Proposed changes this week to the Trump administration’s tax bill take a bit of the sting out of its potential impact on taxpayers in Canada — among other countries — by lowering the cap on proposed increases to tax rates on U.S.-source income and by providing exceptions to an excise tax on money transfers from the U.S.
The tax bill, currently before the U.S. Senate, proposes a 3.5% excise tax on remittance transfers made by non–U.S. citizens to recipients outside the U.S. The proposal provides a refundable tax credit in cases where U.S. citizens, green card holders and those with work visas incur the proposed tax. But concern arose that the proposal could affect some cross-border clients, such as Canadians in the U.S. who plan to return to Canada to retire and who have U.S. accounts to draw from, or Canadians with U.S. property that they plan to sell.
Such concern has largely been allayed with the U.S. Senate’s proposed version of the bill, which includes exceptions when the funds being transferred are withdrawn from accounts at financial institutions subject to the U.S. Bank Secrecy Act — anti–money laundering legislation that applies to brokers and dealers, banks, credit unions and insurers, among other entities. The Senate finance committee also added an exception when the funds being transferred are funded with a U.S. debit or credit card.
“The language here seems to suggest that Canadians remitting money back to Canada from a typical U.S. bank or brokerage firm will be exempt from the 3.5% excise tax,” Matt Alto, president and CEO of MCA Cross Border Advisors Inc. in Montreal, wrote in an email. “Glad to see these changes to the bill are being made by the Senate committee.”
The additional wording “does seem like it would reduce the scope of the tax,” said Jason Ubeika, a partner on the expatriate tax team with BDO Canada in Mississauga, Ont. Still, he cautioned that generally, legislation must pass and rules must be established to provide certainty about changes to the Internal Revenue Code. The proposed excise tax is “a completely new tax,” requiring “a fair amount of regulations put forth to flesh it out,” Ubeika said.
One question is how U.S. financial institutions would handle the compliance burden of the proposed tax, said Max Reed, a cross-border tax lawyer and principal of Polaris Tax Counsel in Vancouver. They’ll be required to submit detailed information returns about their money transfers, and as such, the excise tax “could have broad implications for payment processors and financial accounts,” said BDO USA in an article on Wednesday.
Multiple countries could be impacted
The Senate finance committee also tweaked the bill’s proposed Section 899, which targets countries with taxes — including digital services tax and global minimum tax rules — deemed unfair to U.S. persons or businesses, making Canada among the many countries potentially affected. The Senate lowered by five percentage points the potential total U.S. tax rate increases on the targeted countries, and pushed out Section 899’s effective date.
Before the Senate’s proposed change, Section 899 increased, for example, U.S. withholding tax rates on a Canadian resident’s U.S.-source income, such as dividends from U.S. investments, by five percentage points per year (starting at treaty rates). In addition to Canadian investors, Section 899 would apply to Canadian businesses, investment funds, certain trusts, private foundations and the Canadian government. (U.S. citizens in Canada wouldn’t be affected.)
While the proposed measure had a cap of 20 percentage points above the statutory rate, the Senate version reduced the cap to 15 percentage points. For example, the potential top withholding tax rate on U.S. dividends would be 45% instead of 50%. U.S. withholding tax on U.S. real property dispositions would top out at 30%, instead of 35%.
Whether the Canadian government would increase foreign tax credits to cover increased U.S. withholding tax rates is unknown. “Even once we have that final [U.S.] legislation in hand, there’s going to be still a lot of questions that might take quite some time to resolve,” Ubeika said. “As well as waiting for guidance from the U.S., we might be also waiting for some guidance from Canada … as far as deductions or credits.”
The U.S. Senate’s version of the bill confirms that Section 899’s proposed increased rates don’t apply to portfolio interest, and it also defers the proposed tax hikes. The proposed measure would generally apply in 2027 instead of 2026, assuming a taxpayer has a calendar year-end.
“That’s more time to figure things out,” Ubeika said. “It gives other countries [including Canada] an opportunity to pivot if they need to, or to negotiate with the U.S.”
The proposed U.S. tax bill still must be passed by the Senate, and passed again in the House of Representatives before being signed by the president, with an original target date of July 4.
“That seems pretty ambitious … but it’s by no means a hard deadline,” Ubeika said, noting that negotiations will be ongoing in Congress over the bill’s various measures. “Realistically, these are provisions that [the Trump administration] would want to get enacted before the end of the year,” as was done with the 2017 Tax Cuts and Jobs Act.
Reed also noted that the bill has a lengthy process of negotiations ahead before being passed. Still, as things stand, “the important takeaway is that everybody [both House and Senate] is on board for some version of this chaos,” he said.