The United States recently imposed tariffs on "all articles that are products of Canada" imported into the U.S. In response, Canada published a list of U.S. products that are subject to tariffs when imported into Canada.
For the technology industry, this has sparked questions about whether intangible property, like software, is subject to these tariffs. This article will explore the potential implications of the tariffs on both Canadian and U.S. software as of the date of this article.
The basics: What is a tariff?
Tariffs are taxes imposed on goods imported into a country that are typically collected when the goods cross the border. Typically, tariffs target goods not services.
Software: Good or service?
When software first emerged, it was distributed on physical media like floppy disks or CDs, aligning it clearly with tangible goods. This perception lingered even as software sales moved online, with early digital downloads still treated as goods due to their transactional nature.
However, the landscape has since evolved. Modern software, especially platforms with ongoing subscription payments – such as Software as a Service (SaaS) – is increasingly regarded as a service.
Historically, Canada and the U.S. did not impose tariffs on modern software, viewing it as a service. This view is reflected in the United States-Mexico-Canada Agreement (USMCA), which prohibits the imposition of tariffs on digital products that are transmitted electronically, such as e-books, videos, music, software, games and more.
Additionally, as members of the World Trade Organization, both Canada and the U.S. are engaged in discussions about an international e-commerce agreement that would prohibit signatories from imposing tariffs on electronic transmissions.
Furthermore, applying tariffs to software presents practical challenges. Unlike physical goods, software does not cross the border in a conventional way. Digital transmissions occur instantaneously, lacking the tangible movement that customs processes typically track, making enforcement logistically difficult.
Canada: No tariffs on U.S. software
Canada's simple and clear list-based approach makes it easy to definitively state that U.S. software is not subject to Canadian tariffs. Only those U.S. products listed by the Canadian government are subject to Canadian tariffs. As of the writing of this article, Canada has not listed U.S. software, which is good news for Canadian companies that subscribe to or license U.S.-based software or SaaS offerings.
The United States: Likely no tariffs on Canadian software
Canada's approach stands in contrast to the sweeping language of President Trump's executive order, which makes it hard to definitively state that Canadian software is not subject to U.S. tariffs. It is possible to interpret the language "products of Canada" to include Canadian software, particularly because the USMCA refers to software as a "digital product."
However, assuming President Trump continues to honour the U.S.'s international commitments, and given the fact that he has not mentioned imposing tariffs on Canadian software, there is strong evidence that Canadian software is not currently subject to U.S. tariffs. Canadian software vendors should continue to monitor tariff announcements.
Key takeaways
There is strong evidence that tariffs don't impact Canadian or U.S. software. Additionally, given the logistical difficulties of taxing intangible property, modern software's historical classification as a service and its protection under international agreements. it is unlikely that Canada or the U.S. will impose tariffs on software.
That said, many other factors, such as Canada's relatively new Digital Services Tax Act and President Trump's perception of that legislation, may have an impact on software and other digital services.
We will continue to monitor the situation and provide updates as appropriate. Whether you are a Canadian software vendor or a Canadian company interested in using U.S.-based software, the MLT Aikins technology, intellectual property and privacy team can help your organization navigate the evolving trade landscape.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
