For affluent Canadians with significant U.S. investments—whether in real estate, public markets, or U.S. retirement plans—proposed changes to U.S. tax law could quietly and significantly erode your after-tax returns.
Under a new legislative proposal—Section 899 of the Internal Revenue Code—the U.S. may impose penalty taxes on residents of foreign countries that it deems to be implementing “unfair” taxes on U.S. businesses. Canada is among those targeted.
For high-net-worth Canadians who depend on U.S. assets for income, diversification, or long-term retirement planning, this policy could represent a material increase in their tax burden, regardless of how much time they spend in the U.S.
What Is Section 899?
Section 899, if enacted, would impose escalating tax penalties—up to an additional 20%—on certain U.S.-source income earned by residents of countries classified as “discriminatory”.
The law is designed as a punitive tool in response to countries (like Canada, the U.K., and EU members) introducing extraterritorial taxes (e.g., digital services taxes) on U.S.-based multinationals.
For investors, the implications are not political — they are financial and immediate.
Who Is Affected and How
If you’re a Canadian investor or retiree with U.S. assets or income, Section 899 could apply to:
1. U.S. Dividends, Interest, and Royalties (FDAP Income)
- Currently subject to 30% U.S. withholding tax, often reduced by the Canada-U.S. tax treaty to 15% or less.
- Under Section 899, these rates would increase by 5% annually, up to 20% more, even on top of the treaty-reduced rate.
2. Capital Gains from U.S. Real Property
- Canadians pay U.S. tax on gains from selling U.S. real estate under FIRPTA rules (often as effectively connected income, or ECI).
- Section 899 would increase the rate applied to these gains if you are still considered a Canadian resident.
3. U.S. Retirement Accounts
- Distributions from U.S. 401(k)s and IRAs to Canadian residents are partially taxable in the U.S. as FDAP income.
- These distributions could be hit with the additional Section 899 tax, even if you qualify for treaty relief.
4. Short-Term U.S. Assignments
- If you’re in the U.S. on a short-term visa (e.g., J, F, or Q) and not a tax resident under U.S. domestic law, your capital gains may still be subject to Section 899 if you’re a Canadian tax resident.
Withholding Tax Will Also Rise
Importantly, withholding agents (banks, brokerages, or buyers of U.S. real estate) will be required to collect the additional tax. So even if you’re unaware of the rule change, your investment returns or sale proceeds could be reduced upfront by:
- Up to 50% total withholding on some types of U.S. income.
- Higher FIRPTA withholding on U.S. real estate sales (currently 15% of the gross sale price).
Temporary relief will be available until January 1, 2027, for payors who make good faith efforts to comply.
What About Treaty Relief?
The Canada–U.S. tax treaty currently provides for reduced withholding rates and tie-breaker rules to determine residency. Under the Section 899 proposal:
- The increased tax applies even after treaty reductions.
- That means your usual 15% treaty withholding rate on dividends could become 35% after four years.
- Treaty-based elections to be treated as a U.S. resident could avoid the tax, but may expose your worldwide income to U.S. taxation.
When Would This Take Effect?
If enacted, the new rates would apply to tax years beginning after the later of:
- 90 days post-enactment,
- 180 days after the enactment of the “unfair foreign tax,” or
- The date that the discriminatory tax takes effect in the foreign country.
That gives Canadian investors a limited window to prepare.
Real-Life Examples: How Section 899 Could Affect You
Example 1: Retired Business Owner with U.S. Stocks and REITs
Profile: Linda, age 68, sold her business and now lives in Victoria, BC. She draws $80,000/year from a taxable portfolio that includes U.S. dividend-paying stocks and REITs. Her portfolio also generates $25,000 in U.S.-source interest.
Current tax treatment:
- 15% withholding tax on U.S. dividends (under the Canada-U.S. tax treaty)
- Exemptions or reduced rates on qualified interest
Under Section 899 (after 4 years):
- Dividend withholding could increase from 15% → 35%
- Certain interest income could be taxed at 20% or more if no treaty relief applies
Impact: Over $16,000/year in additional U.S. tax, without any change to her investment profile.
Example 2: Tech Executive with U.S. RSUs and a 401(k)
Profile: Daniel, age 44, lives in Toronto and works remotely for a U.S. tech company. He has:
- $1.2M in vested RSUs in a U.S. brokerage
- A legacy 401(k) from a past stint in California
- Plans to retire in Canada in 10 years
Current tax strategy:
- Delay selling RSUs for long-term gains
- Withdraw 401(k) strategically in retirement
Risk under Section 899:
- Capital gains on U.S. real estate or ECI income (e.g., sale of startup stock) taxed at higher rates
- 401(k) distributions taxed as FDAP income → base rate of 30%, increasing up to 50% with Section 899
Result: $120,000+ in additional tax over the next 15 years unless the structure is changed
Example 3: Family Office Holding U.S. Rental Properties
Profile: A family office based in Montreal holds 10 Florida condos and a small commercial property in Texas and distributes rental income to beneficiaries.
Current structure:
- Pays 30% tax on net income unless ECI elections made
- Plans to liquidate assets in 3 years
Risk under Section 899:
- Real estate income treated as ECI → subject to 20%+ additional tax
- Sale of property could trigger increased FIRPTA withholding (unclear if rate increases would apply to the current 15% FIRPTA tax on gross proceeds)
Strategic Planning Opportunities
For high-net-worth individuals, the introduction of Section 899 requires immediate risk mitigation. Below are key steps to consider:
1. Review Withholding Structures and Treaty Positions
Ensure your financial institutions have updated W-8BEN or W-8ECI forms and that treaty benefits are being correctly applied. Monitor whether Section 899 would override these rates in practice.
2. Consider Electing U.S. Tax Residency (Where Advantageous)
In rare cases, electing to be taxed as a U.S. resident could avoid the penalty rates if:
- You are earning significant U.S.-source income
- The net benefit outweighs the global tax cost
This must be carefully modeled and coordinated with Canadian tax advisors.
3. Accelerate Liquidity Events Before Implementation
If selling U.S. assets, drawing from a 401(k), or planning a major dividend event:
- Consider advancing these plans into 2025 or early 2026
- Section 899 rate increases begin 90+ days after enactment and scale up over four years
4. Use Trust and Entity Structures Wisely
- Consider distributing assets to U.S. beneficiaries earlier
- Review whether restructuring real estate, RSU holdings, or legacy 401(k)/IRA assets into U.S. tax-resident trusts or Canadian holding companies could reduce exposure
5. Monitor Country Listings Quarterly
The IRS will publish quarterly updates listing which countries are deemed “discriminatory.” These updates will determine your exposure year by year. Ensure your tax and investment teams are watching this list.
6. Work with a Cross-Border Financial Advisor
Tax strategies involving foreign tax credits, dual-residency, and trust distributions may need to be revised.
Wealth Deserves Protection
While Section 899 is a U.S. political response to international tax disputes, the collateral damage could fall on wealthy Canadians who invest prudently in U.S. markets. Whether you’re retired, still working, or managing multigenerational wealth, this proposal may warrant substantial rethinking of your cross-border structure.
Stay ahead of this potential change by consulting the Cardinal Point cross-border financial advisory team now to preserve your wealth, avoid surprise tax increases, and ensure your global financial strategy remains tax-efficient and forward-looking.