Relations between Canada and the United States showed signs of improvement this week after Canada announced it would scrap a planned tax on large U.S. technology companies. The decision comes just hours before payments under the so-called digital services tax (DST) were set to be collected, defusing a brewing trade conflict that threatened to derail broader negotiations.
The move followed a sharp escalation on Friday, when U.S. President Donald Trump called the tax a “blatant attack” and threatened higher tariffs on Canadian imports in retaliation. Trump’s administration made clear that talks over a new bilateral trade deal would not move forward unless Canada abandoned the tax, which he described as “egregious,” adding that “economically we have such power over Canada.”
White House economic adviser Kevin Hassett confirmed on Monday that discussions between the two countries would “absolutely” resume following Canada’s climbdown.
Details of the Scrapped Tax
Canada’s DST would have imposed a 3% levy on revenue above $20 million generated in Canada by major U.S. technology companies, including Amazon, Meta, Google, and Apple. The tax was designed to address what Ottawa described as a gap in its tax system, where many large digital firms with millions of Canadian users paid little local tax on those revenues.
Originally announced in 2020, the DST had been structured to apply retroactively to revenue earned from January 2022 onward, a feature that made it particularly controversial. Canada’s federal budget last year estimated the measure would raise over C$5.9 billion (about $4.3 billion USD) over five years, with the first year alone expected to cost the tech giants more than C$2 billion.
However, Finance Minister François-Philippe Champagne announced on Monday that Canada would introduce legislation to repeal the tax and halt collection of any payments that were scheduled to begin immediately.
“Canada’s preference has always been a multilateral agreement related to digital services taxation,” Champagne’s statement read, acknowledging ongoing international negotiations on how best to tax large tech companies.
International Context and Domestic Backlash
Canada’s plan had mirrored efforts in other countries, including the UK and several EU members, to impose digital services taxes on multinational tech giants whose complex corporate structures often reduce local tax liabilities despite large local user bases.
Still, the policy had long been a source of tension between Ottawa and Washington. Even during the previous Biden administration, U.S. officials warned that Canada’s unilateral approach could undermine trade ties and provoke retaliatory measures.
Within Canada, the DST faced criticism from business groups concerned it would ultimately raise costs for consumers. Some experts also faulted the government’s handling of the issue. Michael Geist, a University of Ottawa law professor and prominent commentator on technology policy, wrote on Monday that it was “hard to overstate how badly the government managed the DST issue over the past five years,” pointing to its retroactive design and failure to take bipartisan U.S. opposition seriously.
Political and Economic Stakes
The tax dispute arrives at a sensitive moment for U.S.-Canada relations. The two countries had previously committed to negotiating updated trade terms by July 21, aiming to strengthen what remains one of the world’s most important trading relationships. Canada sends about 75% of its goods exports—worth more than $400 billion USD annually—to the U.S., while it accounts for around 17% of American exports in return.
Tensions had been rising since the start of Trump’s second term. The president threatened sweeping new tariffs on Canadian goods, and even floated the idea of annexing Canada—rhetoric that contributed to a period of strained diplomacy and domestic political shifts. Canada’s Liberal Party, led by former central banker Mark Carney, returned to power amid these tensions, vowing to reset the relationship.
Despite a recent thaw and shared goal of a new trade deal, Ottawa’s insistence earlier this month that it would move ahead with collecting DST payments threatened to derail those plans. That standoff now appears resolved—for the moment—with both sides signaling a renewed commitment to negotiations.
Business Reaction and Future Prospects
Business groups on both sides of the border welcomed Canada’s decision. The American Chamber of Commerce praised the repeal as a “constructive decision” that would let the two countries focus on strengthening their economic partnership. U.S. Commerce Secretary Howard Lutnick also thanked Canada in a social media post, describing the tax as a potential “deal breaker” that would have blocked any trade agreement.
While Canada has shelved its DST for now, the underlying challenge of how to tax global tech giants fairly remains unresolved. Champagne’s statement pointed to Canada’s preference for an international framework—something the OECD has been working on for years, with uneven progress.
For now, Canada’s reversal appears to have cooled tensions, paving the way for trade talks to resume. Whether a lasting agreement can be reached without reigniting old disputes will be a test for both governments in the months ahead.