Budget 2024

Tax and spend fiscal plan will inhibit growth

As published in The Globe and Mail

Earlier this month, Ottawa decided to break with a clear majority of Organization for Economic Co-operation and Development countries by refusing to delay the imposition of a unilateral digital services tax in January, 2024. In defying the OECD consensus, Canada was joined by unusual partners, including Russia and Belarus.

Deputy Prime Minister and Finance Minister Chrystia Freeland defended the DST decision, arguing that it’s “important for us to defend our national interest.” But it’s not clear how it’s in Canada’s national interest to go rogue when the United States, our most important trading partner, has repeatedly warned that doing so would violate the Canada-U.S.-Mexico Agreement (CUSMA).

According to Parliamentary Budget Office calculations, the federal government would stand to collect less than $1-billion of revenue a year from the imposition of a unilateral DST. The tax would be on the domestic revenues of certain tech companies that operate search engines, social-media platforms or online marketplaces.

But to put into context how small that annual DST revenue figure is, more than $2-billion of goods and services cross the U.S.-Canada border per day. Defending our national interest means defending our bilateral trade, which will be adversely affected, if not put in serious jeopardy, if Canada pursues the DST.

This issue isn’t new. For more than two years, U.S. President Joe Biden’s administration and senior leaders in Congress have repeatedly raised the unilateral DST as a major trade irritant. In fact, it’s an issue that has garnered rare bipartisan opposition from Democrats and Republicans alike.

The U.S. Senate finance committee – which has jurisdiction over trade deals such as CUSMA – urged Trade Representative Katherine Tai to challenge Canada’s DST “through dispute settlement, use of other tools available under U.S. laws, or other appropriate avenues.”

To that end, Ms. Tai has repeatedly raised the DST issue with her Canadian counterpart, International Trade Minister Mary Ng, in their bilateral one-on-ones – including just weeks ago on the margins of the third CUSMA Free Trade Commission meeting.

Recently, U.S. Ambassador David Cohen said that “if Canada decides to proceed alone, you leave the United States with no choice but to take retaliatory measures in the trade context, potentially in the digital trade context, in order to respond to that.” This contradicts Ms. Freeland’s assertion that our partners, including the U.S., “understand our approach.”

As bad as retaliation would be, there could be an even worse impact. When Canada, the U.S. and Mexico negotiated CUSMA, the Trump administration at the time insisted that the agreement should be reviewed after it had been in force for six years. That review must take place before 2026 and likely requires U.S. congressional approval.

While the review of the agreement should be a swift, straightforward exercise in Canada, there’s a risk that it could become badly bogged down south of the border. Canadian business leaders have been warned by senior congressional officials that it will be tough to get CUSMA renewal through Congress if Ottawa were to go ahead with its DST.

In the end, all this comes down to a matter of timing – and time is not on Canada’s side. While other OECD countries agreed to defer or delay the imposition of their national DSTs for another year, until 2025, Canada has dug in its heels on 2024.

This is particularly problematic given Canada’s hosting of the next North American Leaders’ Summit with Mr. Biden and Mexican President Andrés Manuel López Obrador. While an exact date has yet to be confirmed, the NALS will likely take place around the time that our disputed DST comes into force – meaning the summit agenda could be disrupted by a trade dispute.

The greater risk, however, is that the imposition of a unilateral DST will occur during a particularly intense period of the 2024 U.S. presidential election cycle. As candidates for office seek to define themselves on politically sensitive issues such as trade, an ill-timed dispute can polarize the debate and lead to anti-CUSMA campaign promises.

Ms. Freeland is absolutely right in saying it’s important for us to defend our national interests, but let’s be clear about what those interests are. The OECD dispute is not about taxes, it’s about trade – and the federal government needs to reconsider its decision to forge ahead with a unilateral DST to avoid putting our trade interests in jeopardy.