Need to Know: Mark Carney’s digital services tax disaster

Welcome to Need to Know, The Hub’s twice-weekly roundup of expert insights into the biggest economic stories, political news, and policy developments Hub readers need to be keeping their eyes on.

Canada caves on DST after series of strategic missteps

By Michael Geist, holder of the Canada Research Chair in Internet and E-commerce Law at the University of Ottawa, Faculty of Law.

After years of dismissing the warnings of likely retaliation, the Canadian government caved to U.S. pressure late on Sunday night as it cancelled the digital services tax (DST). Faced with the prospect of the U.S. suspending trade negotiations, Finance Minister François-Philippe Champagne announced that the government would drop the DST altogether, with legislation forthcoming to rescind the legislation that created it in the first place.

There were repeated warnings that the DST was a serious trade irritant with the U.S. that cut across party and presidential lines. Yet rather than delaying implementation in the hopes of incorporating it into a broader trade deal with the U.S., it marched ahead, leading to an entirely predictable response from President Donald Trump. That left Canada in a no-win situation: stick with the DST but face the prospect of higher tariffs, or embarrassingly drop the tax (and $7.2 billion in revenue over five years) with only restarting negotiations—that were on until the government overplayed its hand—to show for it.

It is hard to overstate how badly the government managed the DST issue over the past five years. It alienated allies by pushing ahead with the DST despite efforts at an international deal at the OECD, stood alone in rejecting an extension of a moratorium on new DSTs, made the DST retroactive which solidified opposition, and continually downplayed the concerns of successive U.S. presidents and members of Congress from both sides of the aisle.

Meanwhile, when companies began passing along the costs of the DST to Canadian businesses, it did nothing. And when Canadian businesses urged the government to delay implementation to at least allow for the issue to be incorporated into a broader trade pact, it ignored the advice.

At every step, there were better options. This year, the likelihood that the DST would come to a boil was obvious to anyone who was paying attention. But rather than following the U.K. strategy, which managed to salvage a smaller DST (2 percent rather than 3 percent) as part of a bigger agreement that includes a commitment to support U.K. digital access to the U.S. market and to negotiate a larger digital trade deal, Canadian officials seemingly assumed that the U.S. was bluffing and would not retaliate. It was a bad bet that leaves Canada looking weak and with nothing to show for years of effort to implement a digital services tax.

Can the Liberals entice Canadian businesses into adopting AI?

By Alex MacDonald, associate vice president, federal advocacy, at Counsel Public Affairs

AI is all the hype these days. Leaders in both the public and private sectors routinely rave about the technology’s potential to transform the economy and enhance citizens’ living standards. Our newly minted minister of AI, Evan Solomon, has wasted no time making his presence and the new federal government’s AI-leveraged ambitions known through speeches, office visits, and interviews.

AI’s detractors and skeptics have remained vocal as well, however. Nobel laureate Geoffrey Hinton has continued to emphasize the need for AI to be regulated despite strong corporate interests for minimal regulation, including outright exemptions in the case of copyright considerations. The AI Futures Project, a non-profit forecasting the future of AI, recently released a forecast report that envisions an AI-driven apocalypse before the end of the decade.

This past week, the federal government opened applications for the AI Compute Access Fund, which is but one part of its broader $2 billion Canadian Sovereign AI Compute Strategy. The Liberal electoral platform promised an additional $2.5 billion in digital infrastructure to support AI adoption, a grant program for workers in priority sectors to learn how to use AI, and a 20 percent tax credit for small and medium-sized businesses to adopt AI.

Prime Minister Mark Carney has increased the enthusiasm for AI with both rhetoric and spending promises. No doubt there will be some large corporate entities ready to gobble up these funds, but is the broader economy and public prepared to be transformed by AI?

Recent public policy should instill caution. In 2022, the Trudeau Liberals introduced the Canada Digital Adoption Program (CDAP), a $4 billion initiative designed to assist small businesses in adopting or upgrading their technology to better operate in the modern economy. Grants were offered to build websites, establish themselves on e-commerce platforms, or engage digital consultants. Interest-free loans of up to $100,000 were offered to support technology upgrades.

Nearly two years into the program, the government abruptly cancelled the program, due to low uptake and budget cuts. CDAP ultimately disbursed $1.2 billion in grants and loans to 71,000 businesses, spending roughly a quarter of its budget.

Presumably, the CDAP program was launched because Canadian firms were failing to adequately invest in technology, and the government thought it could induce greater digitization. And yet, businesses largely turned down the government’s offer of “free” money. Perhaps they don’t see technological adoption as key to their success in the market. Why would re-profiling the support into up-skilling grants and tax credits change uptake?

It’s a cautionary tale that ought to temper expectations and inform policy design. The government failed in its initial round of subsidizing low-tech adoption. It would be sheer hubris for it to presume success in driving high-tech adoption. Deferring to market forces rather than technocratic impulses would be the wiser route this time around.

Iran’s fight isn’t just to topple a regime—it’s to build a democratic culture

By Mathew Giagnorio, a writer, journalist, and podcaster

There’s a dangerous myth—especially in the West—that you can crush a theocracy and democracy will magically emerge in its place. As if the fall of tyrants automatically gives rise to freedom.

It doesn’t. Democracy doesn’t drop from the sky. It is not the natural sequel to revolution. It is something far more demanding: a culture built over time, rooted in pluralism, civic trust, and the hard habit of self-government.

Iran is in the throes of transformation. The Islamic Republic, bloodied and brittle, is teetering. Women, youth, and exiled voices are all pushing for a new era. Reza Pahlavi offers one possible figurehead. But no leader, no matter how symbolic, can substitute for the slow, necessary work of building democratic foundations.

That means independent institutions, free media, secular law, and, most importantly, a democratic ethos—the ability of a society to disagree, adapt, and reform without collapsing.

This is the challenge ahead for Iran—and it’s a challenge the world should take seriously.

The post-Islamic period, if it comes, won’t simply be a political transition. It must be a civic and cultural rebirth. One that doesn’t just remove the mullahs, but replaces the logic of tyranny with the language of liberty.

The West has made the mistake before—cheering revolts, then abandoning the people. We can’t afford that error again.

Iran’s future will be shaped by Iranians. But democracy’s survival depends on all of us.