The following is the first installment in a multi-part series tackling Canada’s housing and immigration crises. The series will focus on their root causes, intertwined nature, and potential solutions. 

That Canada’s current housing crisis is primarily a function of an incredibly misguided set of immigration policies should have been blindingly obvious quite some time ago.

The figure below compares the five-year increase in Canada’s population to the five-year total of housing completions from 1970 through 2015. (The figures for 1970 represent the 5-year totals for 1966-70, and so on.)

Note how there was essentially no trend in either series over this period. The average annual increase in population starts out at 322,000 in 1966-70, gets as low as 255,00 in 1982-86, as high as 386,000 in 1988-92, and ends up at 341,000 in 2011-15. The average annual housing completions starts at 171,000 in 1966-70, gets as low as 153,000 in 1981-85, as high as 242,000 in 1973-75, and ends up at 183,000 in 2011-25.

Note also how, allowing for the ebbs and flows of the housing cycle, there is a rough correspondence between the growth in the population and the number of housing completions to accommodate that growth.

Now, look at what happens when we extend this series out to 2023.

In what could be a messy battle, with Canadian consumers and entertainment producers caught in the crossfire, the United States is predictably challenging Canada’s new Digital Services Tax (DST) on American tech giants.

On August 30, the United States Trade Representative (USTR) launched a complaint against the DST (which went into force in late June) under the Canada-United States-Mexico Agreement (CUSMA)—the trilateral trade deal finalized during the Trump administration that replaced NAFTA from the 1990s.

The federal government created the DST to combat the perception that the world’s biggest tech companies are not paying their fair share of tax; since the tech companies operate in cyberspace, they are able to locate in low-tax jurisdictions while serving clients around the world, including in Canada, where they are largely untaxed.

A multilateral treaty, crafted under the auspices of the Organization for Economic Co-operation and Development, was intended to address this issue, but it has not yet materialized. The Trudeau government could not wait and went ahead with the DST on its own, despite warnings it would anger our largest trading partner.

On its face, the DST applies to large businesses, both foreign and domestic, that meet both of two revenue thresholds: total global revenue of €750 million or more in a fiscal year; and greater than $20 million in earnings in Canada in the calendar year. The tax applies at a rate of three percent on profits over $20 million.

A particularly nasty feature is that the DST applies retroactively for revenues earned since Jan. 1, 2022; billions of dollars are already payable.

There are four DST revenue categories: online marketplace services, which would appear to target companies like Amazon; online advertising services, which catches Alphabet (Google) and Netflix; social media services, for Meta (Facebook and Instagram); and finally, user data revenue (Amazon, Alphabet, and Meta could all owe in this category, along with other giants like Apple).

Since the DST appears to only affect American companies, the U.S. is justifiably concerned the legislation is discriminatory.

Interestingly, in bringing the claim against Canada, the USTR mentioned the services chapter of CUSMA specifically as the source of its rights. The services chapter prohibits discrimination between services or services suppliers, either foreign versus local or among foreign companies from different countries.

The scope of these obligations is fairly broad, prohibiting less favourable treatment accorded to other services and service suppliers that are in “like circumstances.” Whether treatment is accorded in “like circumstances” depends on a range of factors, including legitimate public welfare objectives.

Accordingly, Canada might assert that the equitable and effective imposition and collection of taxes on digital service suppliers is such an objective. But the design of the DST, which appears to single out American companies, would surely weaken this claim. The U.S. case would be strengthened by the demonstration of some injury to the companies involved—not just in the form of their paying more tax, but ideally also that Canadians had reduced their consumption of their services.

Oddly, although the USTR’s press release did not mention it, CUSMA also includes a digital trade chapter. The U.S. might assert the DST violates the digital trade chapter’s prohibition on duties on electronic transactions. However, that obligation expressly does not preclude a party from imposing internal taxes, fees, or other charges on a digital product transmitted electronically “provided that those taxes, fees, or charges are imposed in a manner consistent with this Agreement.”

While the DST is a tax, and therefore seems excluded, the U.S. may claim that it has not been applied in a manner that is consistent with CUSMA because of its discriminatory nature, as alluded to above.

Canada might seek to defend the DST based on the “direct tax” exception, incorporated into CUSMA services chapter as a transplant from the World Trade Organization General Agreement on Trade in Services. But most commentators agree that digital services taxes are not direct taxes (imposed directly on the taxpayer, like income tax) but rather indirect (levied on goods and services).

Another conceivable means of responding to the U.S. challenge might be on the basis that the DST involves “cultural industries,” which are exempt from CUSMA. If it uses this line of defence, Canada will need to craft an argument that U.S. online services are somehow undermining Canadian culture—plausible in the case of Netflix, for example, which carries predominately U.S. and international content.

If the U.S. complaint proceeds to a formal dispute and Canada loses on the basis that the DST is discriminatory against the U.S., Canada will have to bring its legislation into conformity with CUSMA, and eliminate the discriminatory element.

Should Canada lose and fail to comply, the U.S. could retaliate with tariffs on Canadian services or goods, even in unrelated sectors. The ensuing trade war would be damaging for U.S.-Canadian relations, not to mention harmful to the Canadian economy. It is difficult to see how the Trudeau government did not see this coming.

Even if Canada were to win, the result would still be negative. Either the big American tech companies will pass on the cost of the tax to consumers (higher prices for your Amazon Prime or Netflix subscription), or they could reduce their presence in Canada. Meta famously blocked access to news on Facebook and Instagram in response to a Canadian law mandating that tech giants pay Canadian news outlets for news.

It could also spell the end of Canadian content on these platforms—no more Heartland or Schitt’s Creek on Netflix. Price hikes, reduced consumer choice, harm to the Canadian entertainment industry—the DST has very little to recommend it.

Resorting to CUSMA to resolve grievances regarding the DST represents a failure of diplomacy. The U.S. had engaged extensively with Canada over the last few years when the DST was still a proposal. The retroactive nature of the tax surely indicated that the American response would be swift.

The Trudeau government, which has enjoyed warm relations with the Biden Administration, may have felt that the U.S. would not respond, perhaps due to the distraction of the upcoming election.

Consultations will continue for the next 70-plus days before a formal dispute is launched through CUSMA’s Chapter 31. CUSMA disputes can take many years to conclude and the agreement itself is up for review in 2026. So, there is a chance the dispute could be discontinued if the rules themselves were revised.

USTR Katherine Tai emphasized the need to continue negotiations for a global tax treaty to deal with digital services, which are fast becoming a critical element of the global economy.

U.S. preference for trade multilateralism is encouraging and in many respects is a throwback to an earlier era of globalized rulemaking. But this approach, while welcome, is at odds with American refusal to rehabilitate the WTO’s failing dispute settlement system.

It is difficult to imagine a multilateral digital services tax, or functional digital trade rules of any kind, without an effective enforcement mechanism at the international level.