Commonwealth_ In a dramatic turnaround, Canada said it would repeal its controversial digital services tax (DST) on large US tech firms. The decision, taken just hours ahead of the first payments being due, comes after rising trade tensions and the breakdown of negotiations with the United States. The move follows a strong response by US President Donald Trump, who abruptly cancelled trade negotiations on Friday, calling the Canadian tax imposition an intolerable act of provocation. Canada has vowed to introduce legislation that will formally repeal the tax and halt the collection of the outstanding payments, which were initially due on Monday.
The 2020 digital services tax was intended to ensure that online technology giants reaping meaningful Canadian user revenues paid their fair share of taxes. Under the contemplated system, companies such as Amazon, Google, Meta, and Apple would have paid a 3% tax on Canadian revenues in excess of C$20 million annually. The anticipated cost for the targeted firms in its first year alone was over C$2 billion, and the tax was to be retroactive to January 2022. The federal budget of Canada had previously estimated that the DST would bring in around C$5.9 billion over five years. By these big figures, Ottawa’s decision to cancel the tax would appear to have been prompted by the danger of prejudicing broader economic relations with its one most important trading partner.
The United States is Canada’s biggest export market, and it accounts for approximately 75% of Canada’s total goods exports, more than $400 billion annually. However, Canada only receives 17% of US production. The asymmetry of this trade relationship underscores the effect of strained economic relations on the Canadian economy. There had been escalating tensions between the two North American neighbours for months, with persistent threats from Washington that the DST would damage the bilateral relationship and prompt retaliatory measures. The Canadian government had previously threatened to go ahead with the tax despite ongoing multilateral talks at the Organisation for Economic Co-operation and Development (OECD) aimed at securing a global deal on taxing digital services.
But with the US on the edge of retaliatory tariffs and the threat of a blocked trade deal, Ottawa has now shifted tack. The White House applauded the about-face, with senior officials announcing that trade talks between the two countries will immediately resume. The Canadian action is politically well-timed, after a dramatic about-face in domestic politics. The Liberal Party’s return to power, under a previous central banker, Mark Carney, has been followed by heightened efforts to restore diplomatic and economic relations with the US. The Trudeau government, which had implemented the DST, faced mounting pressure from domestic business lobbies as well as foreign actors, all warning of the policy’s unintended consequences.
Critics of the tax pointed to its several flaws, such as its retroactive nature and its failure to respond to concerns raised by bipartisan US legislators. It was opposed by Canadian business lobbies as well, who argued that it would ultimately be passed on to consumers through higher prices of digital content and online advertising.
As Canada makes the move to eliminate the DST, the focus now shifts to resumed US-Canada talks for a comprehensive trade agreement before July 21, which is the deadline it has imposed for itself. The repeal of the tax has been described as Ottawa’s most important concession, one that would facilitate a broader economic union. This policy change marks a significant turning point in Canada-US relations, reflecting the global challenge of reconciling tax systems with a digital world economy while preserving essential trade partnerships. With both countries now destined to sit down at the negotiating table anew, there is cautious hope that the age of a more collaborative approach will break.
