Late last week, the Office of the United States Trade Representative requested dispute settlement consultations with Canada under the United States-Mexico-Canada Agreement (USMCA) regarding Canada’s recently enacted Digital Services Tax (DST). The U.S. believes the tax discriminates against American companies and breaches Canada’s commitments under the USMCA.
The DST applies a 3% tax on the sum of revenues from online marketplaces, online targeted advertising, social media platforms, and user data. The Digital Services Tax Act set out in Bill C-59 was passed on May 28, 2024 and received royal assent on June 20, 2024.
According to Devon MacDonald, president of Cairns Oneil, the U.S. opposition to the tax was expected, however, he anticipates the dispute will be resolved. “The DST and its application is becoming a standard in many markets where global companies have earned significant revenues from local advertisers,” says MacDonald.
“As a Canadian company ourselves, we think it’s important for the government to properly tax revenues earned in Canada. Overall, we view the implementation of the DST and how it’s being applied by some media platforms as an opportunity to review media effectiveness across platforms,” he adds. “We should look at other properties who are not subject to DST or not passing DST onto their clients and understand what those costs mean to working media dollars.”
Meanwhile, the Interactive Advertising Bureau (IAB) in Canada has urged the Prime Minister’s Office and the Deputy Minister and Minister of Finance Chrystia Freeland to repeal the DST, or at a minimum, repeal the retroactivity demanded from the federal government. Some of IAB’s concerns include that the DST directly targets the industry, disproportionately affects small and medium-sized businesses, and that compliance represents astronomical costs to Canadian businesses as they rework their billing infrastructure.
Sonia Carreno, president of IAB Canada, says the response from the U.S. Trade Representative was both foreseeable and avoidable, but she is hopeful that this will be met with swift corrective action by the Government of Canada. Carreno says the response from the USTR is an alarming signal of the challenges to come as the country moves closer towards renegotiating CUSMA, the Canada-United States-Mexico Agreement, in 2026.
“The targeted Digital Services Tax will have a catastrophic impact on Canada’s $18B digital advertising ecosystem, hitting businesses hard,” says Carreno. “From agencies to publishers, everyone will feel the effect of surcharges and rising costs to make up for the retroactive demands of the government.
“The DST poses a threat to jobs, small businesses, and as evidenced by the USTR announcement, cross-border trade with the U.S. Fortunately, there is time to change the collision course we are on. The tax can be repealed without the need for a new bill and Canada can resume negotiations with the OECD/G20 to align with the Multilateral Convention, which has already gained significant traction.”
Shannon Lewis, president of the Canadian Media Directors Council, which has been closely following the DST, and is in contact with the federal government, says, “With the economy still facing headwinds, this tax adds undue pressure on Canadian advertisers and the broader media sector — an industry contributing $25.2 billion to our GDP. The government should support an environment that encourages innovation, not impose barriers. Additionally, from a trade relations perspective, it undermines global initiatives like the G20 and OECD’s plan. We urge the federal government to reconsider, advocating for a collaborative approach that fosters growth and strengthens Canada’s competitiveness.”
