Canada scraps digital services tax after U.S. backlash, revives trade talks

Canada has scrapped its digital services tax targeting U.S. technology firms just hours before it was set to take effect, in a move aimed at reviving stalled trade negotiations with the United States.

Canada’s government announced late Sunday that it would withdraw its digital services tax (DST), which had targeted major U.S. technology firms, only hours before the measure was due to be enforced. The decision is part of an effort to restart high-level trade negotiations with the United States, which had broken down over the planned tax.

Canadian Prime Minister Mark Carney and U.S. President Donald Trump are expected to resume talks this week, with a goal to reach a new economic deal by 21 July, according to a statement from Canada’s finance ministry. The negotiations stalled on Friday when President Trump abruptly ended discussions, calling Canada’s tax on digital services a "blatant attack" on U.S. firms.

On Sunday, Trump threatened to impose new tariffs on Canadian goods within a week, raising the risk of renewed trade tensions between the two neighbours.

The now-cancelled digital services tax was designed to impose a 3% levy on revenue generated by digital services provided to Canadian users, applied to companies earning over $20 million annually from such services. The tax, retroactive to 2022, would have affected some of the world’s largest technology companies, including Amazon, Meta, Google and Apple.

Monday’s planned collection has been halted, the finance ministry said, and Finance Minister François-Philippe Champagne will bring forward legislation to formally rescind the Digital Services Tax Act. 

"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’s statement explained. 

"Canada’s preference has always been a multilateral agreement related to digital services taxation."

Canada’s retreat from the digital tax comes after the Biden administration initiated trade dispute settlement consultations, arguing the measure breached the North American trade agreement. While Canada had avoided broad tariffs imposed by Trump in April, it still faces steep U.S. duties on steel and aluminium.

The announcement had an immediate impact on financial markets, with futures and Asian shares climbing as investors welcomed the news.

Canada remains the United States’ second-largest trading partner, buying $349.4 billion in U.S. goods last year and exporting $412.7 billion, according to U.S. Census Bureau data. Both governments now face a renewed push to resolve differences and reach a comprehensive trade deal before the July deadline.

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