On May 12, 2025, the House Ways and Means Committee released the legislative text of the tax title of the Republican bill entitled “The One, Big, Beautiful Bill.” The bill was passed by the Ways and Means Committee and is moving forward. The final shape of the bill is to be determined, and several broad-based summaries such as this one are available.
The bill aims to extend and expand President Donald Trumps’s 2017 Tax Cuts and Jobs Act, certain key provisions of which are scheduled to expire by the end of 2025. Spanning 389 pages, the tax title of the sweeping 1,000-page plus bill stretches across 3 subtitles, 8 parts, and 111 provisions concerning a multitude of areas. The bill contains mostly domestic provisions. However, one esoteric section buried within the bill, proposed Code section 899, could tremendously impact Canadians businesses, tax exempts, and individuals with U.S. operations or investments. If enacted and implemented, proposed section 899 would rupture the Canada-U.S. tax relationship the same way that Trump’s tariffs have impaired the Canada-U.S. trade relationship.
Entitled “Enforcement of Remedies Against Unfair Foreign Taxes,” proposed section 899 would increase the tax rate of foreign individuals and foreign-owned companies by 5% per year if their parent country imposes what the bill considers to be “unfair foreign taxes” on U.S. businesses. If the applicable tax rate is negotiated down under a tax treaty, the 5% penalty will start from the treaty rate. The maximum tax increase is 20% above the otherwise applicable statutory rate. Further, foreign governments would lose their statutory tax exemption.
Specifically, proposed section 899 targets “discriminatory foreign countries” with a Digital Services Tax (“DST”) and the Undertaxed Profits Rule (“UTPR”), among other things. Both DST and UTPR are the result of coordinated international efforts by the Organization of Economic Co-operation and Development to reform international tax. Details of each set of rules can be found here and here.
Canada is at risk of being targeted by the proposed section 899 because Canada imposes both a digital services tax and a global minimum tax. Enacted in June 2024 and retroactively effective to January 1, 2022, Canada’s Digital Services Tax Act imposes a federal DST of 3% on Canadian-source digital services revenue exceeding CA$20 million. While Canada has recently proposed to implement the UTPR, the UTPR is not included in the current version of the Global Minimum Tax Act enacted also in June 2024.
- If proposed section 899 is enacted and aimed at Canada, the results would be significant. Virtually all cross-border planning would be turned on its head, including:
Canadian government entities such as Canadian Pension Plan, government-sponsored pensions, and First Nations would lose access to their U.S. tax exemption and be subject to the treaty rates below. - Currently, there is no withholding on interest from U.S. sources. That would increase at 5% a year unless the portfolio interest exemption applies to a maximum withholding rate of 50%.
- Dividend withholding tax rates would increase over the applicable rate (0%, 5%, or 15%) at 5% a year to a maximum rate of 50%.
- The corporate income tax and branch profits tax paid by Canadians would increase at 5% a year. For corporations, the maximum corporate tax rate would be 41% plus a branch profits tax of 50%. For individuals, the maximum federal tax rate would be 57%.
Although illustrated to their maximum impact, the above examples show how these changes would subvert all existing Canada-U.S. tax planning since the new U.S. rate would be in many cases higher than the otherwise applicable Canadian rate. Moreover, Canada is unlikely to credit the penalty tax because the CRA appears to view the treaty rate as the ceiling, not the floor, for Canada’s foreign tax obligations.
These are early days. Many things remain uncertain, including:
- Whether proposed section 899 will be enacted. My view is that this is likely. Although many provisions in the current version of the bill are controversial and expensive, proposed section 899 fits well into the current U.S. political zeitgeist. Further, “tax the foreigners” is an easy sell because the bill includes basically no other provisions to actually raise revenue to offset the proposed massive tax cuts.
- Even if enacted, whether Canada would be targeted and whether Canada would repeal its DST and not adopt the UTPR. My view is that Canada will be targeted and will not repeal the existing DST. The current political climate in Canada does not favor repealing taxes on American multinationals to cave to American pressure.
- How proposed section 899 would interact with the Canada-U.S. Tax Treaty under U.S. domestic law, including whether a treaty-based claim for reduced rates would be practical. This will depend on the language of the section and the outcome of pending U.S. litigation. What is clear, however, is that third-party withholding agents will err on the side of caution and withhold at the new, higher penalty rate regardless of any treaty-based position.
In the trade realm, the current U.S. administration has needlessly and pointlessly run roughshod over nearly 40 years of trade treaties. In the tax realm, proposed section 899 threatens to do the same by stomping all over a carefully negotiated tax treaty that has been in place since 1942. For now, there is nothing to do but wait to see what Congress does and, perhaps, flag the point for policy makers in Ottawa to consider among other tumultuous Canada-U.S. foreign policy issues.