As a second term for president-elect Donald Trump is on the horizon, Canadian businesses are closely monitoring how US tax policies could shift under his administration’s leadership. Given the interconnectedness of the Canadian and US economies, changes to US tax policies could have ripple effects on cross-border trade, investment, and the Canadian economy.
During his first administration, President Trump introduced significant tax reforms, including the Tax Cuts and Jobs Act (TCJA) of 2017. Key elements of this legislation, such as reducing the corporate income tax rate to 21% and creating incentives for repatriating foreign earnings, made the US an attractive destination for business investment. Some provisions of the TCJA are set to expire December 31, 2025, which could bring higher taxes for many Americans. It's plausible that in their second term, the Trump administration will seek to extend some elements, or introduce new measures, like their campaign proposal to further reduce the corporate income tax rates for businesses that make their products in the US. This could lead to new competitive pressures for Canadian businesses.
For example, additional reductions in corporate taxes or tax incentives for US manufacturers might encourage Canadian companies with US operations to expand south of the border. Conversely, firms without US exposure may find it harder to compete with American counterparts benefiting from a more favourable tax environment.
The incoming Trump administration declared intentions to impose 25% tariffs on all products from Canada and Mexico, and an additional tariff on goods from China. The president-elect has said these tariffs will stay in place until the countries clamp down on border security. As Canada and the US are each other’s closest international neighbours, with daily trade topping $3.6 billion, this could hit the Canadian economy hard, squeezing margins for importers and exporters. It’s not yet clear if the incoming administration will exclude oil due to the mutual economic benefits of cross-border energy trading.
US tax changes often influence Canadian tax policy. If the Trump administration implements significant tax cuts, Canada might face pressure to adjust its own corporate tax rates or introduce other incentives to remain competitive. Such adjustments could benefit Canadian businesses, but it would also depend on broader fiscal considerations.
The proposal to lower US corporate tax rates could draw more foreign direct investment and encourage Canadian companies to relocate or expand in the US instead of at home. Additionally, lower US taxes could incentivize skilled workers and entrepreneurs to move south, further eroding Canada’s talent pool. As a result, Canada may struggle to maintain its economic appeal, particularly if its tax policies are perceived as less business-friendly in comparison. To remain competitive, Canada would need to counterbalance these changes by offering other incentives, such as new tax breaks or more robust infrastructure.
From a trade perspective, nearly 80% of Canada’s exports go to the US (representing roughly one-fifth of Canada’s GDP). Any changes to trade policies, like increased tariffs, could impact Canadian exports. In the energy sector, projects like the Keystone XL pipeline might see renewed support under the Trump administration, boosting Canada’s oil and gas industry. However, this could also lead to heightened criticism regarding environmental concerns, which may strain Canada’s domestic climate policies.
While it remains uncertain what specific tax policies the new Trump administration will prioritize, Canadian businesses can take steps to prepare. We can help you develop cross-border tax strategies that will help your business remain competitive and ensure you and your business remain compliant as US tax legislation and policy evolves.
We’ll continue to monitor policy developments as they unfold to help you stay informed of changes. Check back for more insights and reach out to your local advisor today.
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