Canada scrapped its digital services tax hours before launch to restart U.S. trade talks.

 

Canada has decided to cancel its proposed digital services tax just hours before it was set to take effect, in an effort to restart trade negotiations with the United States. The tax, first introduced in 2020, would have imposed a 3% levy on the revenue large digital companies earn from Canadian users, provided it exceeds $20 million annually. The tax was also going to be applied retroactively to earnings from 2022.

Major U.S. tech companies such as Amazon, Meta, Apple, and Google were directly targeted by the measure. This angered U.S. President Donald Trump, who abruptly ended trade discussions on Friday, calling the tax a “blatant attack” on American businesses. On Sunday, he warned that Canada could face fresh tariffs on its exports, raising fears of renewed economic tension between the two nations.

In response, Canada's finance ministry issued a late-night statement announcing the tax would not proceed. Finance Minister François-Philippe Champagne will soon introduce legislation to officially repeal the Digital Services Tax Act. The ministry emphasized that Canada's preference has always been a global agreement on taxing digital services rather than a unilateral one.

Markets responded positively to the announcement, with U.S. stock index futures climbing and Asian markets following the trend. This news comes at a critical time as Canada and the U.S. key trading partners hope to reach a broader economic agreement by July 21, after recent progress made at the G7 summit in June.

See also: Canadian Dollar Drops as Trump Ends Trade Talks with Canada

The sudden removal of Canada’s digital tax underscores how fragile Canada-U.S. relations have become under renewed trade pressure. Prime Minister Mark Carney and President Donald Trump had reportedly agreed at the G7 summit in June to finalize a new economic pact within 30 days. However, Trump's aggressive stance over the digital services tax threatened to derail the process entirely.

Trump's administration viewed the tax as unfair to American tech companies and inconsistent with Canada’s trade obligations under the United States–Mexico–Canada Agreement (USMCA). Earlier this year, the Biden administration also formally challenged the tax, requesting consultations under the trade deal’s dispute settlement framework. While Canada had previously avoided major tariffs like the ones Trump imposed in April on other countries it now faces the threat of a 50% tariff on its steel and aluminum exports if relations worsen.

The now-rescinded tax was seen by Ottawa as a temporary measure to ensure global digital firms pay their fair share for business done within Canada. But recognizing the bigger economic risk, Canada has prioritized salvaging its trade ties with its largest customer. The U.S. is Canada's biggest buyer, purchasing $349.4 billion in goods last year, while Canada exported $412.7 billion in return.

By removing the tax, Canada hopes to de-escalate tensions and return to the negotiating table swiftly. Both sides are aiming to reach a compromise trade deal by July 21. While this move may reduce immediate tensions, future flashpoints remain possible as Trump continues to assert protectionist policies in his second-term agenda.

Markets reacted swiftly and positively, signaling relief over the reduced risk of a Canada-U.S. trade war. Investors are now watching closely to see whether talks produce lasting solutions or fall apart once again.