Changes in US Tax Policy Affecting Canadian Businesses

President Donald Trump’s proposed tax legislation could lead to a notable rise in tax rates for Canadian firms, which may ultimately burden investors with up to $8.1 billion in extra taxes over a seven-year timeframe.

Recently, the House approved a Republican measure—dubbed “The One, Big, Beautiful Bill”—by a slim margin of 215-214. Should it become law, this bill would void the longstanding tax treaties between Canada and the US established in 1942.

Contained within the extensive 1,100-page document, Section 899 is a specific tax strategy aimed at countering what the US perceives as “discriminatory or unfair taxes,” particularly targeting the Canadian Digital Services Tax set for introduction in 2024.

The pathway for this bill includes passage through the Senate and approval from the president before it can take effect. The government anticipates formalizing the final bill by July 4th. If Section 899 passes, the tax rates for foreign entities and companies could increase significantly—up to 20% over time, exceeding the current statutory limits.

For instance, Canadian businesses receiving dividends from US subsidiaries currently benefit from a 5% withholding rate thanks to the US-Canada tax treaty—well below the 30% statutory rate. If Section 899 becomes law, that rate would increase to the statutory level, climbing by 5% each year until reaching or exceeding 20% or even surpassing the 50% mark. This new policy would remain enforced until the “Unfair Tax” is eliminated.

In a similar vein, Canadian individuals with direct ownership of US securities now face a 15% withholding tax under the existing treaty, compared to the 30% statutory rate. Should Section 899 take effect, this withholding tax could escalate to as high as 50%.

Ian Bragg, vice-president of research and statistics at the Securities Investment Management Association, indicated that the current draft of the Act might impose over $8.1 billion in additional tax liabilities on Canadian investors within the next seven years.

Bragg mentioned in a statement that these measures would unfairly penalize ordinary Canadians who are saving for important future endeavors like retirement or education, creating unwarranted instability in the market. “Addressing this at the highest level of Canada-US trade negotiations is crucial to safeguarding millions of Canadians’ financial well-being,” he added.

Max Reed, a cross-border tax attorney and principal at a tax advisory firm in Vancouver, suggested that if the bill is enacted, Section 899 would “rupture” the existing Canada-US tax relationship similarly to how Trump’s tariffs could disrupt trade ties.

“The ramifications are significant,” Reed noted in a communication with clients. “Most cross-border strategies would need reconsideration.”

The proposed legislation further seeks to eliminate long-established tax exemptions for governments and related entities from affected companies. As a result, organizations like the Canada Pension Plan Investment Committee and First Nation Communities may now face tax liabilities.

Canadian multinationals operating in the US would find themselves at a competitive disadvantage compared to US companies and subsidiaries of foreign multinationals that aren’t subject to the same punitive taxes.

At one point, it seems Canada really ought to reconsider the digital services tax, given its financial implications for Canadian enterprises and their competitive edge in the US marketplace, as suggested by Noberga in an interview.

Calgary’s Kim Moody, who founded a tax practice, echoed the sentiment, arguing that the Digital Services Tax (DST) only complicates relations since Canada has “explicitly exacerbated” US concerns.

“Canada needs to grasp the overall picture of the US creating a protective barrier. Do we really want to provoke such a fortress?” Moody remarked. “The DST is a significant hurdle for the US, and Canada’s reluctance to adapt is, frankly, puzzling.”

Earlier, Prime Minister Mark Carney articulated in a campaign strategy that the Canadian government wouldn’t relent on ensuring that large multinationals contribute a fair share of their domestic earnings.

Carl Dennis, the national leader of Canada’s US Corporate Tax Team, stated that discussions are still ongoing about the potential effects as Trump’s law progresses through Congress. However, he’s concerned that Canadian individuals and companies could see higher US tax rates applied to their revenues.

“The actual impact will likely differ widely,” Dennis noted in an email. “It’s critical for Canadian investors to keep an eye on developments regarding this provision.”