What is Canada's Digital Service Tax that made Trump cut off trade deal?

The long-simmering trade tensions between the United States and Canada flared dramatically this week, after US President Donald Trump abruptly cut off trade negotiations over Ottawa’s plan to press ahead with its new Digital Services Tax. Trump called the move “a direct and blatant attack” on America, warning that punitive tariffs on Canadian goods would be announced within days.

As per Associated Press, the President said on Friday that Canada had confirmed it would enforce the controversial tax starting Monday, ending months of fraught negotiations between the two close trading partners.

What is Canada’s Digital Services Tax?

Canada’s Digital Services Tax (DST) was signed into law in June 2024 under the former Trudeau government. According to the Financial Post, the DST applies a three per cent levy on certain revenues earned by large digital firms, those with at least €750 million in global sales and over $20 million in annual Canadian digital revenue.

That includes online marketplaces, social media, advertising, and user data sales. It primarily targets American tech giants such as Amazon, Google, Meta, Uber, and Airbnb. The tax is retroactive to January 1, 2022, leaving US companies with an estimated US$2 billion bill due at the end of June.

How companies are expected to comply?

Under Canadian law, firms had to register with the Canada Revenue Agency by 31 January 2025 and must file their first DST returns by 30 June 2025. Failure to register could mean $20,000-per-year fines. Companies that don’t file on time face penalties of five per cent of the unpaid tax plus an extra one per cent per month, capped at 12 months.

The Canadian government says the goal is to make sure digital giants pay their fair share of taxes in Canada.

Why is Trump so angry?

The DST has long infuriated Washington. The US argues it unfairly discriminates against American firms, effectively singling out Silicon Valley giants for extra taxes. Trump used blunt language this week to make his anger clear.

“Based on this egregious Tax, we are hereby terminating ALL discussions on Trade with Canada, effective immediately,” he wrote on social media, as per AP. He added: “Economically, we have such power over Canada. We’d rather not use it. But it’s not going to work out well for Canada. They were foolish to do it.” Trump also predicted Canada would eventually remove the tax — but insisted he didn’t care either way.

US industry reaction

US tech firms and trade associations cheered Trump’s tough stance. As quoted by AP, Matt Schruers, head of the Computer & Communications Industry Association, said: “We appreciate the Administration’s decisive response to Canada’s discriminatory tax on US digital exports.”

But companies are already passing the costs onto Canadian users. Google has added a special “Canada DST Fee” — a 2.5 per cent surcharge on ads in Canada — to help cover its new tax burden.

Why Canada is standing firm?

Despite heavy pressure, Canada’s government is refusing to blink. Finance Minister François-Philippe Champagne said last week that Ottawa is “going ahead” with the DST, as per the Financial Post.

Prime Minister Mark Carney, speaking Friday, was measured but firm: “We will continue to conduct these complex negotiations in the best interests of Canadians. It’s a negotiation.” Canadian officials have suggested they’re open to discussions about the tax as part of broader talks, but for now, it will be enforced, as reported by AP.

Trade dependence raises the stakes

The dispute comes against the backdrop of an extremely deep economic relationship. The United States is by far Canada’s largest trading partner. As per AP, about 80 per cent of Canadian exports go south of the border. That includes three-quarters of all goods shipped abroad.

Canada is the largest foreign supplier of steel, aluminium and uranium to the US. It provides 60 per cent of America’s crude oil imports and 85 per cent of electricity imports. Trade is highly integrated, especially for industries like automotive manufacturing, where car parts cross the border multiple times before final assembly. Trump has already imposed 25 per cent tariffs on Canadian steel and aluminium, as well as new auto tariffs, citing security and anti-drug smuggling concerns.

A fragile trade relationship

The DST fight is only the latest flashpoint. Trump’s administration has warned for months it would retaliate against countries with digital taxes targeting US firms.

According to Bloomberg, the US previously launched formal consultations over Canada’s tax under the US-Mexico-Canada Agreement. And while Trump says he’ll set new tariff rates for Canadian goods within seven days, Canadian business groups fear the dispute could spiral, hurting both economies. The Canadian Chamber of Commerce has warned the DST could “damage our beneficial and lucrative trade relationship with the US.”

Uncertainty ahead

For now, negotiations have collapsed. Trump has said bluntly that Canada could restart talks by scrapping the tax. But Canada insists it won’t be intimidated, betting that the two countries’ deep interdependence will eventually force both sides back to the table.

As trade experts warn, the row could test the strength of one of the world’s closest economic relationships at a time when both economies are already facing challenges.

(With inputs from the agencies)