Section 899: How It Could Affect Canadians Investing in U.S. Assets
The "Big, Beautiful Bill" but not for Canadians - The Hidden Consequences
The proposed U.S. tax bill, often referred to as the "big, beautiful bill," includes a provision known as Section 899, which could significantly impact Canadian investors holding U.S. assets. This section aims to penalize countries with tax policies deemed “discriminatory” by the U.S. government. If enacted, it could substantially raise taxes on passive income—such as interest and dividends—for Canadian investors. Let’s explore its potential consequences.
1. Higher Taxes for Canadian Investors
Section 899 introduces an escalating tax on passive income from U.S. assets, starting with a 5% increase above the standard withholding rate and rising by 5 percentage points annually, up to a maximum increase of 20%.
For instance, under the current U.S.-Canada tax treaty, the withholding tax on dividends is 15%. If Section 899 applies, this rate could climb to 35% over four years (or potentially 50%, depending on whether the increase is additive rather than replacing the existing rate). This would make holding U.S. income-generating assets significantly less attractive for Canadian investors.
Numerical Example
For a $1,000 U.S. dividend, a 50% withholding tax would result in $500 withheld by the U.S. In Canada, assuming a 30% marginal tax rate, the investor might only receive a foreign tax credit for 15% ($150), with limited relief for the excess, leading to an effective tax rate as high as 54.5% on the dividend.
2. The Risk of a U.S. Asset Sell-Off
Analysts warn that if Section 899 is enacted, Canadian investors may begin selling off U.S. assets to avoid the tax burden. This could lead to:
A reduction in Canadian investment in U.S. stocks, bonds, and Treasury securities.
Financial losses for Canadians selling assets at lower values due to market shifts.
Less cross-border diversification, potentially limiting Canadian portfolios.
The tax hike would apply to U.S.-sourced passive income, including dividends, interest, royalties, and potentially gains from disposing of U.S. real property (e.g., real estate).
3. Impact on Canada-U.S. Financial Relations
Canadian investors hold a substantial amount of U.S. assets, contributing to the $31 trillion in foreign holdings of U.S. long-term securities recorded in 2024. If Section 899 comes into effect, it could:
Place financial strain on individual investors and retirees.
Disrupt financial planning strategies for Canadians who rely on U.S. investments.
Reduce demand for U.S. Treasury bonds, possibly pushing yields higher.
4. Broader Economic Consequences
Beyond individual investors, this tax increase could trigger wider economic effects, including:
A weaker Canadian dollar, as investors adjust their international holdings.
Higher borrowing costs, as reduced demand for U.S. assets influences Treasury yields and global interest rates.
Possible trade tensions, as Section 899 serves as a retaliatory measure against policies like Canada’s digital services tax1.
5. The Fallout for Canadian Pension Funds & Businesses
Canadian pension funds and businesses could be particularly affected. Entities like the Canada Pension Plan Investment Board (CPPIB) often rely on U.S. stocks and bonds for steady returns. A 20% increase in tax rates on passive income could:
Reduce pension fund returns, potentially impacting payouts to retirees.
Affect Canadian corporations with U.S. operations, making investments less profitable.
6. How Investors Can Prepare
Canadians investing in U.S. assets should consider the following steps:
Stay informed: The bill is still under discussion in Congress, and changes may occur before final approval.
Reevaluate portfolios: Investors may need to shift their focus to domestic or alternative global markets.
Seek expert advice: Consulting financial advisors can help mitigate tax risks and explore tax-efficient investment structures.
In Summary
If enacted, Section 899 could pose major challenges for Canadian investors, increasing taxes, disrupting financial ties, and potentially weakening investment returns. While the bill's fate remains uncertain, Canadians should prepare for possible shifts in tax policy and market dynamics.
As Canada navigates key decisions on a new free trade agreement with the U.S., investors should evaluate their portfolios to anticipate potential impacts if the bill passes.
Dividend-focused investors holding high-growth, low-yield stocks—such as Apple, Microsoft, and Google—will see minimal effects. However, those invested in higher-yield, lower-growth stocks like Coca-Cola, Verizon, and Altria may experience greater claw backs on their dividend payments.
The following YouTube video provides an excellent explanation, accompanied by visuals, on the significant impact of this change for Canadian investors and the broader Canadian economy.
● Written with the help of Grok
Consider joining DiviStock Chronicles’ Referral Program for more neat rewards!Please refer to the details of the referral program.Canada's Digital Services Tax (DST) is a levy imposed on large foreign and domestic businesses that generate revenue from online users in Canada. It was enacted on June 28, 2024. The Canadian government implemented the DST to ensure that tech giants contribute their fair share of taxes on revenue generated in Canada, even if they lack a physical presence in the country.