U.S. President Donald Trump with U.S. House Speaker Mike Johnson on Capitol Hill in Washington, on May 20.Tasos Katopodis/Getty Images
Risk appetites have been fed anew by a savoury acronym, with stocks continuing to rebound this week from early April lows.
The TACO trade (for Trump Always Chickens Out) is thriving. More than $9-billion flowed into Canadian exchange-traded funds last month, with equities leading the way and cash funds experiencing outflows.
Investors aren’t even overly concerned about the growing number of companies pulling their guidance because tariffs are making forecasting too difficult.
But if markets aren’t feeling as threatened by weaponized trade policy, what about when tax policy becomes a big, beautiful bazooka?
Clare O’Hara and Rudy Mezzetta wrote last month about a provision in U.S. tax legislation that threatens to raise taxes on investors in Canada and in other countries that impose taxes (such as a digital services tax) the U.S. deems unfair to U.S. corporations.
U.S. President Donald Trump’s One Big Beautiful Bill passed by one vote in the House of Representatives and is now before the Senate. It’s getting attention for its contribution to the already substantial U.S. deficit and for the very public blow-up with former White House advisor Elon Musk. Bond investors are noticing.
Most relevant to Canadian investors is section 899. Canadians who hold U.S. securities or invest in U.S. companies through Canadian investment funds could see the rate of U.S. foreign withholding taxes on dividends they receive rise significantly.
What is a withholding tax, and how does it work? Mr. Mezzetta explains the implications for registered and non-registered accounts.
How worried should investors and advisors be? That’s a question for readers.
A blog post from Ryan Harder, an associate portfolio manager and lead strategist with the Chieduch Group at RBC Dominion Securities Inc., says the effect would be minimal for investors who focus on total returns in their U.S. and international equity exposure rather than on dividends.
“[S]ince we already source minimal dividend income from U.S. stocks, the worst-case scenario of a 50 per cent withholding tax on U.S dividends would have very little impact on the after-tax return picture for our taxable Canadian clients,” he wrote.
More concerning, perhaps, is what Mr. Harder calls a “broader ideological pivot in U.S. policy,” with the tax code turned into a weapon aimed at foreign governments and investors.
Max Reed, principal and cross-border tax lawyer at Polaris Tax Counsel, put it this way in a blog post: “In the trade realm, the current U.S. administration has needlessly and pointlessly run roughshod over nearly 40 years of trade treaties. In the tax realm, proposed section 899 threatens to do the same by stomping all over a carefully negotiated tax treaty that has been in place since 1942.”
While the bill may be amended in the Senate, investors are left with yet another Trump-inspired source of uncertainty. For now, as Mr. Reed and others point out, there’s not much to do but wait and see.
In the meantime, what are advisors telling clients? Let us know.
- Mark Burgess, Globe Advisor assistant editor
Must reads
Home tips: The Liberal government is moving ahead with a new GST rebate for first-time homebuyers, a key campaign promise from the recent election. Rudy Mezzetta explains how the new rebate will work, and also provides a refresher on other programs and tax credits for first-time homebuyers.
Meanwhile, here’s what advisors are telling would-be homebuyers looking in this tariff-plagued environment, and Rob Carrick has these tips for the just-right mortgage payment.
Risk tips: In turbulent markets, investors often reach for reliable tools such as high-interest savings accounts and guaranteed investment certificates. These so-called “risk-free” investments have long been considered cornerstones of conservative portfolios, but they can also erode wealth in real terms, writes Travis Forman, portfolio manager with Strategic Private Wealth Counsel at Harbourfront Wealth Management Inc.
Audit tips: With a list of tax-deductible entitlements available to sole proprietors, some may face a tax review or audit of their business soon after the June 15 income tax-filing deadline. Deanne Gage reports on seven areas to watch.
More from The Globe
Trump-proof: When U.S. President Donald Trump launched a trade war back in February, Canadians had plenty of questions about how it would affect their finances. Globe reporters answered 42 reader questions about how to manage their portfolios, household finances and lives.
Tax-proof: After a long, cold spring, it’s beginning to look a little bit like cottage season. Tim Cestnick has five tax tips for cottage owners.
Proof of tariff: Canada’s trade deficit, the difference between imports and exports, ballooned to $7.1-billion in April from $2.3-billion the prior month – the highest recorded, and far above analyst expectations.