What U.S. Tax Retaliation Could Mean for Canadian Investors

Canadian investors with exposure to U.S. markets may soon face a shifting tax landscape that could materially affect after-tax returns. A new provision—Section 899—is currently included in H.R. 1, widely referred to as the “One Big Beautiful Bill,” passed by the U.S. House of Representatives in May 2025. The bill introduces a sweeping retaliatory tax mechanism aimed at countries the U.S. deems to impose unfair taxes on American businesses. Canada is one of the targets due to its 3% Digital Services Tax (DST), which came into effect in 2024.

Why Section 899 Matters

Unlike executive actions from past administrations, Section 899 is part of H.R. 1 (the One Big Beautiful Bill)—a formal legislative package—which makes it more durable and less susceptible to legal challenge. It grants the U.S. Treasury broad discretion to define what constitutes an “unfair foreign tax.” The list currently includes:

• Digital Services Taxes (DST)

• Diverted Profits Taxes (DPTs)

• Undertaxed Profits Rules (UTPRs)

• Other levies seen as extraterritorial, discriminatory, or unfair to U.S. firms

Section 899 is designed to serve both as a negotiating tool in trade talks and a shield for U.S. multinationals, particularly large tech and digital platforms.

Key Impacts on Canadian Investors

• Individuals:

  The current 15% withholding rate on U.S. dividends under the Canada–U.S. tax treaty could rise to as much as 35% due to a surtax that starts at 5% in 2026 and increases by 5 percentage points per year, reaching a maximum of 20% in year four.
  
  

• Corporations:

  The treaty rate of 5% on intercorporate dividends could rise to 25%, and non-treaty income (e.g., some interest, royalties, or capital gains) could face rates up to 50%.

  
  

• Pensions & Trusts:

  Section 899 could override long- standing treaty-based exemptions, affecting Canadian pension plans, RRSPs, trusts, and partnerships. These entities may lose treaty protection, and there is uncertainty as to whether foreign tax credits would remain available to offset the increased burden.

  
  

• U.S. Real Estate & PTPs:

  The surtax would apply to effectively connected income (ECI), including income from U.S. real estate investments under FIRPTA and publicly traded partnerships (PTPs). In some structures, effective tax rates could rise to 41% for corporations and 57% for individuals, based on current top marginal rates combined with the 20-point surtax.

  
  

• Portfolio Interest Income:

  Notably, the proposal preserves the exemption for portfolio interest (e.g., U.S. Treasuries, investment-grade bonds), offering a potential safe harbor for fixed income strategies that don’t generate ECI or dividend-type income.

What Could Change the Outcome

While these changes are material, Section 899 is not yet law. It passed the U.S. House but still requires Senate approval, where terms may be revised or delayed. Notably, Canada could potentially be removed from the target list by repealing its 3% Digital Services Tax, which is expected to raise $7.2B CAD over five years—a fraction of what Canadian investors stand to lose if Section 899 is enacted.

Still Uncertain but Worth Watching

At this stage, Section 899 remains a proposed provision and has not yet been enacted. However, the language of the proposal gives the U.S. Treasury broad discretion to define what qualifies as an unfair tax. This creates significant uncertainty for Canadian investors with U.S. exposure. It also signals a potential escalation in tax and trade tensions that could affect cross-border investment activity.

We are monitoring these developments closely and will continue to keep you informed as the situation evolves. While Section 899 is not yet law, its potential implications are significant, particularly for investors who rely on U.S. dividend income or generate meaningful returns from U.S. assets.

If you have questions about how this may affect your portfolio or would like to review your current U.S. exposure in light of these possible changes, please reach out. Proactive planning today can help manage uncertainty and protect after-tax returns in the years ahead.