June 10, 2025

Section 899: A New Cross-Border Tax Threat for Canadian Investors?

Update as of June 30, 2025: The proposed policy discussed below was ultimately removed from the "Big Beautiful Bill Act." Although the bill passed the House of Representatives, the Senate removed the revenge tax before passing it, bringing this saga to a close and providing welcome relief to Canadians. 

It has been a wild ride so far this year for Canadian investors, akin to being strapped into a roller coaster with no brakes, no seatbelt, and a track slick with maple syrup. While much of our conversations with clients early in the year were focused on the market impact of a second Trump term and his ‘Liberation Day’ tariff hikes, attention has now shifted to a new and pressing concern for Canadian investors: a proposed legislative tax change in Trump’s 1,000+ page ‘One Big Beautiful Bill Act’ (OBBA) that could come into effect as early as January 2026, and ramp up over five years

Specifically, section 899 of OBBA, “Enforcement of Remedies Against Unfair Foreign Taxes,” outlines retaliatory measures targeting countries that the US believes unfairly penalize their businesses through policies like the Digital Services Tax (DST) and global minimum tax top-ups, both of which Canada adopted in 2024.

Leith Wheeler’s President & CEO and Head of Fixed Income, Jim Gilliland, says about the scrutiny of this tax measure: “We’ve had a couple of US Senators who are uncomfortable with the provisions because they clearly contravene existing tariff treaties. Specifically, they’re concerned that by allowing the administration and the Treasury Secretary to override these long-standing treaties, it will set a dangerous precedent.”

What could Section 899 mean for Canadian resident investors (who are not US persons) if the Bill is passed in its current form?

For Non-Registered Accounts:

• US-source interest income: The withholding tax rate could increase from 0% to 20%.
• US-source dividend income: The withholding tax rate could rise by 5% per year, potentially reaching 35% (based on the current 15% rate under the US-Canada Tax Treaty), or even up to 50% if applied against the default 30% rate.

• Canadian tax treatment: Under current Canadian tax rules, foreign tax credits or deductions may not apply to the increased withholding taxes under section 899, leading to higher after-tax costs for investors.

For Registered Retirement Accounts (RRSPs, RRIFs, LIRAs, LIFs):

• These accounts are recognized by the US as retirement plans, meaning US-source interest and dividend income grows tax-deferred until withdrawal.
• It is uncertain whether section 899 would override this treatment, and whether any US taxes paid would be eligible for a foreign tax credit in Canada.
• Note: Canadian mutual funds and ETFs held in registered accounts do not qualify for the retirement account exemption. Holding US securities directly may preserve tax deferral but raises US estate tax considerations.

For Other Registered Accounts (TFSAs, FHSAs, RESPs, RDSPS):

• These accounts are not recognized by the US as tax-deferred plans.
• As a result, they are already ineligible for treaty exemptions and could be subject to the increased withholding tax rate of up to 50% on US-source investment income under section 899.

Gilliland adds that OBBA is not solely targeting Canada but is part of a broader OECD-related effort. “That increases the stakes in terms of what’s involved here,” he said. “If you go through the actual numbers, the Digital Services Tax was backdated in Canada and is expected to only generate something like $1.4 billion. If you look at the potential impact of this new tax regime, it could easily be ten times that amount.” In other words, Canada may be able negotiate its way out of the measure by offering concessions, such as repealing the DST.

“From Carney’s perspective,” he continued, “I think it’s pretty unlikely he will allow it to persist because economically it doesn’t make sense for Canadians. This will also likely be one of the aspects that will be negotiated with a new US-Canada Agreement – a bilateral agreement that may ultimately replace the existing multi-lateral USMCA.”

The question many clients are asking now is – should I be looking to sell down my US equities to avoid these potential taxes? Our advice to clients is not to make any hasty decisions at this time. As we’ve seen with past policy proposals such as the capital gains inclusion rate change, and Trump’s track record of rapid reversals, it’s important to avoid triggering unnecessary capital gains or making long-term asset allocation decisions based on uncertain legislation. While the OBBA has narrowly passed in the US House of Representatives, it still faces a Senate vote by July 4, 2025 and remains subject to amendments or may not pass into law at all.

Gilliland adds that the initial impact of section 899 should be marginal on our clients and believes that it’s way too early to feel the economic impact. “At just 5% additional tax on US dividends annually, our Leith Wheeler US Equity Fund with a yield of 2.5% would have a drag of 0.1%, so it’s not consequential enough,” he said. “Even if section 899 does come into effect, we should be able to overcome that differential especially in the early days of implementation. Also, since its current form suggests a five-year ramp-up, it’s not certain the next administration wouldn’t completely reverse it.”

On the margin, we would factor this potential tax policy into our decision making when managing investments for our taxable clients, but it doesn’t mean we’ll shy away from US stocks altogether. What this does do, however, is highlight the current challenges to US-Canada relations – and serve as a reminder of the tools that the US administration can and will use as they enter future negotiations with Canada. While we continue to navigate shifting policies and cross-border dynamics on behalf of our clients, our focus remains on the fundamentals of the businesses we own and their ability to create long-term value.

NOTE: The information contained herein should not be treated by readers as investment, tax, or legal advice and should not be relied on as such. You should consult legal or tax professionals regarding your specific situation.