Letter to Deputy Prime Minister and Finance Minister Chrystia Freeland regarding the implementation of Canada’s Digital Services Tax.

Dear Deputy Prime Minister,

When your government ratified the Canada-U.S.-Mexico Agreement (CUSMA), you committed to a set of rules ensuring a free flow of goods and services across North America. Businesses rely on that agreement every day. And yet, CUSMA risks being undermined by Canada’s Digital Services Tax. To preserve our trade relationship, we urge you to delay the implementation of the DST and give the OECD discussions on a global tax framework more of a chance.

At a time where there is little bipartisan consensus in the United States, the Biden Administration and U.S. Congress – both Democrats and Republicans alike – are aligned in viewing the DST as discriminating against American companies and, as such, contravening the commitments we made in CUSMA. This unified position has been expressed repeatedly in recent weeks, including by U.S. Trade Representative Katherine Tai to International Trade Minister Mary Ng.

While it is normal for irritants and trade disputes to arise between countries, even among close economic partners, the DST poses a particular risk to our most important trading relationship. No matter how some here in Canada may view the relative merits of the DST, the government’s decision to act unilaterally, outside of the OECD inclusive framework, has alienated important allies within the Biden Administration including U.S. Treasury Secretary Janet Yellen.

More recently, the leaders of the U.S. Senate Finance Committee – which has jurisdiction over trade issues – called on USTR Tai to seek full enforcement of CUSMA in relation to the DST. Senator Ron Wyden (D-OR) and Senator Mike Crapo (R-ID) underscored “the importance of continuing to press Canada to abandon these discriminatory measures through dispute settlement, use of other tools available under U.S. laws, or other appropriate avenues.”

Given the timing of the DST’s implementation, this pressure will continue to mount. At present, the DST will be imposed on U.S. headquartered companies as of January 1, 2024, and applied retroactively in respect of revenues earned as of January 1, 2022. This means U.S. companies will face sizeable tax liability around the time Canada hosts the next North American Leaders’ Summit. It will also become further politicized in the context of the U.S. election cycle.

Therein lies the danger. As one of the lead negotiators and advocates for the CUSMA agreement, you will know it contains a provision that did not exist in the former North American Free Trade Agreement – a review clause. Specifically, Article 34.7 of CUSMA provides the agreement is subject to a mandatory joint review within six years of its coming into force. The review may be imperiled if U.S. lawmakers view Canada as abrogating our CUSMA commitments.  

With so many other cross-border issues at play, from expanded Buy America provisions to auto rules of origin to softwood lumber and Canada’s tariff rate quota for dairy, Canada cannot allow a further irritant to become a lightning-rod for protectionist sentiment on either side of our shared border. To be clear, our concern here is not about how certain businesses should be taxed. Rather, it is about retaining preferential access to the U.S. market for Canadian businesses.

That is why we strongly encourage you to defer the application of the DST until 2026. Given its retroactive approach, a two-year delay in DST implementation need not have a financial cost. It would, however, allow more time for the OECD negotiations on a global tax framework to succeed and help assuage concerns about our CUSMA compliance. To ensure Canadian companies are not placed at a competitive disadvantage, the DST must be delayed for all taxpayers.

If the OECD negotiations fail, Canada would retain its full range of options. If, however, the OECD negotiations are successful, Canada would not have to impose the DST – which we know was your stated preference from the outset. The only course of action that forecloses on Canada’s room to maneuver is forging and forcing ahead with an arbitrary and, even, acrimonious January 2024 deadline. That is the scenario which we respectfully submit Canada must avoid.

President Biden will shortly travel to Canada for his first state visit since coming to office. It would decidedly be in Canada’s interests to be ready when he raises this issue in Ottawa.

Yours very truly,

Goldy Hyder

c.c.        The Honourable Mary Ng, P.C., M.P.
Minister of International Trade, Export Promotion, Small Business and Economic Development
Global Affairs Canada

Mr. Michael Sabia
Deputy Minister
Finance Canada

Mr. Rob Stewart
Deputy Minister of International Trade
Global Affairs Canada