U.S. President Donald Trump may invoke a clause within the American tax code to double corporate taxes on Canadian businesses and individuals operating in the U.S. as a retaliatory measure to the Trudeau government’s digital services tax.
The Liberals implemented the contentious tax last summer despite an onslaught of push back from business groups and economists warning that it would be met with U.S. retaliation. It was also a point of contention with former U.S. president Joe Biden.
The tax is a levy placed on technology companies that provide a digital service to Canadians, granted they earn at least $1.1 billion in annual global revenues and at least $20,000,000 annually in Canada.
These include tech companies Meta, which operates Facebook and Instagram, as well as Google, Amazon, Uber, Lyft, Airbnb, Netflix, and Spotify.
Trump issued a memo to his officials last month indicating that he may invoke a clause in Section 891 of the U.S. Internal Revenue Code that would allow him to double corporate taxes on Canadian companies operating in the U.S. as a punitive measure for the tax.
Section 891 states that, on the grounds of discrimination, tax rates should “be doubled in the case of each citizen and corporation of such foreign country.”
Trump signed an order last month requesting the Treasury secretary “investigate whether any foreign country subjects U.S. citizens or corporations to discriminatory or extraterritorial taxes.”
His memo called for officials to deliver a report on said “discriminatory” and “extraterritorial taxes” by April 1.
The federal government’s decision to begin taxing 3% of all Canadian revenues from the companies was swiftly met with the U.S. requesting dispute settlement consultations with Canada under the United States-Mexico-Canada Agreement.
“The United States opposes unilateral digital service taxes that discriminate against US companies,” said U.S. Trade Representative Katherine Tai in a statement from September, which her office referred to as “Canada’s discriminatory policies.”
The Business Council of Canada then called for the Liberals to revoke the tax following the U.S. seeking dispute settlement consultations.
The council’s president and chief executive Goldy Hyder said that retaliatory measures by the U.S. would hurt Canadian businesses, the economy, and ultimately families in a letter to then-finance minister Chrystia Freeland and International Trade Minister Mary Ng the following week.
Hyder also warned of the impacts the tax would have on Canada’s relationship with the U.S. as the CUSMA trade agreement will be up for review in 2026.
“In successive meetings with senior U.S. officials, we have been repeatedly told that if Canada’s unilateral DST remains in place it will imperil the upcoming mandatory review of the CUSMA,” wrote Hyder at the time.
The U.S. Trade Representative’s Office urged “Canada to abandon any plans for a unilateral measure and instead redouble its commitment to the rapid implementation of Pillar One of the October 8 OECD/G20 agreement” in a statement issued in 2022.
Three years later, Trump signed what he called a plan on “Reciprocal Trade and Tariffs” which instructed his officials to review what retaliatory measures should be taken against Canada and other countries on Thursday.
“Though America has no such thing, and only America should be allowed to tax American firms, trading partners hand American companies a bill for something called a digital service tax,” reads a background note on the issue. “Canada and France use these taxes to each collect over $500 million per year from American companies.”
These additional taxes would be stacked on top of the numerous U.S. tariffs the Trump administration has threatened to place on Canadian goods.