Written by: Jake Darlington
They say beauty is in the eye of the beholder, and for Canadian investors, this is One, Big, Ugly Bill.
Last Thursday, a sweeping tax and spending bill dubbed the “One, Big, Beautiful Bill” narrowly passed through the US House of Representatives. If enacted by the Senate in its current form, the legislation could significantly increase the US tax burden on Canadian investors and pension funds. This would jeopardize decades of preferential cross-border tax treatment and create substantial uncertainty for high-net-worth investors.
The bill contains a series of proposals designed to retaliate against “unfair” foreign tax regimes, with new provisions that override existing tax treaties and introduce punitive tax rates on income sourced from the US. While the bill does not specifically name Canada, we qualify as an “unfair” foreign regime given the Digital Services Tax our government currently imposes on several US tech companies. Canada would also likely qualify for retaliation if the proposed implementation of the Undertaxed Profits Rule becomes integrated into the Global Minimum Tax Act that is currently in effect. Interestingly, these tax measures that put Canada at risk result from coordinated international efforts by the Organization of Economic Co-operation and Development to reform international tax.
Key Risks for Canadian Investors
The bill threatens to override the Canada-US tax treaty in place since 1942, significantly raising US withholding tax rates and resulting in permanent tax leakage for Canadians who earn US-sourced income. For example:
- Canadian resident taxpayers currently benefit from a 0% withholding tax rate on US-sourced interest under the treaty. The new legislation would increase this rate by 5% per year to a maximum of 50% (unless certain other exemptions apply).
- Canadian resident taxpayers earning US-sourced portfolio dividends currently benefit from a 15% withholding tax rate under the treaty. The new legislation would increase this rate by 5% per year to a maximum rate of 50%.
- Canadian corporations receiving dividends from US subsidiaries are currently subject to a 5% withholding tax rate. This would rise by 5% yearly to a maximum rate of 50%.
- Under the U.S. Foreign Investment in Real Property Tax Act (“FIRPTA”) Canadian investors in U.S. real estate currently pay a 15% withholding tax rate on the gross sales price upon asset disposition. This would rise by 5% yearly to a maximum of 35%. However, the amount is recoverable upon filing a U.S. tax return. So although the timing of payment may differ, the total tax paid under FIRPTA will not ultimately change.
- Tax-exempt pension funds may also become subject to US taxes, which would reduce the after-tax returns ultimately paid out to beneficiaries of Canadian pension plans over the long term.
- If the current “trade war” begins to expand into a “capital war”, the resulting shifts in capital flows could have far-reaching impacts.
What’s Next?
The bill now heads to the Republican-controlled Senate, where Trump has indicated that he wants it finalized by July 4th. If passed by the Senate, Trump can sign the bill into law this summer, with higher tax rates coming into effect as soon as January 2026.
The impact of higher taxes on US source income would inevitably mean less foreign capital flows into the US. This would increase the cost of capital for US companies, including US treasuries, thereby raising interest rates in the US. This would be an undesirable outcome for the US and runs counter to President Trump’s stated desire to lower interest rates. The reduced foreign capital inflows will also lead to lower US equity valuations and a potentially weaker US dollar. This type of self-destructive act is illogical in isolation. However, if we draw parallels to recent US tariff policy, this may ultimately be a game of chicken meant to bring nations, including Canada, to the negotiating table.
How Should Canadian Investors React?
It is important to avoid overreacting at this stage. First, the bill has yet to pass the Senate, and amendments are expected before it does. We have also seen numerous significant policy reversals under the current administration. Second, it is in the interest of all stakeholders—including the United States—to pursue measures that mitigate the economic impact of these proposed changes. Third, the repeal of the digital services tax and global minimum tax could provide Canada with a viable path to avoid potential retaliatory measures.
For now, careful monitoring of legislative developments is essential. Should the bill become law, Canadian investors may need to reassess their portfolios and overall strategy. A reactionary reduction in US exposure could offer tax relief but may not align with long-term objectives around portfolio diversification, intergenerational wealth transfer, or global asset allocation. The issues are complex and thoughtful, balanced decision-making will be critical.
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