Liberal government enacts controversial digital services tax, raising trade concerns

The federal government has enacted a controversial digital services tax that will bring in billions of dollars while threatening Canada’s trading relationships by taxing the revenue international firms earn in Canada.

The Liberal government proposed the tax in its 2019 election platform. It later agreed to hold off on implementing the measure in the hopes it could reach a deal with other OECD countries on how multinational digital companies should be taxed.

On June 28, the federal government issued an order in council to enact the tax. It received royal assent June 20.

Katherine Cuplinskas, press secretary to Deputy Prime Minister and Finance Minister Chrystia Freeland, told CBC News Thursday that “Canada’s priority and preference has always been a multilateral agreement” and Ottawa still hopes a deal can be struck in the near future.

“Unfortunately, despite best efforts, repeated deadlines to reach an international agreement have come and gone,” she said.

Digital firms that have global annual income of at least $1.1 billion will see annual revenues in Canada over $20 million taxed at a rate of three per cent. The first year of the tax includes revenue earned since Jan. 1, 2022. 

The Parliamentary Budget Office estimated last year that the tax would bring in more than $7 billion over five years. The 2024 budget forecast revenues at $5.9 billion over five years, starting in 2024-25.

Multinational digital companies such as Meta, Alphabet, Facebook and Amazon are not based in many of the countries where they conduct business, allowing them to avoid paying certain taxes.

The federal government sees the digital services tax as a way to bring the tax code up to date and capture revenues earned in Canada by firms located abroad.

“Canada strongly supports international efforts to end the corporate tax race to the bottom and to ensure that all corporations, including the world’s largest corporations, pay their fair share,” Cuplinskas said.

Tax is ‘discriminatory,’ says U.S. envoy 

The Liberal government’s decision to impose the tax before an international agreement could be reached with other OECD countries has raised concerns about possible negative impacts.

U.S. Ambassador to Canada David Cohen issued a media statement Thursday calling the tax “discriminatory.”

“[The United States Trade Representative] has noted its concern with Canada’s digital services tax and is assessing, and is open to using, all available tools that could result in meaningful progress toward addressing unilateral, discriminatory [digital services taxes],” Cohen said in the statement.

An Amazon spokesperson told CBC News on Thursday that the company is disappointed by the decision and called it “a discriminatory tax that will harm Canadian consumers.”

As soon as the legislation enabling the tax became law, the U.S. Chamber of Commerce and the American Chamber of Commerce in Canada issued a statement strongly objecting to the measure, which they say will raise prices for everyone.

They said a digital services tax would disproportionately hit U.S. companies, undermine digital exports to Canada and violate Canada’s obligations under the U.S.-Canada-Mexico free trade agreement and the World Trade Organization.

“At this very sensitive time in the Canada–U.S. trade relationship, we urge the Government of Canada to reconsider this unilateral and discriminatory new levy,” the statement said.

Ontario government opposition

The Canadian Chamber of Commerce told CBC News Thursday that “a retroactive discriminatory digital services tax” will harm Canada’s relationship with the U.S. and raise the cost of living in Canada.

“The government should reverse its unilateral decision that is out of step with our allies, and instead work with our trading partners on an international solution that would better serve Canadians,” Robin Guy, the chamber’s vice president of government relations, told CBC News.

On June 28, Ontario Finance Minister Peter Bethlenfalvy wrote to Freeland asking that the tax’s implementation be paused.

“Canada, like the rest of the world, is taking steps to address the tax fairness issues that arise from the digital transformation of the global economy,” Bethlenfalvy wrote.

“However we must do this carefully and not in a way that will impose unnecessary taxes on people and businesses or risk isolating Canada from the U.S. marketplace.”

Bethlenfalvy’s office told CBC News Thursday that it was “disappointed” with the decision to impose the tax before an international agreement could be reached.

Last month, the U.S. Computer and Communications Industry Association, which represents big tech companies such as Amazon, Apple and Uber, wrote to U.S. President Joe Biden asking his administration to initiate formal dispute settlement procedures under the United States-Mexico-Canada Agreement (USMCA).

The group said that move is necessary because a digital services tax could cost American firms up to $2.3 billion annually and result in the loss of thousands of full-time U.S. jobs.