**A Retaliatory Measure or A New Tax?**
The U.S. has proposed a tax bill that could have a significant impact on Canadian investors holding U.S.-listed securities, as it seeks to retaliate against what it considers discriminatory or extraterritorial taxes imposed by foreign countries, including Canada. The proposed legislation, known as H.R. 591, would add 5 percentage points to the withholding tax rate each year for four years on certain types of U.S. income for anyone living in a country that imposes a tax that the U.S. considers discriminatory or extraterritorial for U.S. citizens or corporations. This would result in a 20-per-cent withholding tax on top of the existing rate, bringing the total withholding tax rate to 50 per cent.
Key Points to Consider
• The proposed legislation would apply exclusively to U.S. source income, such as U.S. dividends. • The additional tax would be imposed for four years, with the first annual 5-percentage-point increase taking effect in the upcoming years. • The current Canada-U.S. tax treaty provides a reduced tax rate of 15 per cent for non-U.S. residents, but this reduction would be eliminated under the proposed bill. • Canadian investors who own U.S. securities that pay dividends or interest, or have realized gains, could see a significant tax increase. • The proposed bill would also apply to registered retirement accounts, such as registered retirement savings plans, which could expose investors to an immediate 35-per-cent withholding tax.
“This bill is a step in the right direction for the U.S. to assert its authority in a fair and reasonable manner.”
How Will the Bill Affect Canadian Investors?
Canadian investors who hold U.S. securities could face a significant tax increase if the proposed bill is passed. The current withholding tax rate for non-U.S. residents is 15 per cent, but under the proposed bill, this reduction would be eliminated, and investors would be subject to a 30-per-cent withholding tax. In addition, investors who hold U.S. securities could also face an additional 20-per-cent withholding tax, bringing their total withholding tax rate to 50 per cent. This could result in a significant tax increase for investors, particularly those who own U.S. securities that pay dividends or interest. Impact on Registered Retirement Accounts
The proposed bill would also apply to registered retirement accounts, such as registered retirement savings plans. This could expose investors to an immediate 35-per-cent withholding tax, in addition to the first annual 5-percentage-point increase. Expert Opinions
Karl Dennis, KPMG’s national leader for the U.S. corporate tax team in Canada, said that it is still early days in the legislative process for the proposed tax bill and that Canadian investors should not make any drastic changes to their investment portfolio as a result. “It will need more work before it can be put up to vote,” he said. “It is not very articulately worded and has some internal inconsistencies in it.”
However, Jason Smith, the House ways and means committee chair, said that the proposed bill is a step towards becoming more real and that President Trump has been targeting taxes in more than 120 countries that he argues discriminate against American companies. Statistics and Data
• Canadians held $3.045-trillion of U.S securities at the end of December 2024. • Canadian mutual fund investors have about $1.46-trillion invested in equity funds, of which 47.7 per cent – or nearly $700-billion – is held in U.S. securities. • There is another $170-billion of U.S. bonds held by Canadian investment funds, and more than $127-billion in U.S. securities purchased through Canadian exchange traded funds. Conclusion
The proposed U.S. tax bill could have a significant impact on Canadian investors holding U.S.-listed securities. Canadian investors should be aware of the potential impact of the bill and monitor the legislative process in the U.S. as it develops.