As Canada pushes ahead with a new digital services tax on foreign and domestic technology companies, United States President Donald Trump has retaliated by ending all trade talks and threatened to impose additional tariffs on exports from Ottawa.

In a post on his Truth Social platform on Friday, Trump called the new Canadian tax structure a “direct and blatant attack on our country”, adding that Canada is “a very difficult country to trade with”.

“Based on this egregious Tax, we are hereby terminating ALL discussions on Trade with Canada, effective immediately,” he wrote. He added that he would announce new tariffs of his own for Canada in a matter of days.

US companies such as Amazon, Meta, Google and Uber face an estimated $2bn in bills under the new tax.

Trump’s decision marks a sharp return to trade tensions between the two countries, abruptly ending a more cooperative phase since Mark Carney’s election as Canada’s prime minister in March.

It also marks a further escalation in the trade-as-pressure tactic under Trump’s second term in Washington.

The US is Canada’s largest trading partner by far, with more than 80 percent of Canadian exports destined for the US. In 2024, total bilateral goods trade exceeded US$762bn, with Canada exporting $412.7bn and importing $349.4bn – leaving the US, which counts Canada as its second-largest trading partner, with a goods deficit of $63.3bn.

A disruption due to tariffs on products like automobiles, minerals, energy or aluminium could have large ripple effects across both economies.

So, what is Canada’s digital tax? Why is Carney facing domestic pushback on the taxes? And how is Washington responding?

What is Canada’s digital services tax?

Canada’s Digital Services Tax Act (DSTA) came into force in June last year. It is a levy on tech revenues generated from Canadian users – even if providers do not have a physical presence in the country.

The DSTA was first proposed during the 2019 federal election under then-Prime Minister Justin Trudeau, and received approval in Canada on June 20, 2024. It came into force a week later, on June 28. The first payments of this tax are due on Monday, June 30, 2025.

Large technology firms with global revenues exceeding $820m and Canadian revenues of more than $14.7m must pay a 3 percent levy on certain digital services revenues earned in Canada. Unlike traditional corporate taxes based on profits, this tax targets gross revenue linked to Canadian user engagement.

Digital services the levy will apply to include: Online marketplaces, social media platforms, digital advertising and the sale or licensing of user data.

One of the most contentious parts of the new framework for businesses is its retroactive nature, which demands payments on revenues dating back to January 1, 2022.

Why is Trump suspending trade talks over the new tax?

On June 11, 21 US Congress members sent a letter to President Trump, urging him to pressure Canada to eliminate or pause its Digital Services Tax. “If Canada decides to move forward with this unprecedented, retroactive tax, it will set a terrible precedent that will have long-lasting impacts on global tax and trade practices,” they wrote.

Then, in a Truth Social post on Friday this week, Trump said Canada had confirmed it would continue with its new digital services tax “on our American Technology Companies, which is a direct and blatant attack on our Country”.

He added that the US would be “terminating ALL discussions on Trade with Canada, effective immediately” and that he would be levying new tariffs of his own on Canada within seven days.

“They have charged our Farmers as much as 400% Tariffs, for years, on Dairy Products,” Trump said, adding, “We will let Canada know the Tariff that they will be paying to do business with the United States of America within the next seven day period.”

Later, at the Oval Office, Trump doubled down, saying: “We have all the cards. We have every single one.” He noted that the US holds “such power over Canada [economically]”. “We’d rather not use it,” Trump said, adding: “It’s not going to work out well for Canada. They were foolish to do it.

“Most of their business is with us, and when you have that circumstance, you treat people better.”

Trump also said he would order a Section 301 investigation under the Trade Act to assess the DSTA’s effect on US commerce, which could potentially lead to other punitive measures.

On Friday, White House National Economic Council director, Kevin Hassett, told the  Fox Business Friday programme: “They’re taxing American companies who don’t necessarily even have a presence in Canada.”

Calling the tax “almost criminal”, he said: “They’re going to have to remove it. And I think they know that.”

How has Canada responded?

Relations had seemed friendlier between the two North American neighbours in recent months as they continue with trade talks. Trump and former Prime Minister Justin Trudeau had clashed previously – with Trump calling Trudeau “very dishonest” and “weak” during the 2018 G7 talks in Canada.

But newly elected Carney enjoyed a cordial visit with Trump in May at the White House, while Trump travelled to Canada for the G7 summit in Alberta on June 16 and 17. Carney said at the summit that the two had set a 30-day deadline for trade talks.

In a brief statement on Friday, Prime Minister Carney’s office said of Trump’s new threats to suspend trade talks over the digital tax: “The Canadian government will continue to engage in these complex negotiations with the United States in the best interests of Canadian workers and businesses.”

Last week, Canadian Finance Minister Francois-Philippe Champagne told reporters that the digital tax could be negotiated as part of the broader, ongoing US-Canada trade discussions. “Obviously, all of that is something that we’re considering as part of broader discussions that you may have,” he had said.

Those discussions had been expected to result in a trade deal in July. However, they are now in limbo.

What do Canadian business leaders say?

Carney has been facing pressure from domestic businesses as well, which have lobbied the government to pause the digital services tax, underlining that the new framework would increase their costs for providing services and warning against retaliation from the US.

The Business Council of Canada, a nonprofit organisation representing CEOs and leaders of major Canadian companies, said in a statement that, for years, it “has warned that the implementation of a unilateral digital services tax could risk undermining Canada’s economic relationship with its most important trading partner, the United States”.

“That unfortunate development has now come to pass,” the statement noted. “In an effort to get trade negotiations back on track, Canada should put forward an immediate proposal to eliminate the DST in exchange for the elimination of tariffs from the United States.”

Has Trump used tariffs to pressure Canada before?

Yes. Prior to the DSTA, Trump has used tariffs to pressure Canada over what he says is its role in the flow of the addictive drug, fentanyl, and undocumented migration into the US, as well as broader trade and economic issues.

On January 20, in his inaugural address, Trump announced a 25 percent tariff on all Canadian goods and a 10 percent tariff on Canadian energy resources. Trump claimed that Canada has a “growing footprint” in fentanyl production, and alleged that Mexican cartels operate fentanyl labs in Canada, particularly in British Columbia, Alberta and Ontario.

These tariffs were paused for 30 days following assurances from Canada that appropriate action would be taken to curb the flow of fentanyl, and then re-imposed in early March.

Do other countries levy a similar digital tax?

Yes, several countries around the world have introduced digital services taxes (DSTs) similar to Canada’s. France was one of the first to introduce a DST in 2019, eliciting an angry response from Trump who was serving his first term as president. The French tax is a 3 percent levy on revenues from online advertising, digital platforms and sales of user data.

The UK followed with a 2 percent tax on revenues from social media platforms and search engines. Spain, Italy, and Austria have also implemented similar taxes, with rates ranging from 3 to 5 percent. Turkiye has one of the highest DST rates at 7.5 percent, covering a wide range of digital services such as content streaming and advertising.

Outside Europe, India has a 2 percent “equalisation levy” on foreign e-commerce operators which earn revenues from Indian users. Kenya and Indonesia have also created their own digital tax systems, though they’re structured slightly differently – Indonesia, for instance, applies Value Added Tax (VAT) – or sales tax – on foreign digital services, rather than a DST.

The US government has strongly opposed these taxes; some of these disputes have been paused as part of ongoing negotiations led by the Organization for Economic Co-operation and Development (OECD), an international organisation made up of 38 member countries, which is working on a global agreement for taxing digital companies fairly.

Canada held off on implementing its DST until 2024 to give time for the OECD talks. But when progress stalled, it went ahead with the 3 percent tax that applies retroactively since January 2022.

The European Union is likely to be watching this situation closely as digital tax is likely to be a key concern during its own trade talks with the US.

Trump has repeatedly warned that similar tax measures from other allies, including EU countries, could face severe retaliation.

Trump’s administration has previously objected to digital taxes introduced by EU member states like France, Italy, and Spain. In 2020, the US Trade Representative investigated these taxes under Section 301 and threatened retaliatory tariffs, though those were paused pending OECD-led global tax negotiations.

The European Commission has confirmed that digital taxation remains on the agenda, especially if a global deal under the OECD fails to materialise. President Ursula von der Leyen said on June 26 that “all options remain on the table” in trade discussions with the US, including enforcement mechanisms against discriminatory US measures.

The high-stakes trade negotiations ongoing between the US and the EU have a deadline for July 9 – the date that Trump’s 90-day pause on global reciprocal tariffs is due to expire. Trump has threatened to impose new tariffs of up to 50 percent on key European exports, including cars and steel, if a deal is not reached.

In response to these threats, the EU has prepared a list of retaliatory tariffs worth up to 95 billion euros ($111.4bn), which would target a broad range of US exports, from agricultural products to Boeing aircraft. EU leaders have signalled that they will defend the bloc’s tax sovereignty, while remaining open to negotiation.