2025-05-22T21:38:49Z

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In a significant development affecting international commerce, U.S. President Donald Trump recently advanced a new tax bill that poses a serious threat to Canadian corporations and investors. This proposed legislation, titled “The One, Big, Beautiful Bill,” was narrowly passed by the House of Representatives on Thursday with a vote tally of 215-214. The bill, if enacted, would effectively override the longstanding tax treaty between the United States and Canada that has been in place since 1942.

One of the most contentious elements of this 1,100-page bill is section 899. This provision is characterized as a retaliatory measure aimed at what the U.S. government deems “discriminatory or unfair taxes” imposed by foreign nations, particularly targeting Canada's digital services tax, which was introduced in 2024. This could have profound implications for cross-border investments and tax liabilities.

However, before becoming law, the bill must pass through the Senate and receive the president's signature. The government is optimistic it will finalize the legislation by July 4. If enacted, section 899 would raise tax rates for foreign individuals and foreign-owned companies operating in the U.S. by 5 percentage points annually, capping at a staggering 20 percentage points above the standard statutory rate.

Currently, under the existing tax treaty, Canadian corporations that receive dividends from U.S. subsidiaries benefit from a relatively low withholding tax rate of just 5%, significantly lower than the statutory rate of 30%. But if section 899 is implemented, these corporations would be subjected to the standard statutory rate, with the potential to escalate by 5 percentage points each year, ultimately reaching a maximum tax rate of 50%. This is a drastic shift that could discourage Canadian investment in the U.S.

Similarly, Canadian individuals who directly hold U.S. securities currently pay a withholding tax rate of 15%, a reduction from the statutory 30%. However, should section 899 come into effect, this rate could rise to 50%, inflicting further financial strain on Canadian investors.

Ian Bragg, the vice-president of research and statistics at the Securities and Investment Management Association, expressed grave concerns over the proposed tax changes, estimating that Canadian investors could face an additional tax burden exceeding $81 billion over the next seven years. He argues that these measures would unfairly penalize ordinary Canadians who are saving for crucial life events such as retirement and education, thereby introducing unnecessary uncertainty into the financial markets.

Max Reed, a cross-border tax attorney and principal at Polaris Tax Counsel in Vancouver, echoes this sentiment, stating that the enactment of section 899 would significantly damage the Canada-U.S. tax relationship, analogous to how tariffs imposed by Trump have disrupted trade. “The results would be significant,” Reed warned in a communication to his clients. “Virtually all cross-border planning would be turned on its head.”

Further complicating matters, the tax bill proposes to eliminate long-standing exemptions for governments and associated entities from targeted companies. This change could result in organizations such as the Canadian Pension Plan Investment Board and First Nation communities facing new tax obligations.

In terms of competitive dynamics, the proposed tax changes are likely to place Canada’s multinational companies at a disadvantage compared to domestic U.S. firms and subsidiaries of other foreign multinationals that are not subjected to similar taxes. Ron Nobrega, a tax partner at Fasken Martineau DuMoulin LLP in Toronto, suggested that Canada may have to reconsider its digital services tax in light of the fiscal impact these changes could impose on Canadian businesses.

Kim Moody, founder of Moody Tax Law in Calgary, supports the notion that Canada should reconsider its digital services tax, stating that it has “clearly aggravated” relations with the United States. “Canada has to see the bigger picture,” he said, emphasizing that the U.S. appears to be building a protective wall around its economy.

Earlier this year, Prime Minister Mark Carney emphasized in his campaign documents that his government “will not surrender” on policies ensuring that large multinational corporations contribute a fair share of taxes based on profits generated within Canada.

As Trump’s tax legislation continues its journey through Congress, there will undoubtedly be ongoing discussions and analyses regarding its potential ripple effects. Karl Dennis, KPMG’s national leader for the U.S. corporate tax team in Canada, anticipates that Canadian individuals and businesses will indeed face elevated rates of U.S. tax on their earnings derived from U.S. sources. “The actual extent of the impact will vary,” Dennis clarified, urging Canadians with U.S. investments to remain vigilant as the legislative process unfolds.