President Donald Trump arrives at Hagerstown Regional Airport on his way to Camp David on June 8.Manuel Balce Ceneta/The Associated Press
Canadian wealth managers are starting preparations for potential U.S. tax hikes on foreign investors amid growing fears that the country’s Senate will approve U.S. President Donald Trump’s proposed tax bill.
Vlad Tasevski, chief innovation officer for Purpose Investments Inc. PRP-T, said his firm is scenario-testing, examining the investments that will be affected, and considering whether to adjust portfolios with high U.S. exposure.
“Ultimately, this is a form of capital control. And, if passed, investors’ returns on investing in the U.S. will get meaningfully less attractive than what they were before, because it will be a lot less tax efficient,” Mr. Tasevski said in an interview.
Known as the One Big Beautiful Bill, Mr. Trump’s tax proposal includes a retaliatory measure against what the U.S calls “discriminatory or unfair taxes” in foreign countries, including Canada’s digital services tax (DST), which was introduced in 2024.
If Canada retains the targeted tax rules, the measure, known as Section 899, would increase the U.S. tax rate for Canadian companies and could cost investors who own U.S. securities up to $81-billion in additional taxes over seven years, according to an estimate by the Securities and Investment Management Association.
The tax increases could be implemented as early as Jan. 1.
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The current proposal has left a trail of unresolved questions about whether it would affect certain investments in registered retirement plans, whether the tax would qualify for a foreign tax credit in Canada and what the exact tax increase would be. Tax experts are saying that in some cases the withholding tax rate could increase to 50 per cent.
It is also unclear whether financial instruments that are currently exempt from U.S tax altogether will continue to be exempt under Section 899.
Mr. Tasevski said that while there is still a lot of uncertainty around the proposed bill, he isn’t taking any chances.
Several weeks ago, Purpose Investments began to take a closer look at its overall U.S exposure, including dividends, interest income, capital gains and real estate.
“We know how unpredictable the information is so we have to plan for multiple scenarios,” Mr. Tasevski said.
One potential solution for Canadians holding U.S. securities is to consider an alternative product such as a “swap-like” derivative structure that would provide U.S exposure indirectly, Mr. Tasevski said. For example, equity swap contracts allow investors to receive returns from an equity security without directly owning that security.
However, it is still unclear whether swap contracts would be included in 899.
Now that dividends are facing the prospect of higher taxes, portfolio managers at Purpose are calculating whether certain positions should be redeemed and replaced with non-dividend-paying investments.
Another scenario being considered, Mr. Tasevski said, is whether the tax rate can be lowered through the use of options – contracts that allow investors to buy a security at a specific time or date − rather than simply holding a long-term direct position in a U.S stock.
The U.S. legislation still needs to be passed by the Senate and receive presidential approval before it can become law. The White House expects the President to sign the final bill by July 4.
Edward Jones Canada published client guidance saying it does not recommend “any action by investors” as the bill is likely to face more debate – and potential revisions – by the Senate.
Both the Canadian Bankers Association and the Canadian Life and Health Insurance Association said in separate statements to The Globe and Mail that they are monitoring the legislation.
RBC Wealth Management said in a bulletin last week that Section 899 is likely to become law, but still has a “high chance of being avoided for Canadians if the Carney administration can negotiate it away through concessions (like removing the digital services tax).”
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Mary Hagerman, a senior portfolio manager with Raymond James Canada in Montreal, said Canadians should wait until there is “absolute certainty” on Section 899 before making “transactions that could be punitive.”
Ms. Hagerman pointed to Canada’s proposed increase to capital gains tax that was announced last year and then cancelled by Prime Minister Mark Carney on March 21.
“People made major moves based on something that looked pretty darn certain, and they got the rug pulled out from under their feet,” she added. “Obviously we have to react and readjust in situations that are confirmed, but this is far from being confirmed yet.”
However, Rob Tetrault, senior portfolio manager at Canaccord Genuity Corp. in Winnipeg, said the fear with Section 899 is that everyone could wait and then a sudden announcement could make everyone jump at once.
“You get a dumping of equities because you’re trying to exit a party through the fire exit and there is only one door out and everyone gets squeezed,” he said. “In practice it sounds like that could be the situation, but I think in real life it is going to play itself out longer.”
Shiraz Ahmed, founder of Toronto-based portfolio manager Sartorial Wealth Inc., said he has been preparing with the expectation that “something is coming,” but will wait until it is finalized to take action.
“We encourage our clients to be tax smart, but that tax should not drive the bus, it sits in the passenger seat,” Mr. Ahmed said. “Often folks get derailed by making decisions that are completely optimal from a tax perspective but perhaps take a secondary position from a strategy perspective.”