For the past two years, Canadian digital tax policy has been on a collision course with Canadian trade policy. The Liberal government committed in the 2019 election campaign to a digital services tax primarily designed to target large U.S. technology companies that generate significant revenues in Canada from online advertising and user data. The policy has been adopted in several other countries, repeatedly sparking a response from the U.S. that threatens to retaliate with tariffs on sensitive sectors of the economy. For example, after France announced plans for a similar tax, the U.S. threatened to levy billions in tariffs on French products.

As the trade threats escalate, the effort to strike an international agreement on the issue has gained increasing traction (my Law Bytes podcast last February with Professor Itai Grinberg provides a great backgrounder into the issue). After a preliminary deal was struck in October on an international approach, the U.S. dropped the tariff threat against several countries. Yet as efforts to finalize and implement the deal continue, Canadian Finance Minister Chrystia Freeland announced this week that new legislation will be introduced to create a Canadian digital services tax (this is distinct from digital sales taxes, which are currently in effect).

The Digital Services Tax Act will take effect in 2024 should the international agreement fail to materialize by that date. If so, it will apply a three per cent tax on revenues from four sources: online marketplace services revenues, online advertising services revenues, social media services revenues, and user data revenues. The tax would apply to large companies that generate €750,000,000 or more globally and at least $20 million in-scope revenues in Canada. The government says the policy applies equally to Canadian and foreign companies, but it is obvious that the U.S. tech companies are the primary target.

Less than 24 hours after Freeland’s announcement, the U.S. Trade Representative responded that if the Canadian law is implemented, it would “examine all options, including under our trade agreements and domestic statutes.” In other words, the Canadian decision to move ahead with legislation despite an international agreement invites yet another trade battle at the very time that Canada and the U.S. are locked into a contentious dispute involving the auto sector that has spilled over areas such as copyright and dairy.

The Canadian decision to push ahead now is puzzling given that an international consensus is precisely the approach that benefits Canada, since it provides the prospect of new revenues with the cover of a global agreement that removes the risk of tariff retaliation. There is unquestionably a need to ensure that large multinational companies – whether tech or otherwise – pay their fair share. But there is also a need for Canada to be strategic in implementing such policies. Launching into new digital services tax legislation two years before it is scheduled to take effect while there is both an international agreement on the table and mounting disputes with the U.S. seemingly invites further trade escalation with no real benefits from years to come.