Canada drops big tech tax to reopen trade talks with U.S.

Canada has scrapped its controversial digital services tax (DST) targeting U.S. tech giants just hours before the first payments were due — a move that has cleared the way for stalled trade negotiations with the United States to resume.

The decision came after U.S. President Donald Trump abruptly called off ongoing trade discussions last Friday, slamming the tax as a “blatant attack” on American business and threatening retaliatory tariffs. In response, Canada announced it would introduce legislation to formally repeal the tax and suspend all collections.

White House economic adviser Kevin Hassett confirmed on Monday that talks between the two countries would “absolutely” restart, signalling a thaw in what had been a tense diplomatic standoff.

Canada’s now-abandoned DST would have imposed a 3% levy on revenues above C$20 million generated in Canada by companies like Amazon, Google, Meta, and Apple. The tax was projected to cost these tech giants over C$2 billion in its first year alone, with payments retroactive to January 2022.

In a statement, Finance Minister François-Philippe Champagne emphasized that the DST had been introduced in 2020 to address the tax gap created by large tech firms operating in Canada without contributing fairly. However, he also noted Canada’s long-standing preference for a global framework on taxing digital services.

U.S. Commerce Secretary Howard Lutnick echoed that sentiment, saying on social media that the tax "would have been a deal breaker" for any new trade pact with Canada.

Trade between the two nations is highly interdependent. The U.S. absorbs about 75% of Canadian exports, while Canada is the destination for just 17% of American goods — a power imbalance President Trump highlighted as he ramped up pressure.

The tax, which has long irritated Washington, had faced bipartisan criticism in the U.S. for its potential to destabilize cross-border relations. Canadian critics also warned it would lead to higher costs for consumers, as businesses passed on the charges.

University of Ottawa law professor Michael Geist, a vocal critic of the DST, described the policy rollout as “mishandled from the start,” citing its retroactive design and Ottawa’s dismissal of repeated U.S. concerns.

Canada’s abrupt climbdown follows months of rocky diplomatic exchanges that had begun to thaw in recent weeks. The two governments have now committed to striking a new trade agreement by July 21.

For Canada, dropping the DST is a tactical retreat — but one aimed at protecting a far larger economic relationship.