At the last minute, just hours before it was due to go into effect, Canada backed away from a controversial tax on digital services that was set to hit major US technology companies. The move is being read as an attempt to deescalate tensions and salvage trade relations with the US – Canada’s most important economic partner.
The planned 3 per cent tax was intended to cover digital service revenues generated from Canadian users in excess of CAD 20 million per year, retroactive to 2022. The immediate targets were global platforms – Amazon, Meta, Alphabet (Google) and Apple – which have been generating revenue in Canada for years with a relatively low tax burden in Canada.
The withdrawal of the tax means that Canada has put pragmatism above the symbolism of fiscal sovereignty. The threat of 50 per cent tariffs on Canadian steel and aluminium exports and possible reprisals against other industries – including agriculture or automotive – posed a real risk to trade stability. The US is the largest recipient of Canadian exports ($412.7 billion in 2024) and the second largest supplier of imports ($349.4 billion). An escalation could have meant billions of dollars in losses on both sides of the border.
For Washington, the digital tax posed not only a financial threat to US companies, but also a precedent striking at the uniformity of the system of international taxation of digital services, which was to be settled at the OECD. As early as 2024, the Biden administration took formal action against Canada under trade dispute settlement procedures under the USMCA.
For Ottawa, on the other hand, the DST (Digital Services Tax) was an attempt to level the playing field for domestic players against international giants and in response to the slowdown in the OECD global agreement. Canada has maintained that its preference has always been for a multilateral solution – but the lack of progress prompted the government’s own legislative initiative, which will now be repealed.
The withdrawal of the DST came as a relief to markets, with US index futures going up and bullish sentiment shifting to Asia. The decision may also pave the way for the resumption of trade negotiations between Prime Minister Mark Carney and Donald Trump, which are expected to be completed by 21 July.
The Canadian turnaround is also a signal to other countries considering unilateral digital taxes. In an era of rising protectionism and unstable alliances, local fiscal initiatives – while politically attractive – may prove too costly in the wider geopolitical picture.
