In a significant policy reversal, Prime Minister Mark Carney rescinded Canada's proposed digital services tax (DST) in June 2025. The decision came directly after President Donald Trump threatened to halt crucial trade talks between the two nations if the tax was implemented.
A Strategic Retreat Under Pressure
The tax, a three per cent levy on the digital services revenue of large domestic and foreign companies, was officially repealed to restart stalled negotiations with the United States. While talks did resume following Carney's announcement, they were later disrupted by unrelated political events. Despite the concession aimed at easing tensions, the immediate diplomatic payoff for Canada has been limited.
An Unexpected Favor? Expert Weighs In
However, according to Adam Michel, director of tax policy studies at the Cato Institute in Washington, D.C., President Trump's forceful intervention may have actually done Prime Minister Carney and Canada a favor. Michel contends that digital service taxes ultimately hurt the economies of the countries that impose them.
With royal assent for the repeal expected in Parliament this month, Michel explained his view that DSTs, while problematic, are preferable to the alternative global tax framework being pushed by the Organisation for Economic Co-operation and Development (OECD).
The Flawed Global Alternative
Michel argues that the OECD's 2021 Pillar One proposal seeks to upend a decades-old international consensus on taxing businesses where they create value. Instead, it would redistribute a portion of the corporate tax base to jurisdictions where consumers are located for a subset of large multinational firms.
"Pillar One is really trying to upend the entire consensus around how we allocate corporate taxing rights around the world," Michel stated. He warns this creates instability and could fragment the global corporate tax system, leading back to an era of multiple tax layers that stifle trade and economic growth.
Furthermore, he views Pillar One as an infringement on national sovereignty, imposing a one-size-fits-all scheme designed by international bureaucrats. In his analysis, while DSTs act as de facto tariffs whose costs fall on local consumers, they are a lesser evil than the sweeping changes proposed by the OECD, which he believes would cause greater long-term economic harm.
The repeal of Canada's digital services tax marks a pivotal moment in the ongoing clash between national tax policies and evolving global digital economies, with the nation's relationship with its largest trading partner hanging in the balance.
