Blog post

Key Points

• Importance to Canadians: Section 899 of the proposed U.S. tax bill targets countries with “unfair” taxes, like Canada’s digital services tax, potentially increasing U.S. taxes on Canadian investors and businesses by up to 20% (e.g., dividend withholding tax rising from 15% to 35% over four years, up to 50% if new rates are in addition to treaty rates), which could deter U.S. investments and disrupt cross-border portfolios.
• Historical Context: Originating from 2023 U.S. opposition to OECD Pillar Two’s undertaxed profits rule and Canada’s digital services tax, Section 899 was formalized in 2025 to protect U.S. tax revenue by penalizing countries deemed to impose unfair taxes, reflecting U.S. resistance to global tax reforms.
• Exclusion of U.S. Citizens in Canada: Section 899 applies to “applicable persons” (non-U.S. citizens/residents, including Canadian individuals and non-CFC corporations) but excludes U.S. citizens in Canada, sparing them from punitive tax hikes, though they still face complex dual tax obligations.
• Implementation Uncertainty: Broad definitions and Treasury Secretary discretion over what constitutes an “unfair” tax create ambiguity, potentially leading to inconsistent enforcement, unexpected tax hikes, and economic impacts like reduced Canada-U.S. trade or Canadian divestment from U.S. assets.

For Americans living in Canada and Canadians with US investments, navigating the complexities of cross-border taxation is already a daunting task. The introduction of Section 899 in the proposed U.S. tax bill, often referred to as the “Trump tax bill,” adds a new layer of concern—particularly for Canadians with investments or business interests in the U.S. This article breaks down why Section 899 matters to Canadians, traces its historical roots, clarifies why it doesn’t apply to U.S. citizens living in Canada, and explores the uncertainty surrounding its real-world impact.

Why Section 899 Matters to Canadians

Section 899, titled “Enforcement of Remedies Against Unfair Foreign Taxes,” is a provision designed to penalize countries deemed to impose “unfair” taxes on U.S. entities by increasing U.S. taxes on residents and entities from those countries. Canada, with its digital services tax (DST) and other measures like the underused housing tax, could be classified as a “discriminatory foreign country” under this section. As a result, Canadian individuals, corporations, and trusts with U.S. investments could face significantly higher U.S. taxes.

For example, a Canadian investor holding U.S. stocks might see their withholding tax rate on dividends jump from 15% (under the U.S.-Canada tax treaty) to 20% in the first year, increasing by 5% annually up to a maximum of 35% after four years. This escalation could make investing in the U.S. prohibitively expensive for Canadians. As Max Reed notes in his article on Polaris Tax, “The US would impose higher taxes on Canadian residents investing in the US if Canada is deemed to have unfair taxes. This could increase the cost of investing in the US by up to 20%.” This punitive approach could deter Canadian investment in U.S. markets, impacting portfolios and businesses alike.

John Richardson, in his detailed analysis on Citizenship Solutions, highlights the broader implications: “The US response is that if Canada enacts a digital services tax on Facebook, Canadian investors in the US will be punished with an additional 5% tax, increasing annually to a maximum of 20%.” This retaliatory mechanism places the burden on individual Canadians, not their government, creating a ripple effect across cross-border financial planning.

Recent discussions on X underscore the concern. One user, @TaxHavenCA, posted:

Section 899 is a slap in the face to Canadians investing in the US. Our DST is modest, but now we’re looking at 20%+ tax hikes on US dividends? This could tank cross-border portfolios.

Another user, @CanFinExpert, warned:

If Canada gets hit with Section 899, expect a sell-off of US assets by Canadian investors. The math just won’t work anymore.

These sentiments reflect the real fear that Section 899 could disrupt the financial ties between Canada and the U.S.

The History of Section 899

The origins of Section 899 trace back to U.S. concerns over global tax reforms, particularly the OECD’s Pillar Two framework and digital services taxes. As discussed in the podcast “Dissecting the Republican Tax Bill” by Anthony Parent and John Richardson (YouTube), the provision emerged as a response to the Biden administration’s engagement with Pillar Two in 2023. The framework’s undertaxed profits rule (UTPR) allows countries to tax multinational corporations on extraterritorial income, a practice the U.S. itself employs but deems unfair when others do it. Richardson explains in the podcast: “The United States, the one country that claims the right to enforce extraterritorial taxation, believes that if another country does it, it’s an unfair tax.”

In February 2025, Republicans introduced a precursor to Section 899, targeting countries with taxes like Canada’s DST. The provision was formalized in the current bill, expanding its scope to include any tax the U.S. Treasury Secretary deems “unfair,” such as digital services taxes, extraterritorial taxes, or discriminatory taxes. The Globe and Mail notes, “The legislation is a reaction to global tax reforms, particularly Canada’s digital services tax, which the U.S. views as unfairly targeting its tech giants.” This historical context reveals Section 899 as a tool to protect U.S. tax revenue while asserting dominance in international tax policy.

Why Section 899 Doesn’t Apply to U.S. Citizens Living in Canada

A critical aspect of Section 899 is its focus on “applicable persons,” defined as non-U.S. citizens or residents who are tax residents of a discriminatory foreign country, such as Canada. This includes Canadian individuals, foreign corporations, trusts, and certain private foundations, but explicitly excludes U.S. citizens and residents. As Richardson clarifies in the podcast, “It’s the foreign corporation that would be the applicable person, not the shareholders… Any foreign corporation that is not a controlled foreign corporation (CFC) will be subject to this tax.” A CFC, under U.S. tax law, is a foreign corporation where more than 50% of the voting power or value is owned by U.S. persons, thus exempting it from Section 899.

For U.S. citizens living in Canada, this means they are not directly targeted by Section 899’s punitive taxes, even if Canada is deemed a discriminatory foreign country. Their U.S. citizenship exempts them from being classified as “applicable persons.” However, as Wealth Professional points out, “While U.S. citizens in Canada may dodge the direct hit of Section 899, they still face the broader challenges of navigating dual tax systems.” This distinction is crucial for Americans in Canada, who must already contend with complex tax obligations like foreign tax credits and simultaneous U.S.-Canada filings, as is often the case in cross-border tax scenarios.

John Richardson does a great job explaining section 899 here:

How Section 899 Could Hit Non-U.S. Canadians with U.S. IRAs Hardest

For non-U.S. Canadians holding U.S. Individual Retirement Accounts (IRAs), the proposed Section 899 of the U.S. tax bill could deliver a significant financial blow. This provision, aimed at countries like Canada with “unfair” taxes such as the digital services tax, may increase U.S. withholding taxes on payments to Canadian residents. Unlike smaller dividend or interest payments, IRA distributions are often much larger, amplifying the impact of any tax hike. This article explores why non-U.S. Canadians with U.S. IRAs could face the biggest hit if withholding rates rise, drawing on expert insights to clarify this cross-border tax challenge.

Section 899, part of the so-called “Trump tax bill,” targets “applicable persons” from countries deemed to impose unfair taxes, including Canadian tax residents who are not U.S. citizens. If Canada is labeled a “discriminatory foreign country,” U.S. withholding taxes on payments like IRA distributions could increase by 5% annually, starting at 20% and reaching up to 35% after four years. Currently, under the U.S.-Canada tax treaty, IRA distributions to Canadians are subject to a 15% withholding tax. A jump to 35% would significantly erode retirement savings. If the new proposed tax is in addition to treaty rates, individuals could face total tax rates on income from the US up to 50%.

IRA distributions, often representing years of accumulated savings, are typically much larger than periodic dividend or interest payments from U.S. investments. For example, a Canadian retiree withdrawing $100,000 annually from a U.S. IRA could face an additional $5,000 in withholding tax in the first year, rising to $20,000 by year four. As Max Reed notes in his analysis on Polaris Tax, “This could increase the cost of investing in the US by up to 20%.” For IRA holders, this tax hike could dwarf the impact felt by those with smaller dividend or interest income.

Why IRAs Are Particularly Vulnerable

Unlike dividends from U.S. stocks or interest from bonds, which are often modest and spread over time, IRA distributions can involve substantial lump sums or regular withdrawals critical to retirement income. The sheer size of these payments means that even a small percentage increase in withholding tax translates to a significant dollar amount. John Richardson, in his discussion on Citizenship Solutions, explains, “Canadian investors in the US will be punished with an additional 5% tax, increasing annually to a maximum of 20%.” For non-U.S. Canadians, this could force a reevaluation of holding U.S. IRAs, potentially leading to early withdrawals or portfolio shifts, each with its own tax and financial consequences.

Real-time sentiment on X highlights the concern. A user, @CanRetireSafe, posted: “Section 899 could crush Canadian retirees with U.S. IRAs. A 35% withholding on big distributions? That’s thousands lost yearly.” The scale of IRA payments makes them a prime target for Section 899’s punitive measures, hitting retirees hardest when they rely on these funds most.

The Uncertainty of Section 899’s Implementation

The implementation of Section 899 is shrouded in uncertainty, primarily due to its broad definitions and reliance on Treasury Secretary discretion. The bill allows the Secretary to designate any tax as “unfair,” potentially encompassing a wide range of Canadian policies beyond the DST. This vagueness, coupled with the lack of clear guidance on enforcement, creates a minefield for Canadians with U.S. ties. Reed warns, “The uncertainty of what constitutes an ‘unfair’ tax could lead to arbitrary applications, leaving Canadian investors in limbo.”

The podcast highlights this ambiguity, with Parent noting, “The Treasury Secretary has residual authority to decide whether something’s an unfair tax, and that’s frightening.” This discretion could lead to inconsistent applications, affecting everything from dividend withholding to corporate taxes on Canadian businesses operating in the U.S. On X, @GlobalTaxWatch commented:

Section 899’s vague criteria could hit Canadian firms with unexpected tax hikes. Nobody knows how Treasury will enforce this yet.

Moreover, the economic fallout is uncertain. The Globe and Mail suggests, “Canadian companies may reconsider U.S. investments, potentially reducing cross-border trade.” This could strain Canada-U.S. economic relations, already tense due to proposed tariffs. For individual Canadians, the increased cost of U.S. investments might prompt portfolio restructuring or divestment, as @CanFinExpert’s X post suggests.

Conclusion

Section 899 represents a bold U.S. move to counter perceived unfair foreign taxes, but it places a heavy burden on Canadians with U.S. financial interests. Its historical roots in global tax disputes underscore a U.S. desire to maintain tax dominance, while its exclusion of U.S. citizens offers limited relief to Americans in Canada. The uncertainty surrounding its implementation—driven by vague definitions and discretionary power—leaves Canadians facing potential tax hikes and economic disruption. As discussions on X and expert analyses reveal, the full impact of Section 899 remains unclear, but its potential to reshape cross-border financial planning is undeniable. Canadians should stay informed and consult cross-border tax professionals to navigate this evolving landscape.