As Canada pushes forward with a brand new digital services tax on overseas and home know-how firms, United States President Donald Trump has retaliated by ending all commerce talks and threatened to impose extra tariffs on exports from Ottawa.
In a put up on his Reality Social platform on Friday, Trump referred to as the brand new Canadian tax construction a “direct and blatant assault on our nation”, including that Canada is “a really troublesome nation to commerce with”.
“Primarily based on this egregious Tax, we’re hereby terminating ALL discussions on Commerce with Canada, efficient instantly,” he wrote. He added that he would announce new tariffs of his personal for Canada in a matter of days.
US firms equivalent to Amazon, Meta, Google and Uber face an estimated $2bn in payments underneath the brand new tax.
Trump’s resolution marks a pointy return to commerce tensions between the 2 nations, abruptly ending a extra cooperative part since Mark Carney’s election as Canada’s prime minister in March.
It additionally marks an extra escalation within the trade-as-pressure tactic underneath Trump’s second time period in Washington.
The US is Canada’s largest buying and selling associate by far, with greater than 80 p.c of Canadian exports destined for the US. In 2024, complete bilateral items commerce exceeded US$762bn, with Canada exporting $412.7bn and importing $349.4bn – leaving the US, which counts Canada as its second-largest buying and selling associate, with a items deficit of $63.3bn.
A disruption resulting from tariffs on merchandise like cars, minerals, power or aluminium may have massive ripple results throughout each economies.
So, what’s Canada’s digital tax? Why is Carney dealing with home pushback on the taxes? And the way is Washington responding?
What’s Canada’s digital providers tax?
Canada’s Digital Companies Tax Act (DSTA) got here into power in June final yr. It’s a levy on tech revenues generated from Canadian customers – even when suppliers do not need a bodily presence within the nation.
The DSTA was first proposed in the course of the 2019 federal election underneath then-Prime Minister Justin Trudeau, and acquired approval in Canada on June 20, 2024. It got here into power every week later, on June 28. The primary funds of this tax are due on Monday, June 30, 2025.
Massive know-how companies with world revenues exceeding $820m and Canadian revenues of greater than $14.7m should pay a 3 p.c levy on sure digital providers revenues earned in Canada. Not like conventional company taxes primarily based on income, this tax targets gross income linked to Canadian person engagement.
Digital providers the levy will apply to incorporate: On-line marketplaces, social media platforms, digital promoting and the sale or licensing of person knowledge.
Probably the most contentious elements of the brand new framework for companies is its retroactive nature, which calls for funds on revenues courting again to January 1, 2022.
Why is Trump suspending commerce talks over the brand new tax?
On June 11, 21 US Congress members despatched a letter to President Trump, urging him to stress Canada to eradicate or pause its Digital Companies Tax. “If Canada decides to maneuver ahead with this unprecedented, retroactive tax, it can set a horrible precedent that may have long-lasting impacts on world tax and commerce practices,” they wrote.
Then, in a Reality Social put up on Friday this week, Trump mentioned Canada had confirmed it might proceed with its new digital providers tax “on our American Expertise Corporations, which is a direct and blatant assault on our Nation”.
He added that the US can be “terminating ALL discussions on Commerce with Canada, efficient instantly” and that he can be levying new tariffs of his personal on Canada inside seven days.
“They’ve charged our Farmers as a lot as 400% Tariffs, for years, on Dairy Merchandise,” Trump mentioned, including, “We’ll let Canada know the Tariff that they are going to be paying to do enterprise with the US of America inside the subsequent seven day interval.”
Later, on the Oval Workplace, Trump doubled down, saying: “We’ve got all of the playing cards. We’ve got each single one.” He famous that the US holds “such energy over Canada [economically]”. “We’d fairly not use it,” Trump mentioned, including: “It’s not going to work out nicely for Canada. They have been silly to do it.
“Most of their enterprise is with us, and when you will have that circumstance, you deal with folks higher.”
Trump additionally mentioned he would order a Part 301 investigation underneath the Commerce Act to evaluate the DSTA’s impact on US commerce, which may doubtlessly result in different punitive measures.
On Friday, White Home Nationwide Financial Council director, Kevin Hassett, advised the Fox Enterprise Friday programme: “They’re taxing American firms who don’t essentially also have a presence in Canada.”
Calling the tax “nearly prison”, he mentioned: “They’re going to should take away it. And I believe they know that.”
How has Canada responded?
Relations had appeared friendlier between the 2 North American neighbours in latest months as they proceed with commerce talks. Trump and former Prime Minister Justin Trudeau had clashed beforehand – with Trump calling Trudeau “very dishonest” and “weak” in the course of the 2018 G7 talks in Canada.
However newly elected Carney loved a cordial go to with Trump in Could on the White Home, whereas Trump travelled to Canada for the G7 summit in Alberta on June 16 and 17. Carney mentioned on the summit that the 2 had set a 30-day deadline for commerce talks.
In a quick assertion on Friday, Prime Minister Carney’s workplace mentioned of Trump’s new threats to droop commerce talks over the digital tax: “The Canadian authorities will proceed to interact in these complicated negotiations with the US in one of the best pursuits of Canadian staff and companies.”
Final week, Canadian Finance Minister Francois-Philippe Champagne advised reporters that the digital tax may very well be negotiated as a part of the broader, ongoing US-Canada commerce discussions. “Clearly, all of that’s one thing that we’re contemplating as a part of broader discussions that you’ll have,” he had mentioned.
These discussions had been anticipated to end in a commerce deal in July. Nonetheless, they’re now in limbo.
What do Canadian enterprise leaders say?
Carney has been dealing with stress from home companies as nicely, which have lobbied the federal government to pause the digital providers tax, underlining that the brand new framework would enhance their prices for offering providers and warning towards retaliation from the US.
The Enterprise Council of Canada, a nonprofit organisation representing CEOs and leaders of main Canadian firms, mentioned in an announcement that, for years, it “has warned that the implementation of a unilateral digital providers tax may danger undermining Canada’s financial relationship with its most vital buying and selling associate, the US”.
“That unlucky improvement has now come to move,” the assertion famous. “In an effort to get commerce negotiations again on monitor, Canada ought to put ahead an instantaneous proposal to eradicate the DST in trade for the elimination of tariffs from the US.”
Has Trump used tariffs to stress Canada earlier than?
Sure. Previous to the DSTA, Trump has used tariffs to stress Canada over what he says is its role within the circulate of the addictive drug, fentanyl, and undocumented migration into the US, in addition to broader commerce and financial points.
On January 20, in his inaugural handle, Trump introduced a 25 percent tariff on all Canadian items and a ten p.c tariff on Canadian power sources. Trump claimed that Canada has a “rising footprint” in fentanyl manufacturing, and alleged that Mexican cartels function fentanyl labs in Canada, significantly in British Columbia, Alberta and Ontario.
These tariffs have been paused for 30 days following assurances from Canada that applicable motion can be taken to curb the circulate of fentanyl, after which re-imposed in early March.
Do different nations levy an analogous digital tax?
Sure, a number of nations world wide have launched digital providers taxes (DSTs) just like Canada’s. France was one of many first to introduce a DST in 2019, eliciting an angry response from Trump who was serving his first time period as president. The French tax is a 3 p.c levy on revenues from internet advertising, digital platforms and gross sales of person knowledge.
The UK adopted with a 2 p.c tax on revenues from social media platforms and search engines like google and yahoo. Spain, Italy, and Austria have additionally carried out comparable taxes, with charges starting from 3 to five p.c. Turkiye has one of many highest DST charges at 7.5 p.c, protecting a variety of digital providers equivalent to content material streaming and promoting.
Outdoors Europe, India has a 2 p.c “equalisation levy” on overseas e-commerce operators which earn revenues from Indian customers. Kenya and Indonesia have additionally created their very own digital tax programs, although they’re structured barely in another way – Indonesia, as an illustration, applies Worth Added Tax (VAT) – or gross sales tax – on overseas digital providers, fairly than a DST.
The US authorities has strongly opposed these taxes; a few of these disputes have been paused as a part of ongoing negotiations led by the Group for Financial Co-operation and Growth (OECD), a global organisation made up of 38 member nations, which is engaged on a world settlement for taxing digital firms pretty.
Canada held off on implementing its DST till 2024 to offer time for the OECD talks. However when progress stalled, it went forward with the three p.c tax that applies retroactively since January 2022.
Ought to the EU be nervous about this?
The European Union is prone to be watching this case carefully as digital tax is prone to be a key concern throughout its personal commerce talks with the US.
Trump has repeatedly warned that comparable tax measures from different allies, together with EU nations, may face extreme retaliation.
Trump’s administration has beforehand objected to digital taxes launched by EU member states like France, Italy, and Spain. In 2020, the US Commerce Consultant investigated these taxes underneath Part 301 and threatened retaliatory tariffs, although these have been paused pending OECD-led world tax negotiations.
The European Fee has confirmed that digital taxation stays on the agenda, particularly if a world deal underneath the OECD fails to materialise. President Ursula von der Leyen mentioned on June 26 that “all choices stay on the desk” in commerce discussions with the US, together with enforcement mechanisms towards discriminatory US measures.
The high-stakes trade negotiations ongoing between the US and the EU have a deadline for July 9 – the date that Trump’s 90-day pause on world reciprocal tariffs is because of expire. Trump has threatened to impose new tariffs of up to 50 percent on key European exports, together with vehicles and metal, if a deal is just not reached.
In response to those threats, the EU has ready an inventory of retaliatory tariffs price as much as 95 billion euros ($111.4bn), which might goal a broad vary of US exports, from agricultural merchandise to Boeing plane. EU leaders have signalled that they are going to defend the bloc’s tax sovereignty, whereas remaining open to negotiation.