Karsten Wenzlaff, Advisor
August 26th, 2025
Karsten Wenzlaff is a Crowdfunding and Fintech Expert from Germany. He is Secretary-General of Digit[...]
U.S. Tax Bill Could Drive Capital Back to Canada
Taxes and Investing | June 4, 2025
Image: Freepik/gstudioimagen1
Trump’s Dividend Tax Hike Could Move Billions Out of U.S. Markets
U.S. President Donald Trump has progressed the "Big, Beautiful Bill", which recently passed the House and is now in front of the Senate, spanning over 1,000 pages about economic deregulation, tax restructuring, and retaliatory trade measures for certain countries including Canada. Among its most controversial elements is Section 899.
If enacted, the U.S. withholding tax rate on dividends paid to Canadian investors could increase from the current 15% to as high as 50%, which would affect retail as well as institutional investors like the Canada Pension Plan (CPP).
See: Trump’s Tariffs: Impact on Fintech and Canada’s Digital Tax
Tensions are rising over Canada's digital service taxes, and retaliatory U.S. trade policies including tariffs, and bill if implemented could inadvertently boost investment back into Canadian companies and markets.
Would Cross-border Taxes Be A Losing Equation?
Under the Canada-U.S. Tax Treaty, Canadians currently pay a 15% withholding tax on dividends from U.S. stocks. Section 899 proposes a 5% annual increase up to 50%, starting in 2026. While investors can claim foreign tax credits in Canada, the higher upfront U.S. withholding tax would significantly reduce net income from U.S. dividend paying investments.
Although exact rates vary by province and income level, the combined tax on eligible Canadian dividends for higher income earners is generally lower than the proposed 50% U.S. withholding (consult your accountant). This tax gap would force investors to rethink the risks and adjusted value of investing in U.S. dividend exposure.
See: Fintech Fridays EP63: From Angel Investor to Change-Maker: Investing with Impact
The tax drag from a 50% U.S. withholding rate would leave just 50 cents on the dollar before any Canadian tax credits or additional taxation is applied. Compare and contrast this potential reality with a Canadian dividend that would be taxed at an effective rate of around 39% or less would generate more net income for the investor. The result may be a growing appeal to invest capital back into Canadian equities after many years of continual decline.
Impact on Pensions and Funds
Canadian pension funds manage more than $3 trillion in assets. CPP Investments alone had $632.3 billion in assets as of March 2024, with only 11.7% invested in Canada (See: CPP Annual Report 2024). The Ontario Teachers’ Pension Plan (OTPP), managing over $266 billion, had 33% allocated to U.S. markets (See: OTPP Annual Report). So, if U.S. withholding rates rise, institutional portfolios will likely need to be rebalanced and optimized given that higher taxes would reduce net yields.
There's also a policy push for pensions to invest more domestically. In December 2024, the federal government appointed former Bank of Canada Governor Stephen Poloz to lead a review on increasing pension investment in Canada. The Fall Economic Statement mentioned the need to align institutional capital with domestic productivity and infrastructure priorities.
See: Why Ontario Limited Partnerships Are Ideal for Private Funds
If more institutional capital is newly diverted into Canadian assets, it will benefit not just large scale infrastructure projects but fintech, innovation, AI, blockchain, and green finance sectors, to name a few.
Outlook
Trump’s 'Big, Beautiful Bill' could have significant unintended consequences for Canada that encourages investors to prioritize Canadian opportunities for tax efficiency and building national economic resilience. There's no need to panic but you should speak with your investment and tax advisors now to evaluate the potential impact and prepare to rebalance your U.S. cross-border investments.
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