Updated: February 4, 2025
Canadian businesses are closely monitoring how US tax policies could shift under US President Donald Trump’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.
US tax changes often influence Canadian tax policy. If the US government 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.
As Canada and the US are each other’s closest international neighbours, with daily trade topping $3.6 billion, the imposition of tariffs from the US and Canada could hit the Canadian economy hard, squeezing margins for importers and exporters.
We’ll continue to monitor and keep you updated on the impacts of potential tariffs, as developments are ongoing.
See our tax alert on how new tariffs could affect Canadian businesses.
In one of many executive orders President Trump issued on January 20, 2025, he withdrew the United States from the Organization for Economic Cooperation and Development (OECD) Pillar One and Pillar Two proposals. He announced that a global corporate minimum tax deal "has no force or effect" in the US, pulling out of a global tax deal that includes nearly 140 other countries, including Canada.
Significant disruptions for taxpayers are unlikely, as the OECD framework remains closely aligned with many US tax principles. However, if the United States decides to lower its corporate tax rate further, it could create competitive challenges for Canada. In the past, aligning Canadian and US tax rates helped neutralize investment decisions, making Canada equally attractive to foreign investors. This highlights the need for a proactive strategy to ensure Canada can continue to compete for investment.
The US government has also proposed legislation based on a second executive order focused on an “America First Trade Policy”. This proposes a tax on US income earned by companies and individuals from foreign countries whose laws “discriminate against US citizens or companies” (e.g., a digital services tax (DST) or undertaxed payments rule). Canada enacted a DST in 2024 and plans to apply a UTPR starting December 31, 2024.
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.
Stay up to date!
Fill out the form below if you wish to receive relevant email communications specific to US tax policies.
