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The U.S. Federal tax bill and why Canadians should pay close attention

Published May 28, 2025
Michael Lawrence
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House passes reconciliation bill – On to the senate

On Thursday, May 22, the U.S. House of Representatives passed the reconciliation bill by the narrowest of margins – one vote. The far-reaching bill focuses primarily on extending provisions of the 2017 Tax Cuts and Jobs Act (TCJA). As part of the bill, the debt ceiling would also be raised to $4 trillion. While passing the House is an important milestone, the bill now heads to the Senate, where it will be subject to debate and potential revisions.

One section of the proposed bill that is catching the attention of Canadians is section 899 "Enforcement of remedies against unfair foreign taxes".

Section 899

The Trump administration has continued its tough stance on countries that it feels is taking advantage of the United States and its citizens. Section 899 of the "One Big Beautiful Bill Act" has introduced significant tax measures that target corporations, individuals and governments of countries that impose discriminatory taxes on US citizens and corporations by subjecting them to increased tax.

In the proposed bill, it authorizes the U.S. Treasury Secretary to designate any country that it deems imposes "unfair foreign taxes" on U.S. Persons, as a 'discriminatory foreign country'. Among the taxes that the Trump Administration has deemed unfair is the Digital Services Tax which Canada introduced in June 2024.

The Digital Service Tax (DST)

The DST requires foreign and domestic large businesses to pay a 3% tax on certain revenue earned from engaging with online users in Canada under certain conditions. Revenue earned that qualifies includes that from:

  • Online marketplace services
  • Online advertising services
  • Social media services
  • Certain sales of user data

How the proposed changes might impact Canadians and Canadian businesses

Withholding tax on U.S. dividend paying stocks

While Canada has a tax treaty with the United States, under the proposed legislation, Canadians and Canadian business could see a reduced realized after-tax return on U.S. income producing assets.

Under the current treaty, the withholding tax rate on individuals is reduced from 30% to 15% in certain accounts such as a non-registered account, tax-free savings account or first home savings account. For a registered retirement savings plan or registered retirement income fund, the withholding tax is reduced to 0%. Canadian businesses also see a benefit when earning dividends from their U.S. subsidiaries. Currently, the withholding tax rate that they pay is 5%.  

The proposed bill would see the withholding tax applied to individuals and businesses increase by 5% per year until the rate reaches 20% above the statutory rate of 30%.

If the Republican-led bill goes into law in its current form, it is believed that this would override the tax treaty currently in place between the two countries. This would ultimately make owning U.S. dividend paying stocks less attractive as the realized after-tax return would be diminished by the increase in taxes withheld by the U.S.  

Additional considerations for Canadians and Canadian businesses

For most Canadians – if the bill becomes law in its current form - the largest impact would be the increase to the withholding tax rate applied to U.S. dividends. However, the bill includes changes to other U.S. income as well. This includes:

  • Earning income from U.S. sources such as interest and royalties
  • Disposing of U.S. real property (i.e. real estate)
  • Earning effectively connected income

If you are unsure how this may apply to your tax situation, we recommend that you speak with your trusted tax professional.

We do not recommend any action by investors

Passing the House is an important milestone, but now the bill moves on to the Senate, where the bill will likely face more debate, with the potential for more additions and revisions. Ultimately, this process will take time. Congress has set a goal of a final bill signed into law in July, but the final bill could look very different than the initial drafts. Consequently, we do not recommend taking any actions due to the potential revisions of this bill. We will provide updates on the legislation as meaningful developments and additional milestones are reached. 

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