US-Canada Tariff Threats Require Diplomacy Despite Small Numbers

As President Donald Trump imposes a 25% tariff on foreign steel and aluminum, greatly impacting Canada, and threatens to impose an additional 25% tariff on Canadian goods starting April 2, it’s worth asking what the actual impact would be on Canada’s overall economy.

A fact sheet from the White House states that Canada’s digital service tax—which the Trump administration considers unfair—allows Canada to collect over $500 million annually from US companies.

Reciprocal tariffs are presented as a solution to restore trade fairness. A proportional reciprocity based on US goods imports from Canada in 2024 totaled $412.7 billion would result in a tariff of 0.1%. While Trump’s ultimate decision remains unpredictable, Canadian firms are unlikely to feel a significant impact from a 0.1% tariff, a rate too low to substantially affect their operations or profitability.

Calling the digital service tax discriminatory is inaccurate. It applies to all companies, whether Canadian or US, whose total annual consolidated revenue exceeds 750 million euros ($810 million) and generates more than CA$20 million ($14 million) in revenue from Canadian sources.

Still, the US views it as extraterritorial, stating, “only America should be allowed to tax American firms,” and that “trading partners hand American companies a bill for something called a digital service tax.”

The Trump administration also considers taxes such as the goods and services tax to be unfair, discriminatory, or extraterritorial. At first glance, the GST doesn’t seem to be any of those things. It applies uniformly to all products sold in Canada, regardless of origin, unlike customs duties, which specifically target imports.

The rhetoric so far refers to a “double whammy”: A US product sold in Canada is subject to a 12% GST (including provincial taxes), whereas a Canadian product exported to the US is exempt from this tax and only subject to an average state and local sales tax of about 7%.

A deeper analysis may lend support to Trump’s stance. In Canada, consumption taxes account for 22% of government revenue, compared with 16% in the US. If the US compensates for this gap with higher production taxes (corporate taxes, social charges) than Canada, this could place US products at a disadvantage, as these taxes directly affect product pricing.

When it comes to corporate taxes, there is no real difference—the rate is 26% in both countries. However, social charges show a clear discrepancy: They account for an average of 10% to 12% of wages in Canada, compared with about 8% in the US.

Therefore, when Canadian products enter the US exempt from the GST, they don’t disadvantage US products, as the embedded production taxes in US products are slightly lower than those applied to Canadian goods. For the GST, no tariff should be considered. For the DST, a 0.1% tariff could be considered if the US maintains that it is extraterritorial.

The US argument has merit under traditional tax rules, viewing the DST as an overreach targeting US firms with little local presence. However, the DST taxes value created by users locally, not extraterritorially, challenging the outdated focus on physical establishment. The debate hinges on adapting tax rules to the digital economy.

We must not forget the “America First Trade Policy” decree of Jan. 20, which references Section 891, mandating a doubling of US tax rates on Canadians if discriminatory or extraterritorial taxes are proven. This section remains vague, but it heightens pressure on Canada.

Although the tariff reciprocity regarding Canadian taxes seems limited to an almost symbolic rate of 0.1%, Canada will have to continue navigating carefully between numbers and diplomacy to prevent this trade war from escalating too far.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

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Brigitte Alepin is an author, filmmaker, and tax professor at the Université du Québec en Outaouais.

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