DST: The Disposable, Sacrificial Tax?

No tears should be shed for the Digital Services Tax, but what the hell is going on here with Canada's trade strategy?

It was a bit of jarring news for Canadians as we headed into the Canada Day long weekend:

Fortunately, those trade talks have now resumed. Unfortunately for those who supported the Digital Services Tax (DST), the tax has indeed been sacrificed to the cause of “advancing broader trade negotiations with the United States”

To support those negotiations, the Minister of Finance and National Revenue, the Honourable François-Philippe Champagne, announced today that Canada would rescind the Digital Services Tax (DST) in anticipation of a mutually beneficial comprehensive trade arrangement with the United States. Consistent with this action, Prime Minister Carney and President Trump have agreed that parties will resume negotiations with a view towards agreeing on a deal by July 21, 2025.

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. Canada’s preference has always been a multilateral agreement related to digital services taxation. While Canada was working with international partners, including the United States, on a multilateral agreement that would replace national digital services taxes, the DST was enacted to address the aforementioned taxation gap.

The June 30, 2025 collection will be halted, and Minister Champagne will soon bring forward legislation to rescind the Digital Services Tax Act.

This was so close to the wire, in fact, that the Canada Revenue Agency had already collected some revenue from the tax (they won’t say how much), and any refunds will have to wait for the legislation that will officially rescind the tax. And even though the tax was to have been officially implemented on June 30, 2025, the costs have already been passed onto many Canadian businesses. Last year, in anticipation of the tax, for example, Google began charging a 2.5 per cent advertising surcharge in Canada.

If this was all part of some deliberate strategy, it’s a very bizarre and confusing strategy: the government introduced legislation to implement the DST in 2023 despite an OECD moratorium on such taxes (with the goal of reaching an international consensus) and even made it retroactive to 2022. All that, despite very clear U.S. objections to the tax and a very clear likelihood of American retaliation. For a year and a half, we allowed this irritant to fester, until suddenly at the last minute - and just when the Americans had hit the breaking point - we just decide to scrap it altogether.

As far as the Americans are concerned, Canada caved:

For his part, here’s what Prime Minister Mark Carney had to say on Monday:

Now, it’s possible that Prime Minister Carney is not a fan of the DST; that this was part of Trudeau’s legacy that he inherited but didn’t necessarily want, and was happy to have the excuse to be rid of it. But that’s harder to reconcile when we look at how this all played out: if Trump hadn’t called off trade talks, the DST would have been implemented as scheduled on Monday. At no point has Carney made the case for abandoning the tax or refuted any of the previous Liberal talking points about why the DST was necessary.

It’s also possible that Carney wanted Donald Trump to believe that we caved here, so that the US President can feel like he achieved a big victory or concession. There are two problems with that, however. One, is that Canadians are going to see it the same way and understandably bristle at the idea that the White House is dictating Canadian policy (even if many Canadians weren’t overly familiar or overly fond of the DST). Two, it shows Trump that he has leverage: cancelling talks, or threatening to cancel talks, can be an effective way of pressuring the Canadians to back down on certain issues.

We should not grieve over the demise of the DST (University of Ottawa digital law expert Michael Geist has a great overview of the many problems with the government’s DST approach and what a smarter strategy would have looked like), but this is not the way to achieve what would otherwise be a desirable policy outcome.

Next up is very likely supply management. Trump’s post on the DST also made reference to supply management, and it’s something he’s brought up many times - including just a few days ago in an interview with Fox News:

“Until such time as they drop certain taxes, yeah,” he answered. “People don’t realize, Canada is very nasty to deal with.”

He then repeated his previously stated objections to Canada’s agricultural policies, which set high tariffs on imports above certain exempted levels. He did not explicitly say whether Canadian changes to supply management were a precondition for resuming talks.

This appears to be another issue where we’re practically going out of our way to exacerbate trade tensions with the United States. It’s pretty obvious that supply management is a source of trade tension here, and yet we’ve chosen now as the moment to enshrine into law the idea that supply management should be off the table in any trade negotiations.

How long until we cave on this issue, too, after some future Trump tantrum where he calls off talks yet again? Supply management is problematic in many ways, and it’s unfortunate that Canadian politicians have been so unwilling to consider any sort of reforms to the system. But it would be yet another embarrassment if this government is forced by the Americans into yet another climbdown.

It is crucial that we get to some sort of a trade agreement with the U.S. and get past all this drama. The tariffs and the threats from the Americans have not been helpful or reasonable and unfortunately we’re likely going to have to settle for something that’s a downgrade from the trading relationship we’ve previously enjoyed with the United States.

Mark Carney sold Canadians on the idea that he was the best leader to navigate all of this. We’ll be able to judge for ourselves once we get to the end of this process. But this was not a week that will fill Canadians with confidence.