On the evening of June 29, 2025, Canada announced it would cease collections of its digital services tax (DST) that was otherwise due the following day and would rescind the Digital Services Tax Act (DSTA), after President Trump’s threat to suspend bilateral trade talks. Prime Minister Carney and President Trump have each confirmed that they will resume negotiations with a view toward agreeing a trade deal by July 21, 2025.
What is the DST?
The DST is a tax imposed by Canada on companies or consolidated groups – whether based in Canada or abroad – that generate annual revenues of at least €750 million and annual revenues of at least CAD 20 million from Canadian digital services. Canadian digital services revenue refers to revenue earned from specific categories of digital services—online marketplace services, online advertising services, social media services and the provision of user data—that are linked to Canadian users.
Canada announced that it would move forward with implementing the DST in its 2020 Fall Economic Statement with the stated goal to “help ensure that Canada’s tax rules capture new ways in which businesses carry out value-creating activities”, while concurrently stating its “strong preference for a multilateral approach to this issue”. As no multilateral approach had materialized, the DSTA was passed by Parliament as part of Bill C-59 in 2024, and came into force on June 28, 2024. Despite coming into force in 2024, the tax was to apply retroactively to revenues earned from January 1, 2022. The deadline for initial registration was January 31, 2025 and initial returns and payments were to be due by June 30, 2025.
Under the DSTA, qualifying businesses would have been subject to a tax of 3% of annual Canadian digital services revenue exceeding CAD 20 million. In addition to payment of the tax, the DTSA features requirements that affected businesses file annual returns, and maintain detailed records of their Canadian digital services revenue.
Opposition to the DST and similar schemes is nothing new. Many US policymakers view them as discriminatory against American technology firms and end runs around OECD-led multilateral proposals. In fact, in President Trump’s first term, the US Trade Representative concluded investigations under Section 301 of the Trade Act against nearly a dozen countries that had adopted digital services tax schemes. Those actions were subsequently suspended when those countries committed to withdraw the offending taxes pursuant to the OECD G20 Base Erosion and Profit Shifting (BEPS) framework. The US Trade Representative is monitoring the implementation of these measures and may take further action under Section 301 if it determines that any of these countries is not satisfactorily implementing such measures.
Canada-US trade negotiations: Where things stand
The recission of the DST means the US and Canada will return to the table to negotiate a deal to end the current tit-for-tat trade dispute. The spat started with President Trump’s February Executive Order announcing tariffs under the President’s putative authority under the International Emergency Economic Powers Act (IEEPA) and citing Canada’s failure to “stem the tide of illicit drugs” across the border. The order imposed 25% duties on non-energy imports from Canada and 10% duties on energy imports. Although President Trump “paused” the tariffs shortly after the order, that pause has since expired and the tariffs took effect on March 4. Similarly, the President announced a one-month suspension of tariffs on automobiles, which has since expired. Also in March, the US announced a suspension of the tariffs as they relate to USMCA-compliant goods. Notably, recently-elevated rates on steel and aluminum tariffs, which raised the rate to 50%, apply to Canadian steel and aluminum goods. Although two US courts have invalidated the tariffs imposed under the authority of IEEPA, those decisions have been stayed while the cases are appealed and the tariffs remain in effect.
In response, Canada has announced a series of retaliatory tariffs applying to US imports. The retaliatory tariffs arrived in three rounds, as follows:
- On March 4, Canada announced a 25% duty applying to US imports of various goods, such as food items and household products.
- On March 13, Canada expanded the 25% duty to apply to a further swathe of US imports, including additional household items, jewelry, steel, iron and aluminum products, hardware, and electronics.
- On April 9, Canada imposed a third tranche of 25% tariffs on US origin, non-USMCA/CUSMA qualifying vehicles.
Additionally, Canada has issued an March 4 notice of intent suggesting additional products to be subject to 25% duties, ranging from livestock and agricultural products to industrial goods to consumer goods. A public consultation on the notice of intent ran from march 4 to April 2, 2025. Remission processes are available to provide limited relief from the Canadian tariffs.
On June 19, following trade talks at the G7 meeting, Prime Minister Carney stated that the countries had “agreed to pursue negotiations toward a deal within the coming 30 days.” Concurrently, the Prime Minister announced new measures to protect Canada’s domestic steel and aluminum industries. That same day, Canada’s Minister of Finance and National Revenue stated that Canada was “going ahead” with the DST and that the DSTA “is in force and it’s going to be applied.”
On June 27, with the first DST payments due within days, President Trump threatened to withdraw from negotiations and set a new tariff rate for Canada within seven days. US Secretary of Treasury also indicated in an interview that the US Trade Representative would presently initiate an investigation under Section 301 targeting the DST. On June 29, Canada announced that it would bring legislation to rescind the DSTA and cancelled the collection of the DST just hours before the June 30 deadline day to make payment. The recission of the DST would remove the possibility of fresh tariffs for now and brings the parties back to the negotiating table.
Despite the concession, much still needs to be resolved before a final deal is reached. For example, the US has long protested Canada’s dairy supply management program, under which the government set production quotas, establishes minimum prices and imposes high tariffs on dairy imports. The US administration has viewed the trade talks as an opportunity to chase down this white whale. But in June, Canada’s Parliament passed a law that restricts the Prime Minister from bargaining away the supply management program. With two of the major bargaining chips—the DST and the dairy program—effectively off the table, the parties’ room to maneuver before the self-imposed deadline may be diminishing.
For a fuller assessment of the current status of US-Canada trade negotiations (as of July 8, 2025), please refer to our recent post: Canada-US Trade and Security Negotiations: State of Play – Import and Trade Remedies Blog
Takeaways
Canada’s retreat from the DST and the resumption of negotiations toward a comprehensive agreement represents a welcome dĂ©tente from the escalating trade war of recent months. Canada and the US are each other’s most significant trading partner, underscoring the importance of a resolution. The conclusion of a deal will hopefully reduce barriers to trade between the countries and mitigate commercial uncertainty that has burdened organizations that rely on the flow of goods across the US-Canada border. Businesses should continue to monitor developments to plan accordingly and ensure compliance with existing requirements.
