Trump's 'big, beautiful' tax reform bill could cost Canadians billions

A small, obscure section buried in U.S. President Donald Trump's One Big Beautiful Bill Act could cost Canadians and Canadian companies billions of dollars, CBC News has learned.

Moreover, it could hand Prime Minister Mark Carney's government yet another political hot potato from south of the border — forcing it to choose between scrapping Canada's digital services tax (DST) or risk the U.S. imposing a new withholding tax on the income Canadians, Canadian companies and pension plans receive from investments in U.S. securities.

While it still has steps to go before becoming law, the provision has Canadian experts worried.

"This is building a nuclear option into a tax treaty that has lasted for 80 years between Canada and the U.S," said David Macdonald, senior economist with the Canadian Centre for Policy Alternatives. "Just like the U.S. is totally willing to blow up the international trade order, they're totally willing to blow up international tax rules."

The concern centres on Section 899 of Trump's One Big Beautiful Bill — more than 1,000 pages of proposed legislation that Trump says will make good on his domestic campaign promises, including tax cuts for Americans. The bill passed the House of Representatives on May 22 by one vote and now has to be approved by the Senate.

Section 899, entitled Enforcement of Remedies Against Unfair Foreign Taxes, would increase withholding taxes for non-resident individuals and companies from countries that the U.S. believes have imposed discriminatory or unfair taxes.

Experts believe Canada is likely to be one of the countries targeted by the measure because of U.S. government criticism of the DST. The tax applies to all large businesses, foreign and domestic, that earn revenues from certain online business models in Canada. Global minimum tax measures adopted by Canada could also put it in the Trump administration's crosshairs.

The timeline for the legislation is in flux and Section 899 could still get dropped from the bill or be amended.

If, however, Section 899 becomes law, it could hit Canadians in different ways.

For example, the U.S. currently imposes a 15 per cent withholding tax on dividends Canadians receive from U.S. companies. Under tax treaties, however, an equivalent tax credit from the Canadian government generally offsets the withholding tax.

If the measure becomes law and the Trump administration designates Canada as a country with discriminatory taxes, a new five per cent withholding tax would go into effect. That tax would increase by five percentage points per year to a maximum of 20 per cent. It is not known if Canada would adjust its tax credits to offset such a tax.

Max Reed, a cross-border tax lawyer with Polaris Tax Counsel, said the potential impact could be wide ranging.

"It's definitely going to be in the billions, maybe tens of billions," he said.

Kim Moody, founder of Moodys Private Client and Moodys Tax, agrees.