What the proposed "Big Beautiful U.S. Tax Bill" could mean for Americans living in Canada and Canadians alike
- Andrea Thompson
- May 26
- 6 min read
Updated: 1 hour ago
I've had a lot of clients reach out to me trying to interpret what 'big and beautiful' changes could be coming their way. Since there is so much hard-to-understand information out there, they are coming to me to understand what could affect their portfolios.
Proposed Changes to US Withholding Tax on Dividends
The provision that most planners and advisors should be aware of is Section 899 of the bill, which could affect both US taxfilers living in Canada and Canadian taxfilers alike. Under the current U.S.-Canada Tax Treaty, Canadian residents benefit from a reduced 15% withholding tax on U.S.-source dividends, down from the standard 30%.
However, Section 899 of the proposed bill introduces a mechanism to potentially override these treaty benefits for residents of countries that impose taxes deemed "discriminatory or extraterritorial" against U.S. businesses. Canada's implementation of a 3% Digital Services Tax (DST), effective retroactively from January 1, 2022, positions it as a potential target for these retaliatory measures.
If enacted, the US could negate the treaty rate of 15% (bringing it back up to 30%), and incrementally increase the withholding tax rate on dividends paid to Canadian residents by 5% annually, starting from the current 15% rate, up to a maximum of 50%. This escalation would occur over several years unless Canada repeals the DST or negotiates an exemption.
An example scenario:
You generate $10,000/year in US dividend income in your non registered portfolio. You are a Canadian resident and not a US taxfiler. Let's assume an FX rate of 1.35 USD/CAD. Currently, the Canada-US tax treaty reduces withholding taxes on US dividends to 15% in non-registered and TFSA accounts. The 15% is refundable under Canadian tax law (and received as a foreign tax credit to offset taxes payable in Canada). Anything above 15% is not recoverable.
In RRSPs, this withholding is currently exempt - making it a friendlier place to hold your US dividend income.
Scenario | U.S. Withholding Tax | Tax Withheld (USD) | Net Dividends (USD) | Net (CAD) | Notes |
Current | 15% | $1,500 | $8,500 | $11,475 | Under current treaty rules |
If 30% Withholding Applies | 30% | $3,000 | $7,000 | $9,450 | 15% above treaty rate likely not creditable in Canada |
If Withholding Rises to 50% | 50% | $5,000 | $5,000 | $6,750 | Extreme case under proposed Section 899 |
Key takeaways from the example above
A 15% increase in withholding (from 15% to 30%) would reduce your net U.S. dividend income by 17.6%.
If it rises all the way to 50%, your net income would be cut in half—a 41% reduction in after-tax dividend income compared to today.
Any U.S. withholding above 15% is generally not creditable in Canada, meaning it would result in real tax leakage unless the CRA adjusts its rules or Canada and the U.S. renegotiate.
Silver lining? US dividends haven't exactly been a huge contributor to a client's overall income in recent years.
Currently (as of May 2025), the S&P 500 yields around 1.5%. Historically, this has been closer to 1.8-2%. The reason for the current lower yields is mainly due to high stock valuations and the increase in share buybacks in recent years. As well, the top 10 stocks in the S&P 500 (comprised mainly of our fave tech stocks of recent years) generates a 0.54% dividend yield as of this writing, significantly lower than the S&P 500 average. Many of these companies, such as Amazon, Berkshire Hathaway and Tesla have been reinvesting earnings into growth initiatives rather than dividend distribution. However, Alphabet and Meta have started to pay dividends in 2025 (0.49 and 0.33 respectively), siggesting a potential shift towards returning capital to shareholders.
What else should I be concerned about?
If you are a Canadian taxfiler (non US) who owns an IRA (Indiivudal Retirement Account), an increased wtihholding tax could also apply to your IRA withdrawals or RMDs.
Right now, treaty rates of 15% typically apply to any distributions made to an IRA, but this could change. Should Canada be considered a discriminatory foreign country ("we aren't paying our fair share?", US withholding taxes could increase by 5% per year on top of the standard 15%, to a maximum of 35% after 4 years (similar to the dividend treatment above).
This impact would be MUCH more statistically significant from a dollars and cents perspective.
IRA distributions are typically 'large' as they form part of an individuals' retirement income stream.
Mandatory withdrawal requirements would make it virtually impossible to get around the potential increased tax impact, vs. the dividend example above in which portfolios could be rearranged to sell off more punitive US dividend paying securities.
IRA income is not available for pension income splitting in Canada, making this tax impact even more painful.
Canadians may be much more willing to explore the 60J transfer (IRA to RRSP) should it be more favourable to them over the long term, if the legislation comes to pass.
How about yet another tax?
To add insult to injury, a proposed 3.5% excise tax would apply to money transfers from the U.S. to other countries made by non-U.S. citizens, including those in U.S. territories.
U.S. financial institutions and money transfer providers would be required to report detailed information on these transfers. This is is set to take effect in 2026.
Lucky for U.S. citizens, green card holders, and individuals with work visas: they would be eligible for a refundable tax credit if they incur this tax.
Summary of Implications for Canadian Investors
Increased Tax Liability: Canadian investors holding U.S. dividend-paying stocks could see their U.S. withholding tax rate rise from 15% to as high as potentially 50% over time. IRA distributions could also face similar withholding tax penalties (potentially up to 35%).
Impact on Investment Returns: Higher withholding taxes would reduce the net income from U.S. dividends, potentially making U.S. equities less attractive to Canadian investors.
Tax Credit Limitations: The Canada Revenue Agency (CRA) may not provide foreign tax credits for the additional U.S. taxes if they exceed treaty rates, leading to potential double taxation.
Affected Entities: This change could impact not only individual investors but also Canadian pension funds, trusts, and corporations with U.S. investments.
U.S. withholding tax still applies on dividends flowing through Canadian vehicles that are not treaty-protected (e.g. TFSA, FHSA, RESP, or Canadian mutual funds). But this is unrelated to the Section 899 proposal.
A 3.5% excise tax on money transfers made from US to Canadian institutions.
What about US taxpayers in Canada?
U.S. tax filers are taxed on their worldwide income by the IRS, including dividends from U.S. companies. There is no withholding tax on U.S. dividends paid to U.S. citizens or residents—even if they live abroad. Instead, dividends are reported on the U.S. tax return (Form 1040) and taxed at 0%, 15%, or 20% depending on income level (qualified dividend rates).
The same dividends are also reportable on the Canadian return, with a foreign tax credit (FTC) typically claimed for U.S. taxes paid to avoid double taxation.
The Section 899 proposal does not impact U.S. citizens or tax residents—even if they live outside the U.S.
The 15% → 30% → 50% withholding increase targets non-resident aliens (i.e., Canadians who are not U.S. persons).
U.S. persons—regardless of residence—are not subject to U.S. withholding tax on dividends. They pay tax via self-assessment on their U.S. return.
However, there are other items of note from this bill that could affect US taxfilers living in Canada. These include:
Lower Tax Rates & Higher Standard Deduction
The bill would make permanent the lower marginal tax rates and doubled standard deduction that were introduced in 2017. This can reduce a client's U.S. tax liability—especially helpful if they have U.S.-source income or limited foreign tax credits.
Child Tax Credit (CTC)
The CTC would increase to $2,500 per child through 2028, but would apply only to U.S. citizen children. This could be a valuable credit if children have dual U.S./Canadian citizenship and Social Security Numbers.
Qualified Business Income (QBI) Deduction
If a client is self-employed or runs a business that qualifies for U.S. tax reporting, the 20% deduction on pass-through income is expected to remain available. However, proper structuring is crucial to ensure eligibility from abroad.
New “MAGA” Savings Accounts for Children
These are proposed tax-free savings accounts seeded with a $1,000 U.S. government contribution for children born between 2024–2028—including those born abroad, as long as they are U.S. citizens.
Next Steps
While the bill has passed the U.S. House of Representatives, it must still be approved by the Senate and signed into law. Given the potential financial implications, Canadian investors with U.S. holdings should:
Monitor Legislative Developments: Stay informed about the bill's progress and any amendments that may affect its implementation. If you want to follow this in more detail, please visit https://www.congress.gov/, sign up for a free account and follow bill H.R.1.
Review Investment Portfolios: Assess the proportion of U.S. dividend-paying stocks and where they are held (TFSA, vs. non registered, vs. RRSP) and consider diversification strategies to mitigate potential tax impacts. Should the bill come to pass, what changes would you need to consider to your existing portfolio?
Review foreign holdings: Should any assets be repatriated to Canada? Will the 60J transfer (IRA to RRSP) become more popular for non-US tax filers? Does any cash sitting in US bank accounts need to stay there or can it be repatriated?