Canada Backtracks on Digital Services Tax to Salvage Trade Talks

In a swift and significant diplomatic move, the Government of Canada announced the withdrawal of its contentious Digital Services Tax, which was poised to take effect retroactively from 2022. This decision, announced just days before the tax was due to begin collection on June 30th, represents a strategic concession aimed at de-escalating heightened trade tensions with the United States and bringing both nations back to the negotiating table for broader trade discussions.

The DST, a 3% tax on gross revenue derived from digital services provided to Canadian users, including streaming, online marketplaces, and social media platforms, was designed to ensure large multinational tech companies – many of them U.S.-based giants like Amazon, Meta, and Google – paid a perceived fairer share of taxes on profits generated in Canada. It was projected to generate approximately $3 billion in tax revenue in its first year. Canada’s rationale for the DST stemmed from frustrations over the slow progress of multilateral digital taxation efforts at the OECD level, and similar taxes had been implemented by countries like France and the UK.

However, the U.S. had vehemently opposed such unilateral digital taxes, viewing them as discriminatory against American tech firms and a barrier to trade. The dispute reached a boiling point when former U.S. President Donald Trump abruptly suspended all trade negotiations with Canada on June 27th, explicitly citing the DST as the reason. Canada's rapid withdrawal of the tax was a direct response to this ultimatum, showcasing the immense pressure on Ottawa to maintain access to its largest trading partner. Finance Minister François-Philippe Champagne confirmed that the move was made "in anticipation of a mutually beneficial comprehensive trade arrangement with the United States," with both nations now aiming for a new deal by July 21, 2025. This development, while averting immediate retaliatory tariffs, underscores the continued volatility and political influence on Canadian trade policy and creates lingering uncertainty for businesses reliant on stable cross-border economic relations.

Federal Government's "Middle-Class Tax Cut" Takes Effect

As of July 1, 2025, the federal government's "middle-class tax cut" officially took effect. This measure reduces the lowest marginal personal income tax rate from 15% to 14% on the first $57,375 of an individual's taxable income. Nearly 22 million Canadians are expected to benefit, with the largest proportion of the relief, approximately 45%, going to those in the lowest tax bracket. The maximum tax savings are projected to be $420 per person and $840 per couple in 2026. The Canada Revenue Agency will update its source deduction tables, meaning individuals with employment income should see reduced tax withholdings as early as their July paycheques.

This initiative, part of the federal budget, aims to provide tangible financial relief to Canadian households amidst persistent inflationary pressures and economic uncertainty, potentially offering a small boost to consumer spending in the latter half of the year. Finance Minister Champagne positioned the cut as responsive to rising cost-of-living pressures and a cornerstone of the government’s renewed middle-class economic strategy. The Parliamentary Budget Office projects annual government revenue loss of $4.2 B in 2025–26, increasing steadily to $6.4 B by 2029–30

This week, U.S. President Trump announced sweeping 50% tariffs on copper imports, slated for late July or August 1, escalating a new front in his trade offensive. Canada, a top copper exporter, now stands to feel fresh pressure on its mining sector. Copper futures surged over 12% in reaction, while analysts caution that any supply chain disruptions could ripple across manufacturing and construction sectors. In parallel, Ottawa is considering targeted financial support for aluminum producers, who continue to face 50% U.S. import tariffs, though for now their liquidity remains stable. Industry associations have asked the government to explore subsidies or tax relief in the event of sustained fee barriers to the U.S market, underscoring the depth of trade-related stress flowing from Washington.

As for broader trade policy, the previously announced "reciprocal tariffs" that were put on a 90-day pause are now set to come into effect for many nations on August 1, 2025. On July 7th, the White House sent letters to 14 countries, including Japan, South Korea, and various nations in Southeast Asia and Africa, outlining new reciprocal tariff rates ranging from 25% to 40% on their imports to the U.S. unless new trade deals are finalized. This comes alongside recent increases in Section 232 tariffs on steel and aluminum, raised to 50% from June 4th for certain countries, citing national security concerns. These moves signal a determined push for the U.S. to "rebalance" trade relationships, but they also create significant global economic uncertainty, disrupting supply chains and raising input costs for businesses worldwide, including those with indirect ties to affected nations.

In a dramatic escalation of trade tensions, U.S. President Donald Trump announced late yesterday evening, July 10, 2025, that the United States will impose a 35% tariff on a broad range of Canadian imports, effective August 1, 2025. This sweeping measure was conveyed in a letter from President Trump to PM Mark Carney and marks the latest in a series of over 20 similar communications sent to various countries this week as part of his "reciprocal tariff" policy. The announcement came just as Canada had withdrawn its Digital Services Tax in an effort to de-escalate tensions and facilitate broader trade talks, highlighting the unpredictable nature of the current U.S. administration. President Trump justified the new 35% tariff by citing Canada's alleged role in enabling fentanyl trafficking into the U.S., claiming Canada's "failure to stop the drugs from pouring into our Country." Trump explicitly stated that these new 35% tariffs are "separate from all sectoral tariffs" already in place and warned that if Canada were to impose retaliatory tariffs, that amount would be added on top of the 35%. While a White House official, speaking on background, indicated that the 35% tariff would primarily target non-USMCA compliant goods, the broad language in Trump's letter and the lack of specific product lists from the U.S. side have created widespread uncertainty for Canadian exporters.

The response from Ottawa was swift and firm, though tempered by the ongoing need to manage the crucial bilateral relationship. Prime Minister Mark Carney, currently on vacation, posted on X late yesterday, stating, "Throughout the current trade negotiations with the United States, the Canadian government has steadfastly defended our workers and businesses. We will continue to do so as we work towards the revised deadline of August 1." He also briefly touched on fentanyl, saying, "Canada has made vital progress to stop the scourge of fentanyl in North America. We are committed to continuing to work with the United States to save lives and protect communities in both our countries."

Industry Minister Mélanie Joly was more direct today, vowing, "We'll fight against it. Period," without immediately detailing specific counter-measures. She emphasized that "we are not in normal times" and that economic diplomacy is paramount, noting Canada's efforts to diversify trade partners to make Canada stronger as the U.S. "is becoming weaker." However, sources from Politico revealed today that Canada has paused plans to implement new retaliatory tariffs on U.S. steel and aluminum, which had been set for July 21, in light of Trump's new August 1st deadline and ongoing negotiations for a broader economic and security deal. Canada's existing 25% counter-tariffs on U.S. steel and aluminum will remain in place during this period.

Data To Watch

What’s Next for Canada’s Economy? Key Data Releases to Keep an Eye On.

These upcoming indicators could shift market sentiment, alter fiscal strategies, and impact regulatory decisions in real time. Stay ahead with these critical dates:

1. August 1 Tariff Deadline

Employment remains a cornerstone of economic stability. A strong report could validate higher-for-longer interest rates, while weakness may raise recession concerns. Look closely at the unemployment rate, wage growth, and part-time vs. full-time job shifts.

2. June Consumer Price Index — July 15, 2025

Inflation trends will guide monetary policy decisions into Q3. Focus on core CPI and shelter costs, especially in major cities like Toronto and Vancouver. A lower-than-expected number could trigger rate cut speculation. Forecasts state 1.5% YoY.

Final Thoughts

As we've explored this week, from Canada's strategic withdrawal of the Digital Services Tax signalling a hopeful, yet fragile, path for trade with the U.S., to the alarming expansion of U.S. global tariff threats including new duties on copper and the immediate impact of the federal middle-class tax cut, Canada's financial landscape is undergoing a period of dynamic and critical change. The coming weeks are pivotal, with negotiations due, policy pivots likely, and the potential for new tariffs looming large. Join us next week as we delve deeper into the U.S. Federal Reserve’s upcoming June CPI print and its implications for credit markets and economic growth across the country.