Trump's 'big, beautiful' tax reform bill could cost Canadians billions
A small, obscure section buried in U.S. President Donald Trump's One Big Beautiful Bill Act could cost Canadians and Canadian companies billions of dollars, CBC News has learned.
Moreover, it could hand Prime Minister Mark Carney's government yet another political hot potato from south of the border — forcing it to choose between scrapping Canada's digital services tax (DST) or risk the U.S. imposing a new withholding tax on the income Canadians, Canadian companies and pension plans receive from investments in U.S. securities.
While it still has steps to go before becoming law, the provision has Canadian experts worried.
"This is building a nuclear option into a tax treaty that has lasted for 80 years between Canada and the U.S," said David Macdonald, senior economist with the Canadian Centre for Policy Alternatives. "Just like the U.S. is totally willing to blow up the international trade order, they're totally willing to blow up international tax rules."
The concern centres on Section 899 of Trump's One Big Beautiful Bill — more than 1,000 pages of proposed legislation that Trump says will make good on his domestic campaign promises, including tax cuts for Americans. The bill passed the House of Representatives on May 22 by one vote and now has to be approved by the Senate.
Section 899, entitled Enforcement of Remedies Against Unfair Foreign Taxes, would increase withholding taxes for non-resident individuals and companies from countries that the U.S. believes have imposed discriminatory or unfair taxes.
Experts believe Canada is likely to be one of the countries targeted by the measure because of U.S. government criticism of the DST. The tax applies to all large businesses, foreign and domestic, that earn revenues from certain online business models in Canada. Global minimum tax measures adopted by Canada could also put it in the Trump administration's crosshairs.
Up to 20% withholding taxThe timeline for the legislation is in flux and Section 899 could still get dropped from the bill or be amended.
If, however, Section 899 becomes law, it could hit Canadians in different ways.
For example, the U.S. currently imposes a 15 per cent withholding tax on dividends Canadians receive from U.S. companies. Under tax treaties, however, an equivalent tax credit from the Canadian government generally offsets the withholding tax.
If the measure becomes law and the Trump administration designates Canada as a country with discriminatory taxes, a new five per cent withholding tax would go into effect. That tax would increase by five percentage points per year to a maximum of 20 per cent. It is not known if Canada would adjust its tax credits to offset such a tax.
Max Reed, a cross-border tax lawyer with Polaris Tax Counsel, said the potential impact could be wide ranging.
"It's definitely going to be in the billions, maybe tens of billions," he said.
Kim Moody, founder of Moodys Private Client and Moodys Tax, agrees.
"Billions, absolutely billions, for sure, would be the impact," he said. "If Canada and the United States allows this to take hold, the result will be chaos. Absolute chaos."
Experts say it is not clear exactly how the tax would be applied. For example, would the new withholding tax be imposed on top of existing withholding taxes? Would it also apply to securities held within registered accounts such as RRSPs or only to dividends from shares held directly by Canadians?
Finance Minister François-Philippe Champagne's office declined an interview request from CBC News.
"Analysis of the implications of the U.S. tax reform bill is ongoing and we await the final version of the bill," wrote spokeswoman Audrey Milette.
The U.S. embassy also declined to comment on Section 899 or how it would work.
"We are unable to comment at this time as the legislation is still pending final approval," responded an embassy official.
U.S. Internal Revenue Service figures show that in 2022, the U.S. withheld $2.9 billion US in tax on $108.5 billion US worth of income from a variety of U.S. sources for Canadian residents and companies. The IRS said $261.4 million US was withheld from individual Canadian residents while $1.22 billion was withheld from companies and $1.24 billion US under the category of Canadian "withholding rate pools (general)."
Of the sources of U.S. income received by Canadians, the IRS said $31 billion US was from dividends — half of which went to Canadian corporations.
Impact on pensions and beyondDavid Pierce, vice-president of government relations for the Canadian Chamber of Commerce, said the chamber began getting worried messages from Canadian businesses once Trump's tax reform bill passed the House of Representatives.
"I think the attention and the awareness of it really grew from what was a small subset of companies, now right across the economy — from financial to pensions to, you name it," Pierce said.
"They're all very concerned at what this means for average Canadians in your retirement savings and how this would be applied should, of course, it become law."
Pierce said the potential cost of Section 899 far outweighs revenue the Canadian government collects from the DST, a tax his group has opposed from the outset. He said the Canadian government should pause the next DST payment scheduled for June 30 and consider getting rid of the tax in negotiations with the U.S.
"The concern is that when the U.S. administration makes allegations of Canada's trade practices, they can cite the DST and that's a talking point that rings true not just for Republicans, but also Democrats, in the United States," said Pierce.
"That strengthens their hand. It's not strengthening our hand at the bargaining table."
Macdonald says the proposed withholding tax would hit hard.
"It would have major impacts on Canadian companies, Canadian investors in the U.S — they'd be downright punitive," said Macdonald. "That would probably end up shutting down Canadian businesses in the U.S. and kicking Canadian investors out of the U.S."
And the DST isn't the only Canadian tax the U.S. could consider unfair now, or in the future, said Macdonald.
"I think this is the tip of the iceberg in terms of threats against Canadian corporate taxation that attempts to level the playing field between American transnationals and Canadian domestic companies that are paying corporate income taxes," he said.
Macdonald said the proposed tax could also hit Canadians who don't have direct investments in U.S. securities.
"This isn't only for folks with an RRSP," Macdonald said. "I mean, this could extend to the Canada Pension Plan, which is the major means by which people retire in Canada. They could potentially pay dramatically more."
The Canada Pension Plan Investment Board declined to comment.
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