Canada ‘caved’ to Trump’s digital services tax demands, White House says

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Prime Minister Mark Carney “caved” to Donald Trump when he told the U.S. President during a Sunday phone call he would be scrapping Canada’s digital services tax on foreign tech giants, the White House said Monday.

Karoline Leavitt, Mr. Trump’s chief spokeswoman, told a press briefing that Mr. Carney phoned Mr. Trump to inform him that Ottawa would be cancelling the tax, two days after Mr. Trump threatened to walk away from trade talks and impose retaliatory tariffs over the levy, and one day before the first payment of the tax was meant to be collected.

“It’s very simple: Prime Minister Carney and Canada caved to President Trump and the United States of America,” Ms. Leavitt said. “The President made his position quite clear to the Prime Minister and the Prime Minister called the President last night to let the President know that he would be dropping that tax.”

Mr. Carney, speaking to reporters in Ottawa, said that talks between Canada and the U.S. on ending a damaging four-month trade war resumed Monday morning.

He did not respond to a question about the “caved” comments and declined to explain what Canada received in return for scrapping the digital sales tax, which targeted foreign tech companies, chiefly U.S.-based companies including Amazon, Google, Meta, Airbnb and Uber.

Explainer: Canada cancelled its digital services tax. What was it and why did the U.S. hate it?

Mr. Carney said the DST was part of “broader negotiations” with the U.S. and added that it would have been inefficient to charge companies and then end up refunding the levy later. “It doesn’t make sense to collect tax from people and then remit them.”

He said Canada and the U.S. aim to have a deal by July 21, which is a lengthening of the 30-day timetable he first announced at the Group of Seven summit in Kananaskis, Alta.

Ms. Leavitt said Canada’s move, for which the U.S. did not appear to have conceded anything in exchange, showed that Mr. Trump “knows how to negotiate” and “every country on the planet needs to have good trade relationships with the United States.”

Kevin Hassett, director of the National Economic Council, told Fox News on Monday that Mr. Trump raised the DST with Mr. Carney at the G7.

“One of the things that the President asked for,” Mr. Hassett said, “was that they would take the DST tax off. It’s something that they’ve studied, now they’ve agreed to and, for sure, that means that we can get back to the negotiations.”

The tax, which would have imposed a 3-per-cent levy on digital services by major tech companies, was enacted by Canada last year with the first payments due to be collected June 30. Mr. Carney’s government announced it was scrapping the levy mere hours before that due date.

Canada faces tariffs of 50 per cent on steel and aluminum exported to the U.S., 25 per cent on autos, as well as blanket tariffs on all other goods exported outside the USMCA. That trade deal is also set to be reviewed later this year, which could lead to further negotiations.

University of Ottawa professor Michael Geist, who is Canada Research Chair in Internet and E-commerce Law, said Canada came out of this exchange over the DST looking weak.

By scrapping the DST now, Canada has “given up what was a non-trivial card and they basically used it to get back exactly where they were a week ago,” Prof. Geist said.

In an interview with Radio-Canada on Monday, Finance Minister François-Philippe Champagne played down the scrapping of the DST. He said it was always a “transitional measure” introduced because a global pact on taxation of tech giants has not been reached. Talks will continue on a global measure, he said.

William Pellerin, a partner with McMillan LLP’s international trade group, said it was always likely the DST would be sacrificed as part of Canada-U.S. trade negotiations. The former Biden administration was also frustrated with the levy and had challenged it under the U.S.-Mexico-Canada Agreement (USMCA), he noted.

If talks fail, he said, Canada can still likely reverse itself and proceed with the DST. “So ultimately, in a way, we’ve actually given up very little.”

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The DST was first introduced as part of an Organization for Economic Co-operation and Development effort to modernize the international tax system. Larry Nevsky, a partner at the law firm Dentons Canada LLP and head of its Toronto tax group, said that while it makes sense, “academically speaking,” to realign the tax system, in reality global politics make this difficult to execute.

“It’s a bit prejudicial to the U.S. economy because all you’re doing is reallocating what could be potential profits in the U.S. to tax in other countries. You can see why that would be offensive to one of the world’s largest economies,” he said.

On Monday, Conservative Party Leader Pierre Poilievre posted a statement on X, criticizing the federal government’s flip-flopping on the issue.

“As recently as two days ago, the finance minister insisted the Digital Services Tax would proceed. Then the Prime Minister put his elbows down and cancelled the tax at the 11th hour,” he wrote.

While Canada’s DST may be officially dead, Lachlan Wolfers, a tax partner at KPMG Canada, said it doesn’t change the fact that an overhaul of international tax systems is still desperately needed.

“The corporate tax system was built in an era where companies had to have a factory, had to have an office premises, some other form of physical presence in the country, as a means of deriving value. And that’s no longer true,” he said.

Jim Balsillie, former co-CEO and chairman of smartphone pioneer BlackBerry Ltd. and chairman of the Council of Canadian Innovators, said the overarching issue at hand is one of sovereignty, given that Canada has no leverage or control over these digital services operating within its borders.

“Trump is exerting power and leverage over Canada because he can,” Mr. Balsillie said. “The core issue is not how to manage a DST response in the short term but rather how to urgently update capacity and orientation for sovereign and resilient approaches for the contemporary world.”

With a report from Bill Curry in Ottawa