What is Canada’s digital services tax and why is it infuriating Trump? 

U.S. President Donald Trump answers questions from reporters in the Oval Office at the White House in Washington on June 27. Photo by Manuel Balce Ceneta/AP

Article content

U.S. President Donald Trump abruptly cut off all trade negotiations with Canada on Friday, citing Ottawa’s Digital Services Tax (DST) for the decision. The tax, enacted last June, targets U.S. technology companies that operate in Canada but pay little tax here. Under the new tax regime, the first payments are set to be collected on Monday, June 30. The Financial Post breaks down what you need to know about the DST and why it is infuriating Trump and Americans.

Article content

Article content

What is the Digital Services Tax (DST)?

Article content

Article content

Article content

Former Prime Minister Justin Trudeau’s government enacted Canada’s Digital Services Tax Act in June 2024, with the rules coming into effect the same month. The federal tax is applicable to large businesses — both foreign and domestic — that meet two specific criteria: a total global revenue of €750 million and up, and over $20 million of profits earned in Canada annually. The legislation levies a three per cent tax on digital services revenue over $20 million, and is retroactive to Jan. 1, 2022, meaning Ottawa could stand to gain billions in DST revenue, according to some estimates. Taxable revenue includes those of online marketplaces, digital advertising, social media, and user data — which will primarily affect American Big Tech giants such as Amazon.com, Inc., Apple Inc., and Meta Platforms, Inc.

Article content

What are companies’ obligations under the DST? When was it passed?

Article content

Under the DST, companies were required to register with the Canada Revenue Agency (CRA) by Jan. 31, 2025 and are obligated to file their first DST returns on June 30, 2025. The CRA has said that more than 500 companies have already applied to register for DST purposes, and expects more than 100 companies to pay the tax. If applicable companies fail to register with the agency, they could be fined $20,000 per year. If they fail to file a DST return, Canada could dole out a penalty equal to five per cent of the unpaid tax for the year, plus one per cent of the unpaid tax for the year for each month, not exceeding 12 months, in which the return hasn’t been filed.

Article content

Article content

Why is it controversial?

Article content

Article content

According to the government, the goal of the DST is to ensure that major technology firms are taxed appropriately in the country. The legislation however, has come under fire from business groups on both sides of the border, with critics warning that the rules could further inflame Canada-U.S. ties. The Canadian Chamber of Commerce has argued that the tax could increase costs for consumers and risks “damaging our beneficial and lucrative trade relationship with the U.S.” The U.S. meanwhile, has long denounced Canada’s proposed rules, claiming that they unfairly discriminate against American firms. Last August, under the former Biden administration, the Office of the U.S. Trade Representative (USTR) launched dispute settlement consultations with Ottawa under the Canada-United States-Mexico Agreement over the DST. The U.S. has said that American companies are on the hook to pay Ottawa US$2 billion under the DST. “Only America should be allowed to tax American firms,” Trump said in a February statement. Tech giant Google LLC responded to Canada’s digital services tax rules by introducing an additional 2.5 per cent fee for ads shown in Canada starting in October 2024. Called the “Canada DST Fee,” Google said the surcharges will “cover part of the costs of complying with DST legislation in Canada.”