What is the tech tax that prompted Trump to call off trade talks with Canada?

Relations between the United States and Canada are on edge again after President Donald Trump abruptly ended intensive trade talks between the two neighbors on Friday. The reason: Canada's intention to push through a tax on digital services from American tech giants, which Trump called "a direct and blatant attack on our country."

In a message on his platform Truth Social, the president pulled the plug on the high-level talks. “Based on this excessive tax, we are hereby terminating all trade negotiations with Canada, effective immediately,” he wrote. He threatened new tariffs: “We will let Canada know within the next seven days what tariff they will pay to do business with the United States of America.”

The sudden escalation is a major setback for relations between the two North American countries, which had appeared to be on the mend after hitting rock bottom in recent months. Trump unleashed a trade war with Canada, one of the U.S.’s largest trading partners, by imposing tariffs on Canadian imports, despite decades of free trade between the two allies.

Thirty days

Both countries, after a heated dispute, appeared to be on track to conclude a new trade agreement, as the US did with the UK. Canadian Prime Minister Mark Carney indicated earlier this month, after a meeting with Trump during the G7 summit in the Canadian province of Alberta, that such an agreement in principle would be completed "within 30 days". Canada hopes to get 50 percent tariffs on Canadian aluminum and steel off the table as much as possible.

Carney, who was elected in late April on a promise to protect Canada from Trump, also appears to be on good terms with the American president. That is partly why the crisis in relations between the two countries – which was exacerbated by Trump's repeatedly stated desire to make Canada a "51st state" of the US, to the chagrin of many Canadians – appeared to have cooled somewhat.

On Friday, however, Canada’s so-called Digital Services Tax , introduced a year ago by the government of Carney’s predecessor Justin Trudeau, proved to be a deal-breaker for the White House. What is this controversial tech tax, and what does Trump’s move mean for other countries with similar taxes?

1 What is the Digital Services Tax?

The Digital Services Tax is a 3 percent levy on revenues of large tech companies from services to Canadian customers and the sale of their data. The policy targets companies with at least $14.7 million in revenue in Canada, and a global turnover of at least $820 million; in practice, this means American tech giants such as Amazon, Alphabet, Meta, Uber and Airbnb. The tax must be paid retroactively to 2022. The first payment must be received by Monday at the latest. It is expected that more than $2 billion will be owed; this could total more than $5 billion over the next five years.

In the US, there was already dissatisfaction with the law before Trump's return as president, including in the administration of President Joe Biden. The tech companies do not want more countries to tax their income. Trump, who has close ties to the tech bosses, signed an executive order after his inauguration in January to remove the US from multilateral efforts within the OECD to arrive at international rules on taxing digital services. He also promised measures against countries that levy such taxes.

In the US, there was already discontent about the Canadian tech tax before Trump's return

2 Is Canada's Digital Services Tax Unique?

No, other countries have taken similar measures to tax the income of influential tech companies. They include the UK, France, Italy and Spain.

The UK tech tax, however, did not appear to be an obstacle to the agreement in principle that Trump signed with Prime Minister Keir Starmer this month, and was not mentioned in it. Trump also on Friday pointed to European countries with similar tech taxes. But he has not broken off trade talks with the EU; he may be holding up Canada as an example.

3 How is Canadian business responding?

Canadian businesses have warned that the tech tax is an untimely obstacle to restoring vital trade relations between Canada and the United States. They have called on the Carney government in recent weeks to suspend the levy to avoid an escalation like Friday’s. The Business Council of Canada, an advocacy group, said Canada should now offer to scrap the tax in exchange for a repeal of U.S. tariffs.

4 Can the problem be solved?

Carney could indeed scrap the tax — and in doing so, abandon the original policy goal of making the tech giants pay “their fair share.” He has not ruled that out, unlike concessions on some other trade issues between Canada and the U.S. “These are very complex negotiations and we are going to pursue them in the best interests of Canadians,” Carney said Friday in Ottawa.

The Canadian government appeared to hope to include the tech tax in the renegotiation of the North American Free Trade Agreement (USMCA), the successor to the 1990s NAFTA. That newer agreement was signed during Trump’s first term and is up for renegotiation starting in 2026.

5 Trump says the US “holds all the cards”, is that true?

Trump on Friday resumed threatening language about Canada, something he has rarely done since Carney took office. "Economically, we have so much power over Canada," he said in the Oval Office. "I would rather not use it. It will not work out well for Canada. We hold all the cards."

It is true that the trade relationship between Canada and the US is crucial for our northern neighbour. More than three-quarters of Canadian exports go to the US, worth $412 billion in 2024. Interruption of that trade flow could trigger a recession in Canada; the Canadian economy shrank slightly in April.

Yet the trade relationship is also of great importance to America: Canada is the US’s second-largest trading partner, after Mexico, and the largest buyer of US exports, worth $349 billion in 2024. Moreover, tariffs imposed by Trump on Canadian imports are borne by US importers, who often pass them on to their customers. That fuels inflation. Those buyers, such as companies in the US auto industry, can put pressure on the White House.

In recent weeks, however, Trump has not been bothered by negative economic indicators: inflation appears reasonably under control and stock markets closed at record highs on Friday after a dip over the controversy. That gives Trump room to push issues to the forefront.