Canada pulls Digital Services Tax to avoid stalling US trade negotiations

The Canadian government has rescinded its planned Digital Services Tax (DST) to continue negotiating a trade deal with the United States (US) after President Donald Trump called off talks over the measure.

The tax, slated to take effect today and retroactive to 2022, would have recouped three percent of the digital services revenue above $20 million that both foreign and domestic large companies receive from Canadians in a given year. The move was meant to generate revenue from firms that operate in Canada but don’t pay taxes on the gains made from Canadian users, including technology giants like Amazon, Apple, Google, and Meta.

This comes after The Canadian Venture Capital and Private Equity Association (CVCA) co-authored an open letter calling on the government to “pause” the DST to avoid a costly US retaliation. The letter, titled Industry-Wide Opposition to the Digital Services Tax, was signed by five other business groups and sent to Prime Minister Mark Carney on June 12.

“Rescinding the digital services tax will allow the negotiations of a new economic and security relationship with the United States.”

François-Philippe Champagne
Finance Minister

Prime Minister Mark Carney said the reversal was key to a “resumption of negotiations” that now appear more likely to result in a deal before the July 21 deadline established at the G7 Leaders’ Summit earlier in June.

At the same time, some government leaders are characterizing the change as good policy in its own right. In a statement, François-Philippe Champagne, Canada’s finance minister, characterized the change as important to creating the “strongest economy” in the G7 and improving the country’s overall welfare.

“Rescinding the digital services tax will allow the negotiations of a new economic and security relationship with the United States to make vital progress and reinforce our work to create jobs and build prosperity for all Canadians,” Champagne said.

Trump put a halt to negotiations on June 27. He claimed on Truth Social that the DST was a “direct and blatant attack” on the US tech sector and threatened new tariffs within a week. He maintained that Canada was just “copying” the European Union (EU) and was a “very difficult” trading partner in general, citing tariffs on dairy as an example.

One day earlier, Republicans in the US Congress had agreed to scrap a retaliatory tax hike included in Trump’s signature One Big Beautiful Bill, while citing a G7 agreement. The so-called “revenge tax” would be on investment income from American companies paid to foreigners from countries, including Canada, that the United States considers to have “unfair” tax policies. That bill is slated for a vote in the US Senate today after narrowly clearing a procedural hurdle this weekend—with the revenge tax added back in. The House of Representatives passed its version in May, and Trump has hoped to sign a reconciled bill into law by July 4.

White House Press Secretary Karoline Leavitt argued that Canada had “caved” to American demand. US Secretary of Commerce Howard Lutnick thanked Canada for the about-face on X, calling the DST a “deal breaker” for an American trade agreement.

Canadian tech industry leaders were quick to approve of the change. Shopify president Harley Finkelstein claimed on X that the DST would have placed “a ceiling” on Canadian entrepreneurship, while new Build Canada CEO Lucy Hargreaves had already posted on X that she felt the DST was “net-harmful” to Canada’s economy.

Maverix Private Equity founder John Ruffolo asserted on LinkedIn that the measure was a “dumb” effort that would make everyday Canadians pay more.

Canadian Council of Innovators (CCI) President Ben Bergen said in a statement that his trade organization had “long supported” the DST, but that shelving it was a “strategic move” needed to re-establish an “essential” trade relationship with the US.

University of Ottawa professor Michael Geist, the Canada Research Chair in Internet and E-Commerce Law, asserted on his blog that the Canadian government had been ignoring the risk of retaliation for years since the DST’s inception in 2020. He observed that the federal government had a history of “talk[ing] tough” about tech, only to back off when confronted, citing the recent decision against re-introducing the Artificial Intelligence and Data Act to regulate AI adoption.

Université Laval economics professor Stephen Gordon echoed the sentiment on X, claiming that the government was retreating from an “indefensible position.”

Feature image courtesy of Benoit Debaix on Unsplash.