Will Canada’s Digital Services Tax survive Trump’s tariffs?

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Canada’s Digital Services Tax could become a victim of the escalating trade fight with the United States before the first payments under the regime come due after it was singled out by the White House Thursday as part of President Donald Trump’s plan to impose reciprocal tariffs on U.S. trade partners.

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The tax rule, implemented by Ottawa in June of last year, targets large digital service providers that earn more than $1.1 billion worldwide, levying a three per cent tax on their Canadian revenues over $20 million, retroactive to 2022.

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Under the DST, companies were obligated to register with the Canada Revenue Agency by Jan. 31 but have until June 30 to file their first DST returns.

Trump’s reciprocal tariff plan pointed to DST regimes in Canada and France, which the president called “non-reciprocal taxes” that will cost U.S. firms more than US$2 billion per year. Canada’s DST will lead to a US$500 million annual payout from American companies, according to the U.S.

“America has no such thing. Only America should be allowed to tax American firms,” Trump said in the White House statement.

Business groups on both sides of the border have long warned that the tax risked damaging bilateral trade ties.

“We waved a red flag in front of a bull. It incited retaliation,” said Ian Lee, a management professor at Carleton University in Ottawa.

We waved a red flag in front of a bull. It incited retaliation

Ian Lee

When the Liberal government passed the rule, it broke ranks with a group of Organization for Economic Cooperation and Development (OECD) countries that had been discussing a global framework for corporate income taxes to address the tax challenges arising from the digital economy.

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Many multinational tech firms have avoided tax obligations because they lack a physical presence in some of the countries in which they conduct business.

In 2023, two years after the discussion started, 138 out of the 145 framework members agreed to pause imposing digital service taxes until at least 2025 to allow time for further negotiations.

But Canada, along with 18 countries including the U.K. and several EU nations, decided not to wait.

Canada’s tax rule was immediately opposed by the Biden administration.

Last August, the Office of the U.S. Trade Representative (USTR) requested dispute settlement consultations with Ottawa under the 2020 U.S.-Canada-Mexico (USMCA) free-trade agreement.

“The U.S. opposes unilateral digital services taxes that discriminate against U.S. companies. USTR is taking action today to address Canada’s discriminatory policies,” said former U.S. trade ambassador Katherine Tai at the time.

Canada has to be nimble and agile to adapt

Jennifer Quaid

Some believe the clock is now ticking for Canada’s DST.

Ottawa will likely agree to terminate the tax as part of its efforts to temper Trump’s tariffs threats or as part of a renegotiated USMCA trade pact, said Michael Geist, the Canada research chair in internet and e-commerce law at the University of Ottawa.

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Geist said earlier this year that the elimination of the tax would likely emerge as a “key U.S. demand” in trade negotiations given Big Tech’s close ties with president Trump.

Trading the DST’s expected gains “for similar value in sensitive economic sectors may be the price of striking a deal,” he added.

Chios Carmody, professor and Canadian national director of the Canada-United States Law Institute at the University of Western Ontario, said Trump’s threats to Canada suggest that the president is trying to “grab more tax-free foreign revenue” for American tech firms, and that giving in on the DST would just “embolden” the U.S.

“(Trump would) smell blood and seek more concessions on other long-term trade irritants like supply management and defence procurement,” Carmody said.

For now, businesses are set to endure a period of continued uncertainty surrounding the DST as Canada decides how to proceed, said Eric Hendry, a tax lawyer at Gowling WLG.

Hendry believes that most U.S. tech firms that fall within the scope of Canada’s DST have already registered with the Canada Revenue Agency (CRA).

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“Canada’s DST has been on (tech companies’) radar for some time and they’ve likely already made significant investments” to comply,” he said.

Though the White House statement pegged the cost of the DST at US$500 million annually, the Parliamentary Budget Office has projected it could generate north of $1 billion for the federal treasury per year.

Most businesses have not yet filed their first DST returns, meaning it remains unclear how much tax is being collected from the DST and specifically from American firms, Hendry said.

Jennifer Quaid, vice-dean of civil law research at the University of Ottawa, said Canada would likely have been better off cooperating on a global tax agreement and that going it alone “could cost us in the long-run.”

But with Trump now pressuring Canada on multiple trade fronts, all bets are off.

“The rules-based international order is being torn up,” Quaid said. “Canada has to be nimble and agile to adapt.”

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