As Canada pushes forward with a brand new digital companies tax on international and home expertise 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 submit on his Fact 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 tough nation to commerce with”.
“Based mostly 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 akin to Amazon, Meta, Google and Uber face an estimated $2bn in payments below the brand new tax.
Trump’s choice marks a pointy return to commerce tensions between the 2 international locations, abruptly ending a extra cooperative section since Mark Carney’s election as Canada’s prime minister in March.
It additionally marks an additional escalation within the trade-as-pressure tactic below 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 as a result of tariffs on merchandise like vehicles, minerals, vitality or aluminium may have giant 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 companies 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 through the 2019 federal election below then-Prime Minister Justin Trudeau, and obtained 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 expertise corporations with world revenues exceeding $820m and Canadian revenues of greater than $14.7m should pay a 3 p.c levy on sure digital companies revenues earned in Canada. In contrast to conventional company taxes primarily based on income, this tax targets gross income linked to Canadian consumer engagement.
Digital companies the levy will apply to incorporate: On-line marketplaces, social media platforms, digital promoting and the sale or licensing of consumer knowledge.
One of the vital 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 strain Canada to remove or pause its Digital Companies Tax. “If Canada decides to maneuver ahead with this unprecedented, retroactive tax, it’ll set a horrible precedent that can have long-lasting impacts on world tax and commerce practices,” they wrote.
Then, in a Fact Social submit on Friday this week, Trump stated Canada had confirmed it could proceed with its new digital companies tax “on our American Know-how Firms, which is a direct and blatant assault on our Nation”.
He added that the US could be “terminating ALL discussions on Commerce with Canada, efficient instantly” and that he could 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 stated, including, “We’ll let Canada know the Tariff that they are going to be paying to do enterprise with america of America inside the subsequent seven day interval.”
Later, on the Oval Workplace, Trump doubled down, saying: “We’ve all of the playing cards. We’ve each single one.” He famous that the US holds “such energy over Canada [economically]”. “We’d slightly not use it,” Trump stated, 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’ve gotten that circumstance, you deal with folks higher.”
Trump additionally stated he would order a Part 301 investigation below 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, informed the Fox Enterprise Friday programme: “They’re taxing American firms who don’t essentially also have a presence in Canada.”
Calling the tax “nearly felony”, he stated: “They’re going to must take away it. And I feel they know that.”
How has Canada responded?
Relations had appeared friendlier between the 2 North American neighbours in current 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” through the 2018 G7 talks in Canada.
However newly elected Carney loved a cordial go to with Trump in Might on the White Home, whereas Trump travelled to Canada for the G7 summit in Alberta on June 16 and 17. Carney stated on the summit that the 2 had set a 30-day deadline for commerce talks.
In a short assertion on Friday, Prime Minister Carney’s workplace stated of Trump’s new threats to droop commerce talks over the digital tax: “The Canadian authorities will proceed to have interaction in these advanced negotiations with america in the most effective pursuits of Canadian employees and companies.”
Final week, Canadian Finance Minister Francois-Philippe Champagne informed reporters that the digital tax could possibly 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 will have,” he had stated.
These discussions had been anticipated to end in a commerce deal in July. Nevertheless, they’re now in limbo.
What do Canadian enterprise leaders say?
Carney has been dealing with strain from home companies as nicely, which have lobbied the federal government to pause the digital companies tax, underlining that the brand new framework would enhance their prices for offering companies and warning in opposition to retaliation from the US.
The Enterprise Council of Canada, a nonprofit organisation representing CEOs and leaders of main Canadian firms, stated in a press release that, for years, it “has warned that the implementation of a unilateral digital companies tax may danger undermining Canada’s financial relationship with its most necessary buying and selling associate, america”.
“That unlucky improvement has now come to go,” the assertion famous. “In an effort to get commerce negotiations again on observe, Canada ought to put ahead an instantaneous proposal to remove the DST in trade for the elimination of tariffs from america.”
Has Trump used tariffs to strain Canada earlier than?
Sure. Previous to the DSTA, Trump has used tariffs to strain Canada over what he says is its position 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 tackle, Trump introduced a 25 p.c tariff on all Canadian items and a ten p.c tariff on Canadian vitality sources. Trump claimed that Canada has a “rising footprint” in fentanyl manufacturing, and alleged that Mexican cartels function fentanyl labs in Canada, notably in British Columbia, Alberta and Ontario.
These tariffs have been paused for 30 days following assurances from Canada that acceptable motion could be taken to curb the circulate of fentanyl, after which re-imposed in early March.
Do different international locations levy the same digital tax?
Sure, a number of international locations world wide have launched digital companies taxes (DSTs) much like Canada’s. France was one of many first to introduce a DST in 2019, eliciting an indignant 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 marketing, digital platforms and gross sales of consumer 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 applied comparable taxes, with charges starting from 3 to five p.c. Turkiye has one of many highest DST charges at 7.5 p.c, masking a variety of digital companies akin to content material streaming and promoting.
Exterior Europe, India has a 2 p.c “equalisation levy” on international 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, for example, applies Worth Added Tax (VAT) – or gross sales tax – on international digital companies, slightly 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 Improvement (OECD), a world organisation made up of 38 member international locations, which is engaged on a world settlement for taxing digital firms pretty.
Canada held off on implementing its DST till 2024 to present 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 apprehensive about this?
The European Union is more likely to be watching this example intently as digital tax is more likely 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 international locations, 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 below 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 below the OECD fails to materialise. President Ursula von der Leyen stated on June 26 that “all choices stay on the desk” in commerce discussions with the US, together with enforcement mechanisms in opposition to discriminatory US measures.
The high-stakes commerce 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 as much as 50 p.c on key European exports, together with automobiles and metal, if a deal shouldn’t be 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 may defend the bloc’s tax sovereignty, whereas remaining open to negotiation.
