past earnings, with the federal government expecting to collect approximately $2 billion in the first round of payments.
However, US President Donald Trump has been a vocal critic of the tax towards American businesses.
On Friday, President Trump said, "Based on this egregious tax, we are hereby terminating all discussions on trade with Canada, effective immediately."He described the DST as "a direct and blatant attack on our country" and accused Canada of being "a very difficult country to trade with." In the Oval Office later that day, Trump warned, "It's not going to work out well for Canada. They were foolish to do it," adding, "We have all the cards. We have every single one."
On Sunday evening, the Canadian government cancelled the tax.
In a press release, the Department of Finance Canada stated that Minister of Finance and National Revenue, François-Philippe Champagne, would recind the tax "in anticipation of a mutually beneficial comprehensive trade arrangement with the United States."
Trump has also publicly criticised other Canadian legislation.
Last week, Trump renewed long-standing complaints about Canada's tariffs on US dairy products, stating, "They have charged our farmers as much as 400% tariffs, for years, on dairy products," and promised retaliation. The President said new US tariffs on Canadian exports would be announced "within days," raising the possibility of a new round of trade tensions affecting the auto, aluminium, and agricultural sectors.
Additionally, the Trump administration launched a formal investigation into the impact of Canada's DST on US commerce, a move seen as a precursor to further retaliatory action.
Prime Minister Mark Carney's office responded with a measured statement, saying, "The Canadian government will continue to engage in these complex negotiations with the United States in the best interests of Canadian workers and businesses."
Before Sunday's cancellation, Canada had held off implementing the tax for several years, hoping that negotiations at the Organisation for Economic Co-operation and Development (OECD) would result in a multilateral approach to taxing digital giants. With progress stalling, and after similar measures were introduced in countries such as France and the UK, Ottawa decided to move forward unilaterally.
Ontario Premier Doug Ford recently urged Ottawa to reconsider the tax, warning, "For our American partners, this is nothing but an unfair tax that's putting millions of Canadian jobs at risk." The Business Council of Canada has echoed those concerns, arguing that a full-blown trade dispute could do serious harm to Canada's export-dependent economy.
About 80 per cent of Canada's exports go to the United States, making access to the American market vital for Canadian businesses, large and small. With the threat of new tariffs now looming, business leaders are watching developments closely, anxious for a diplomatic solution that will avoid further disruption.
