In recent weeks and months, U.S. President Donald Trump has presented various reasons for escalating the trade conflict between Canada and the United States. On Friday, he focused on Canada’s digital services tax, which could have resulted in significant financial implications for major American tech companies. However, the Canadian government surprisingly withdrew the tax late Sunday, shortly after Trump halted trade negotiations with Canada in response to the levy.
William Pellerin, an international trade lawyer at McMillan LLP, expressed astonishment that the U.S. had not raised concerns about the issue sooner. Pellerin stated that given the longstanding dispute between the U.S. and Canada on this matter, escalating the issue at the last minute was inevitable.
The digital services tax in Canada targeted large companies earning over $20 million from Canadian sources through digital services like online advertising and shopping. Companies such as Amazon, Apple, Airbnb, Google, Meta, and Uber would have been subject to a three percent tax on revenues from Canadian users.
The tax, which was retroactive to 2022, was expected to generate substantial revenue for Canada. The tax was initially proposed during the 2019 federal election under former Prime Minister Justin Trudeau but was implemented independently as international consensus was delayed.
The U.S. strongly opposed the tax as it primarily impacted American tech giants, arguing that it discriminated against U.S. firms. Industry experts and trade associations had warned for years that the tax would strain Canada-U.S. relations and potentially lead to a trade war.
Various entities, including Canadian and U.S. business groups, tech organizations, and lawmakers, had called for the tax’s elimination or postponement. However, Finance Minister François-Philippe Champagne confirmed that Canada would proceed with the tax as planned, prompting Trump to halt trade discussions.
While the Biden administration also opposed the tax, it pursued dispute settlement consultations under CUSMA, which ended without further action. Other countries like France, Italy, Spain, and the United Kingdom have similar digital services tax regimes in place.