The Liberal government has apparently implemented the Digital Services Tax. Now we wait for the inevitable trade retaliation from the US.
The legal woes for the Canadian government is continuing to pile up. Already, the Online Streaming Act has netted the government not one, not two, but three lawsuits so far. What’s more, that is unlikely to be the end of the number of times the government is going to get litigated over that legislation. The litigation was long warned about by observers and experts alike, but the Liberal government simply chose to ignore those warnings and barrel ahead with the implementation of that law anyway. In that regard, I guess it is sometimes required for the Canadian government to learn the hard way.
Now, you would think that basic logic would dictate that, as a government, you should take a step back and reassess the situation. After all, ignoring the critics and presuming that everything they said was wrong turned out to be accurate predictions. The critics said that the Online Streaming Act would result in litigation. That prediction came true. The critics said that Meta would drop news links rather than pay the ransom payments. That prediction came true. What’s more, critics have pointed out that the Digital Services Tax would invariably lead to a trade war with the United States. Do we not see a pattern here in all of this yet?
The prediction of a trade war is backed by a considerable body of evidence as well. After all the United States did warn Canada not once, not twice, not three times, not four times, but at least five times to not implement the Digital Services Tax. This was additionally backed by multiple letters from both Democrat and Republican lawmakers. What’s more, the US followed all of this up by saying earlier this month that they would use all available tools to fight the Digital Services Tax. All this was going on since 2022, yet it seems that, as far as the Canadian government is concerned, those warnings were falling on deaf ears.
Instead, the government just kept saying over and over again that the Digital Services Tax is in line with all of their international trade obligations. This while mixing in a strategy of either subtle delays and simply not responding at all in the hopes that ignoring the problems will magically make those problems go away on their own. That obviously didn’t work on account that American officials aren’t extremely stupid in all of this. So, recently, we found out that the Canadian government is simply resigned to the idea of blowing themselves up politically and legally. Apparently, the Canadian government has decided to flip off the American government and implement the Digital Services Tax. From the CBC:
The federal government has enacted a controversial digital services tax that will bring in billions of dollars while threatening Canada’s trading relationships by taxing the revenue international firms earn in Canada.
The Liberal government proposed the tax in its 2019 election platform. It later agreed to delay implementing the measure until the end of 2023 in the hopes it could reach a deal with other OECD countries on how multinational digital companies should be taxed.
Negotiations on an international deal continued to drag on past that date and the federal government issued an order in council on June 28 to enact the digital services tax (DST), which received royal assent June 20.
Once again, we find ourselves in a situation where it seems that the Canadian government has to learn the hard way – again. This decision pretty much starts the clock on how long it will take before the US government enables trade sanctions on Canada.
To be clear, there is no viable legal response the Canadian government has when the sanctions hit. Some have argued that there is a cultural exemption that the government can use, but that cultural exemption also allows the US to issue tariffs in kind against the Canadian government, putting the whole situation back at square one. So, how much will this crazy tax scheme cost tax payers (at least as far as trade sanctions are concerned)? We actually have a pretty good idea. After all, the estimate that the Canadian government expects to pull in is set to $7.2 billion. So, basic logic dictates that we can expect $7.2 billion worth of trade sanctions to be slapped onto Canada.
On a side note, I thought the Digital Services Tax contained in Bill C-59 needed to receive royal assent first before being implemented. So, I had thought that this wasn’t going to happen until September 16th at earliest given that Canadian lawmakers were on Summer break. Apparently, that’s not the case and, in this specific example, the government could implement it at any time (which has apparently happened). Apparently, I was mistaken on that thinking and I own up to that.
Of course, the Canadian business sector is rightfully freaked out about this. The question is not if the sanctions are going to hit, but rather, when. So, some of them are going to wind up being collateral damage in all of this. It’s why they begged Trudeau to not go through with this. The Canadian Chamber of Commerce also issued a statement begging Trudeau to reconsider this move. The Retail Council of Canada also begged Trudeau not to do this. You might think that, unlike the creative community and journalism community fighting Bill C-11 and Bill C-18 respectively, the business community might have more sway in putting a stop to this. Evidently, in this situation at least, that wasn’t the case. Those desperate pleas fell on deaf ears.
The Canadian Chamber of Commerce issued a solemn statement expressing disappointment about this whole sorry affair:
The imposition of a retroactive discriminatory digital services tax by the federal government will not only make life more expensive for Canadian families, businesses and workers, but it will significantly harm our relationship with the United States. The government should reverse its unilateral decision that is out of step with our allies, and instead, work with our trading partners on an international solution that would better serve Canadians.
– Robin Guy, Vice President & Deputy Leader, Government Relations, Canadian Chamber of Commerce
To put it more bluntly, this is basically business speak for “we’re f*cked”.
Of course, the damage that this will ultimately unleash will go far beyond whichever businesses the US government winds up targeting. That money has to come from somewhere and the likely source of that revenue will very likely come from consumers in the form of higher subscription costs. This has been something that has been long warned about among streaming platforms and it’s difficult to see how this would go down any other way. As I’ve suggested all along, I think a brilliant move on the part of platforms would be to insert the cost of the Digital Services Tax as a separate line item on people’s bills afterwards. Not only would this be an exercise in transparency, but Canadians will know exactly who to blame for that item in the first place.
Obviously, we’ll be on the lookout for additional action from the US government. It’s difficult to say what that trade retaliation will look like because there is a number of theoretical avenues they could take. One possible strategy is to hit the culture sector in kind with sanctions. Another possibility is to exert pressure on specific lawmakers by sanctioning specific industries working in their riding. There could be other considerations that go into the calculus as well. Ultimately, we know it’s coming and it’s going to hurt, but what that looks like remains to be seen.
If there is any silver lining in all of this, it seems that the Canadian media has finally started taking the trade threats seriously and incorporating this aspect into their reporting. I don’t think they took these direct warnings seriously until the last few days. Just know that these trade threats aren’t anything new. Canada actually had about two years warning in all of this, but those warnings were ignored.
At any rate, things are going to get ugly. How much this whole thing will ultimately cost taxpayers remains to be seen (beyond the direct $7.2 billion in estimated tariff costs). There’s going to be money and resources redirected to trying to smooth over these problems (and, to that I say to the Canadian government, “good luck with that.”) What’s more, there’s going to be higher bills for consumers, increasing the costs of day to day living. People like us tried to warn the government not to do this, but we were attacked for being “shills for Big Tech” and summarily ignored. We tried.
This government has exceeded my expectations. When they were first elected I thought they would be terrible. Turns out they’re been a complete f***ing disaster.
I think their first year was the only year where they weren’t brutally bad. I remember at the time that they had a number of great ideas. This included reforming privacy law, enshrining network neutrality into the law books, expanding broadband into rural and indigenous communities, and this promising concept called the “digital charter” (not that the details were necessarily ever released to the public). All of that got largely abandoned saved for privacy reform which wound up being a half measure that has been slow walked to death in the regulatory process.
You would never know that the government in their first year in office was the same government that is currently in power. They dumped all of their great ideas (or, at the very least, great sounding ideas) and declared war on the internet, consequences be damned. Those consequences are coming home to roost.