Canada scraps tech tax to advance trade talks with Donald Trump

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Canada has scrapped a digital services tax that targeted US technology companies, in an effort to smooth trade negotiations with its neighbour after President Donald Trump described the levy as a “direct and blatant” attack.

The decision to abandon the tax, a 3 per cent levy on revenue for the biggest technology companies, came hours before it was due to come into effect on June 30.

“Rescinding the digital services tax will allow the negotiations of a new economic and security relationship with the US to make vital progress and reinforce our work to create jobs and build prosperity for all Canadians,” said Canada’s finance minister François-Philippe Champagne in a statement on Sunday night.

Prime Minister Mark Carney said cutting the tax “will support a resumption of negotiations towards the July 21 timeline” that was declared at this month’s G7 leaders’ summit in Kananaskis, Alberta.

Carney and Trump have agreed that they will resume negotiations, the statement said. Trump said on Friday the US was “terminating” trade talks with Canada in retaliation against the tax on tech companies, reigniting a bitter North American trade war after months of détente.

Trump repeated these complaints on Fox News on Sunday. “Until such time as they drop certain taxes, yeah,” he said. “People don’t realise, Canada is very nasty to deal with.”

In December 2023, Canada’s parliamentary budget office estimated the DST would increase federal government revenues by C$7.2bn ($5.3bn) over five years.

The tax, first announced in 2020, targeted companies such as Meta, Netflix and Amazon as well as local businesses. Those affected had to file a return by the end of June or face a fine.

While the tax was one of Trump’s main complaints, it was also unpopular with some Canadian business groups.

“For many years, we have warned that the implementation of a unilateral digital services tax could risk undermining Canada’s economic relationship with [the US],” said Goldy Hyder, president of the Business Council of Canada.

Trump’s unprecedented hostility to his northern neighbour — with repeated threats to annex Canada and the imposition of tariffs in violation of a free trade agreement — dominated the Canadian election and helped propel Carney’s Liberal party to victory.

Carney had vowed to stand up to Trump and last week the finance minister said Ottawa would push ahead with the tax.

Carney also this month announced a huge increase to Canada’s defence spending, enabling it to meet the Nato target of at least 2 per cent of GDP annually this year instead of 2030. This followed criticism from Trump that it and other Nato members were not pulling their weight.

Canada has an annual trading relationship with the US worth C$1.3tn and sells most of its products and services to the US.

Carney has launched a sweeping set of reforms to diversify the economy from relying on the US too heavily, including a push to drop internal trade barriers that have prevented the flow of goods and services between Canada’s provinces.