Why the digital services tax had to die for the Canada-U.S. trade deal to live

WASHINGTON, D.C. — Ottawa could almost taste the tax revenues.

For nearly five years, Canada has been planning a digital services tax (DST) that would generate billions in revenue by taxing large tech firms on their Canadian digital revenues. Just hours before the first DST payments were due on Monday, however, Prime Minister Mark Carney’s government called the whole thing off.

Carney’s move late Sunday was a capitulation to the White House — and he had little choice after President Donald Trump abruptly cancelled trade negotiations on Friday over the DST, calling it “a direct and blatant attack on our country.”

Faced with 25 per cent tariffs on most Canadian exports to the U.S. and 50 per cent tariffs on its steel and aluminum, Canada needed to keep the trade talks alive. So Carney did what had to be done, stating that the move “will support a resumption of negotiations toward the July 21, 2025, timeline set out at this month’s G7 Leaders’ Summit in Kananaskis.”

What led to the DST, and why did Washington oppose it?

The Liberals first introduced the DST in 2020 — a 3 per cent tax on big tech companies with Canadian digital revenues above $20 million per year — as a stopgap, with the real goal of pushing for a multilateral, OECD-led overhaul of the international tax system to curb multinational tax avoidance.

Several countries, including France, the United Kingdom, Italy, and Spain, had begun implementing DSTs in 2019 and 2020, raising alarm bells for large U.S. tech firms and advocacy groups.

The Computer & Communications Industry Association (CCIA), a U.S.-based trade association representing technology and communications companies, was one that pushed back, calling the DSTs discriminatory. The taxes “hit U.S. companies but are designed to exempt local companies, putting U.S. firms at a competitive disadvantage in the market,” said Jonathan McHale, VP of digital trade at CCIA.

President Joe Biden supported an OECD approach to reforming the international tax system – and its moratorium halting the rollout of unilateral DSTs, adopted by the OECD/G20 Inclusive Framework in late 2021. Canada waited in hopes of there being an international tax reform, but by July 11, 2023, when the OECD agreed to another year-long extension on the moratorium, Prime Minister Justin Trudeau’s government decided it had waited long enough. It pushed ahead unilaterally to pass the Digital Services Tax Act last summer, despite warnings from U.S. diplomats and risk experts that it could spark a trade war.

While Canada’s approach was meant to tax both foreign and domestic firms, McHale said that’s simply how countries go about saying they are not formally targeting American companies. He referred to “disguised techno-trade” and proportionality, noting that “on the surface, [the DST] looks neutral, but the impact is essentially focused on a particular foreign country.” Canada’s DST, he said, would’ve mostly impacted U.S. tech firms.

But there was opposition to it at home, too, he noted, because the tax would have hurt would-be startups trying to establish themselves in the Canadian market.

“There were lots of Canadian companies that were vocal in their opposition to this, the Canadian Chamber of Commerce chief among them,” he said, noting that they didn’t want it to upset their strong startup culture and digital economy.

Biden’s team pushed back last year when the tax was passed, arguing repeatedly for a multilateral solution, and then-U.S. Ambassador to Canada David Cohen labelled it “discriminatory.”

Trump, in turn, had more leverage and threatened the cessation of trade talks and even higher tariffs, but many saw this coming.

“If you don’t push back against Canada’s [DST], isn’t that a green light for other countries to move ahead?” asked McHale. Opposition to DSTs has been a “longstanding bipartisan issue” in the U.S., he noted.

Could dropping the DST lift trade?

It can’t hurt. Besides, it was necessary to get back to the negotiating table.

After Canada rescinded the tax, Trump and Carney agreed to resume trade talks with an eye toward reaching a deal by July 21, 2025. “Canada’s preference has always been a multilateral agreement related to digital services taxation,” Carney’s statement said, reminding folks that the DST was only ever meant to be a short-term solution.

His government also remains “engaged in discussions with the U.S. and other countries to find a workable solution on international taxation that achieves our common objectives,” a Department of Finance official told National Post.

The Canada Revenue Agency issued a statement on Monday confirming the tax was suspended and noting that reimbursements will be made to companies that already paid “if legislation is tabled in Parliament and receives royal assent.”

The White House, meanwhile, viewed the decision to drop the DST as positive. Trump officials also hope the move will encourage other countries to eliminate similar taxes to avoid U.S. retaliation moving forward.

Canada’s DST “would’ve been the most burdensome tax for U.S. companies — topping the list of revenues extracted from U.S. firms,” McHale said.

But DSTs are still in effect in several countries that have strong trade links with the U.S., including the U.K., Spain, and France, and they should expect similar pushback from Washington.

“The U.S. government has been pretty clear that they oppose the policy … so it stands to reason that it would push back against these others as well,” McHale added.

France and Spain are still working to secure a favourable trade agreement with the U.S.. Although the U.K. managed to forge a deal last month, the Trump administration has publicly stated that getting Britain to rescind its DST remains a top priority.

In the meantime, while Ottawa may be left thirsty for big tech revenues, U.S.-Canada trade relations are finally getting a much-needed drink.

National Post

Our website is the place for the latest breaking news, exclusive scoops, longreads and provocative commentary. Please bookmark nationalpost.com and sign up for our politics newsletter, First Reading, here.