U.S. Tariffs on Canadian Software – What It Means for Tech

For decades, trade disputes have centered around physical goods—steel, cars, and agriculture. Tariffs were something manufacturers worried about, not tech companies. But now, a new concern is emerging: the possibility of 25% U.S. tariffs on Canadian software.

At first, this might seem like just another trade policy buried in legal jargon. But for those in tech, it’s a potential storm cloud over an industry that thrives on seamless collaboration, borderless innovation, and digital-first business models.

Unlike physical products, software isn’t something you can load onto a truck or inspect at customs. It’s downloaded, accessed through the cloud, and updated in real time. So, is this just political noise, or could it actually happen? And if it does, what does it mean for businesses in both Canada and the U.S.?

Let’s break it down.

Understanding the Current Trade Dynamics

On March 4, 2025, President Donald Trump announced new U.S. tariffs on Canadian goods, including a 25% tariff on certain products and a 10% tariff on energy exports. While technology wasn’t specifically named, the potential implications for software remain unclear.

Since software classification under international trade agreements is already complex, the introduction of tariffs could create significant confusion for businesses operating across borders.

According to the U.S. Trade Representative, total goods trade with Canada was estimated at $762.1 billion in 2024.

Can You Even Tax Software Like a Physical Product?

Tariffs typically apply to physical goods—things you can ship, store, and inspect at customs. But software? It exists in the cloud, moves through networks, and is consumed as a service rather than a one-time purchase.

Historically, when software was sold on CDs or floppy disks, it was classified as a tangible product. But today, most software is delivered via subscriptions, licenses, or cloud platforms, making it difficult to define under traditional trade rules. And that distinction matters—because tariffs generally don’t apply to services.

So, can the U.S. actually enforce this? There are two competing perspectives:

“It Won’t Happen” – Legal experts argue that existing trade agreements prevent the U.S. from imposing tariffs on digital products. Plus, tracking and taxing software imports would be nearly impossible. Since many U.S. businesses rely on Canadian software, tariffs could end up hurting them just as much.

“Don’t Be So Sure” – The U.S. has already imposed tariffs on Canadian aluminum, steel, and other key industries. If they’re willing to go that far, why not software? If tariffs become a reality, businesses will have no choice but to adapt—fast.

Right now, there’s no clear answer.

The Complexity of Software Classification for U.S. Tariffs

The challenge lies in how software is classified under international trade laws. The Harmonized Tariff Schedule (HTS) includes software under code 8523.49, but its application to digital downloads remains ambiguous. This raises major legal and logistical concerns:

Trade Agreements Are Against It – Under WTO and USMCA agreements, the U.S. has explicitly committed to not imposing tariffs on digital products. Moving forward with this policy would mean breaking those commitments.

Defining “Software” Is Tricky – If a U.S. company subscribes to a Canadian SaaS product, is that a good or a service? If they download an app, does it count as an import? If the software is constantly updated, does every update get taxed? Even legal experts struggle with these questions.

Tracking Digital Trade Is a Nightmare – Unlike physical goods, software doesn’t pass through customs. There are no shipping records or declarations. How would authorities even monitor and enforce such a tax?

In short, even if the policy sounds aggressive on paper, enforcing it is another story. But let’s assume the U.S. finds a way—what would the impact be?

What Happens If the U.S. Tariffs Become Reality?

If software tariffs actually take effect, the consequences won’t just affect Canadian companies—they could disrupt the entire North American tech ecosystem.

Higher Costs for U.S. Businesses – A 25% tariff could force American companies to either absorb the extra cost, pass it on to customers, or seek U.S.-based alternatives, even if they’re not as competitive.

Operational Headaches – Unlike physical imports, software isn’t tracked at customs. It’s downloaded, updated, and accessed instantly. Enforcing tariffs on digital transactions without disrupting business operations would be a logistical nightmare.

A Shift in Business Strategy – To bypass tariffs, Canadian software companies might be forced to set up U.S. subsidiaries. This would favor larger firms that can afford expansion while making it harder for smaller startups to compete.

A Threat to Canada’s Tech Sector – Canada has become a global leader in AI, SaaS, and digital innovation. If access to the U.S. market becomes costly, could we see Canadian firms relocating south just to avoid tariffs?

A Dangerous Precedent for Global Trade – If the U.S. successfully taxes Canadian software, what stops them from doing the same to Europe, India, or other software-exporting nations? This could lead to a fragmented, protectionist approach to digital trade.

For decades, the Canada-U.S. tech relationship has thrived on seamless collaboration. A tariff risks disrupting an industry that depends on borderless innovation.

Is This the Start of Digital Protectionism?

If the U.S. starts taxing software, it could set a precedent for other countries to follow.

The tech industry has long operated under the assumption that digital trade should be borderless. But what happens if governments begin treating software like any other import?

Would companies have to navigate different tax structures, tariffs, and digital trade laws depending on where their customers are? If that happens, the simplicity of global SaaS business models could start to unravel.

What Should Businesses Do Now?

Stay informed – If you’re a Canadian software company, monitor developments closely. Your legal and finance teams should be ready to adapt.

Clarify Contracts with U.S. Clients – If tariffs are imposed, who pays—the provider or the client? Start defining this now in new agreements.

Diversify Your Markets – If reliance on the U.S. becomes risky, expanding into Europe, Asia, and other regions could be a smart long-term strategy.

Watch for Policy Shifts – Tariffs aren’t permanent. The political landscape changes quickly, and trade policies can shift overnight.

Should We Be Worried about U.S. Tariffs?

This isn’t just about Canada or the U.S.—it’s about the future of digital trade.

For decades, software has flowed freely across borders, driving innovation and economic growth. If tariffs become a reality, they could fundamentally change how we think about software, SaaS, and cross-border transactions.

But here’s the thing: Technology doesn’t stop at borders.

Innovation thrives when ideas and solutions move freely. No tariff, policy, or restriction can stop businesses from finding new ways to create, connect, and collaborate.

Whether these tariffs happen or not, one thing is certain—business leaders must stay agile, informed, and ready to adapt.

What’s your take? Do you see this as political noise or a real challenge for the tech industry?