In a dramatic policy reversal, Canada has scrapped its controversial digital services tax (DST) just hours before it was scheduled to take effect on Monday, aiming to revive stalled trade negotiations with the United States.
The tax, which would have imposed a 3% levy on digital services revenue above $20 million earned from Canadian users, retroactively from 2022 was set to impact U.S. tech giants such as Amazon, Meta, Google, and Apple.
Canada’s finance ministry confirmed on Sunday night that Prime Minister Mark Carney and U.S. President Donald Trump have agreed to resume trade talks, with a new deadline of July 21 to reach a deal. The announcement followed Trump’s abrupt termination of negotiations on Friday, denouncing the tax as a “blatant attack” on American companies.
On Sunday, Trump renewed his warning, vowing to introduce fresh tariffs on Canadian goods within a week if no resolution is found. His threat raised fears of a renewed trade standoff between the two long-time economic partners, reminiscent of past tensions.
Canada’s Finance Minister François-Philippe Champagne will now introduce legislation to repeal the Digital Services Tax Act. In a statement, the ministry said the tax was initially proposed in 2020 to address taxation gaps affecting foreign digital firms operating in Canada but reaffirmed that Canada prefers a multilateral solution on the issue.
“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,” the ministry said. “Canada’s preference has always been a multilateral agreement related to digital services taxation.”
The move to drop the DST had immediate financial market implications, with U.S. futures rising and positive sentiment rippling through Asian markets early Monday.
The decision also comes as Canada remains a critical U.S. trading partner, second only to Mexico, with $349.4 billion in U.S. exports and $412.7 billion in imports last year, according to the U.S. Census Bureau.
While Canada avoided inclusion in broad U.S. tariffs introduced in April, it still faces a hefty 50% duty on steel and aluminum. The Biden administration had earlier requested consultations on the DST, claiming it violated Canada’s obligations under the North American free trade agreement.
As both sides return to the negotiating table, attention now turns to whether the latest diplomatic pivot will be enough to calm tensions and cement a new economic pact by the July 21 deadline.
