Canada scraps proposed levy amid Trump’s threat to terminate trade talks: The Digital Services Tax row, explained

What is Canada’s Digital Services Tax, and why was it such a sticking issue with the US? What will its revocation mean for Prime Minister Mark Carney’s government? We explain.

What was the row over Canada’s Digital Services Tax?

The tax aimed to collect a levy of 3% of the revenue a digital services firm made from Canadian users, above $20 million in a calendar year. In one of its more controversial clauses, payments were to be retroactive, beginning 2022. While the law had been passed earlier, payments were due from today.

Among those impacted would have been major American technology firms, such as Google, Meta, Apple, Amazon, etc.

“The DST was announced in 2020 to address the fact that many large technology companies operating in Canada may not otherwise pay tax on revenues generated from Canadians… While Canada was working with international partners, including the United States, on a multilateral agreement that would replace national digital services taxes, the DST was enacted to address the aforementioned taxation gap,” Canada’s finance ministry said on June 29.

If the law had been implemented, American companies would have had to pay roughly $2.7 billion to the Canadian government, a report in The New York Times said. Trump was vehemently opposed to the law.

On Friday, he posted on Truth Social, “We have just been informed that Canada, a very difficult Country to TRADE with… has just announced that they are putting a Digital Services Tax on our American Technology Companies, which is a direct and blatant attack on our Country… Based on this egregious Tax, we are hereby terminating ALL discussions on Trade with Canada, effective immediately. We will let Canada know the Tariff that they will be paying to do business with the United States of America within the next seven day period.”

What will scrapping the Digital Services Tax mean for Canada?

Getting a trade deal with the US is important for Canada, which, going by US Census Bureau data, exported $412.7 billion worth of goods to the US last year.

At present, Trump has slapped 50% tariffs on steel and aluminum imports from Canada and 25% on auto imports, apart from the 10% base tariff he has put on most countries. Along with this, Canada and Mexico face tariffs of 25% apparently to curb fentanyl smuggling to the US.

Canada, thus, agreed to scrap the tax to take trade talks forward.

“In our negotiations on a new economic and security relationship between Canada and the United States, Canada’s new government will always be guided by the overall contribution of any possible agreement to the best interests of Canadian workers and businesses. Today’s announcement will support a resumption of negotiations toward the July 21, 2025, timeline set out at this month’s G7 Leaders’ Summit in Kananaskis,” PM Carney said on Sunday.

Given that Carney had come to power mainly on a platform of standing up to Trump, this fold-up could have been embarrassing for him. However, the tax wasn’t too popular within Canada either, as it could have raised the cost of digital services like hailing rides and streaming movies.

Robin Guy, a leader of the Canadian Chamber of Commerce, had said in July last year, “The imposition of a retroactive discriminatory digital services tax by the federal government will not only make life more expensive for Canadian families, businesses and workers, but it will significantly harm our relationship with the United States. The government should reverse its unilateral decision that is out of step with our allies, and instead, work with our trading partners on an international solution that would better serve Canadians.”

In fact, recently, many had believed that the tax’s best purpose could be to use it as a bargaining chip in talks with the US.