Canada Drops Digital Tax on US Tech Firms to Restart Trade Negotiations
Canada has officially announced it will repeal its planned Digital Services Tax (DST) on large American technology firms, just hours before companies were due to make their first payments. The move comes as part of an urgent effort to resume stalled trade talks with the United States.
The 3% tax would have applied to major US-based firms such as Google, Amazon, Meta, and Apple on Canadian revenues exceeding $20 million, retroactively from January 2022. The measure was expected to generate over C$2 billion in its first year and nearly C$6 billion over five years.
US Pushback and Diplomatic Pressure Forces Canada’s Hand
Tensions escalated when President Donald Trump threatened to walk away from trade negotiations, calling the tax a “blatant attack” and warning of higher tariffs on Canadian imports. In response, Finance Minister François-Philippe Champagne announced legislation would be introduced to rescind the DST and freeze any tax collections.
“Canada’s preference has always been a multilateral agreement on digital services taxation,” Champagne’s statement said.
The US Commerce Secretary, Howard Lutnick, called the tax a “deal breaker”, while the American Chamber of Commerce praised Canada’s decision as “constructive” and beneficial to the economic partnership between the two countries.
High Stakes for Canada in US Trade Relationship
With over 75% of Canada’s exports going to the US—worth more than $400 billion annually—the economic stakes are high. In contrast, only 17% of US production heads north to Canada, giving the US considerable leverage in trade talks.
Earlier this month, Canada insisted it would proceed with tax collection, despite mounting pressure. However, the economic backlash risk and a potential collapse of broader negotiations forced a last-minute reversal.
Controversial Tax Faced Domestic and International Criticism
The DST was introduced in 2020 to address the taxation gap created by digital platforms operating in Canada without paying significant local taxes. But it faced strong opposition from US lawmakers and Canadian businesses alike. Critics argued the retroactive nature of the tax and its timing undermined diplomatic efforts and would ultimately pass costs to Canadian consumers.
Technology law expert Michael Geist called the government’s handling of the issue “deeply flawed,” citing years of warnings about its negative impact on trade relations.
What Happens Next?
The Canadian and US governments have now set a new goal: to finalize revised trade terms by July 21. By shelving the DST, Canada hopes to secure a broader economic agreement while reducing tensions that had escalated sharply earlier this year.
This policy reversal marks a significant diplomatic shift for Prime Minister Mark Carney’s administration and offers a fresh opportunity for US-Canada relations to stabilize and evolve in the digital age.
