The Trump administration has recently advanced a series of initiatives that significantly expand the scope of U.S. economic protectionism, targeting foreign tax practices perceived as discriminatory against American interests. These measures, which include the introduction of proposed Section 899 and the potential activation of Section 891 of the Internal Revenue Code, represent a marked shift in U.S. policy, with important implications for international businesses and cross-border tax planning.

Implications for Canadian businesses and investors

  • Canadian institutional and retail investors with holdings in the U.S. that yield dividends or interest (directly or through investment vehicles) will see the return on their investment affected by the additional 5% withholding taxes.
  • Canadian patent, copyright, trademark or other intellectual property owners, including software developers, who receive royalties from U.S. customers or other U.S. sources will see those royalty payments reduced by the additional 5% withholding taxes.
  • Canadian companies with branch offices in the U.S. could see the income tax on their U.S.-sourced income increase by 5% per year.
  • Canadian companies with U.S. subsidiaries may need to rethink their transfer pricing strategies.
  • Canadian companies trading with the U.S. and impacted by tariffs should keep the impact of 899 in mind in determining their planning.

Withholding taxes apply to the gross payments and may have a proportionally higher impact on the Canadian company’s profit margin.

These U.S. taxes may not generate Canadian foreign tax credits to offset Canadian tax liability resulting in double taxation of the same amount.

1. Section 899: Retaliatory taxation codified

The Defending American Jobs and Investment Act (H.R. 591) introduces proposed Section 899, which institutionalizes retaliatory tax measures against foreign persons from countries that the U.S. deems to have enacted discriminatory or extraterritorial taxes—such as digital services taxes (read more about Canada’s DST here) or undertaxed profits rules—targeting U.S. businesses. Section 899 would:

  • Impose escalating increases in U.S. federal income tax and withholding tax rates on "applicable persons" from "discriminatory foreign countries," rising by 5% per year up to a maximum of 20 percentage points above existing treaty rates.
  • Remove the tax-exempt status under Section 892 for foreign governments and their political subdivisions, subjecting them to the same tax treatment as other non-U.S. persons.
  • Override existing tax treaty benefits, thereby undermining the predictability and mutual agreement that tax treaties are designed to provide.
If enacted, Section 899 is anticipated to take effect in 2026. In its first year of application, it could affect Canadian residents by:
  1. increasing the tax rate applicable to U.S. effectively connected business income (e.g. income earned through a U.S. permanent establishment) by 5%,
  2. increasing the rate of withholding tax on royalties from 10% to 15%, and on royalties from software from 0% to 5% (assuming that it applies when the treaty eliminated withholding taxes, which remains unclear);
  3. increasing the rate of withholding tax on dividends from 5% to 10%, where the dividend is paid to a Canadian corporation that owns 10% of the votes and value, and from 15% to 20% in all other cases;
  4. increasing the rate of withholding tax on plain vanilla interest payments from nil to 5%.

The breadth of Section 899’s definitions means that a wide range of foreign entities (including governments, corporations, trusts and individuals)—even those without a U.S. presence but with U.S. customers or income—could be affected. The result is increased complexity and the potential for double taxation, as traditional treaty protections may no longer apply and Canada may not be willing to offer foreign tax credits for the difference.

2. Section 891: Potential additional tax avenues

Section 891, a longstanding but never-invoked provision, authorizes the President to double U.S. tax rates on citizens and corporations of foreign countries that impose discriminatory or extraterritorial taxes on U.S. entities. In January 2025, President Trump directed the Treasury Secretary to investigate such foreign tax practices, signaling a willingness to escalate retaliatory measures. The statute’s lack of clear definitions and silence on its interaction with tax treaties further compounds uncertainty for affected businesses.

3. Strategic considerations for businesses

Given the convergence of tariffs and aggressive tax measures, businesses should proactively assess their exposure to U.S. tax risks. Recommended actions include:

  • Reviewing and, where appropriate, renegotiating contracts to incorporate gross-up clauses or other mechanisms to allocate the risk of increased withholding taxes.
  • Evaluating existing structures and exposures to determine potential impacts under the proposed rules.
  • Evaluating the ability to shift returns into lesser-taxed alternatives or either accelerate or delay amounts being owed from U.S. subsidiaries (for example, by not declaring dividends).
  • Maintaining flexibility and adhering to sound commercial principles, given the pace and unpredictability of U.S. tax policy developments.

While these measures are not yet enacted—the proposal has been approved by the House and now moves to the Senate—the direction of U.S. policy is clear: a shift toward greater economic nationalism and a willingness to override established international tax norms. Businesses operating in or with the U.S. should remain vigilant and prepared to adapt to this evolving landscape.

If you have questions or would like to understand how these developments may impact your business, please contact Laura Gheorghiu or a member of Gowling WLG’s Tax Group.