The Trump administration’s tax bill currently before the U.S. Senate includes a proposal that would tax money transfers from the U.S. sent by non-American citizens, with potential implications for some cross-border clients.
One of the bill’s proposals is a 3.5% excise tax on remittance transfers made by non-U.S. citizens in the country — and by non-U.S. nationals, such as those in a U.S. territory — to recipients outside the country.
U.S. financial institutions and money transfer providers would be required to submit detailed information returns about their money transfers. The measure would take effect in 2026.
The proposal provides a refundable tax credit in cases where U.S. citizens, green card holders and those with work visas incur the tax.
The measure “seems to be designed to punish non-U.S. citizens who are sending money back to their home countries,” said Matt Altro, president and CEO of MCA Cross Border Advisors Inc. in Montreal. “This is basically … a 3.5[%] net worth tax for some people.”
The remittance excise tax could affect cross-border, non-U.S. citizen clients in the U.S. who plan to move to Canada to retire and have U.S. accounts to draw from. The proposal “is a concern for sure for our clients,” Altro said. “This can affect their cross-border planning and their financial plans.” Altro said he’s thinking about strategies to potentially repatriate an affected client’s U.S.-based funds without being caught by the proposed measure.
A KPMG report suggests relief from the excise tax could be available under non-discrimination articles included in some tax treaties. Also, the report said the measure may not apply to “an entity acting as an employer that directly deposits some or all its employees’ wages in a non-U.S. bank account.”
With the proposed U.S. tax bill overall, “we have to start thinking about the implications and being prepared,” Altro said. “But we must wait and see” as the bill makes its way through the U.S. Senate.
Hike in tax rates for U.S.-source income
The bill’s Section 899 amends the Internal Revenue Code to target countries with taxes deemed “unfair” to U.S. persons or businesses, including digital services tax and global minimum tax rules, making Canada among the many countries affected.
Section 899 would apply to Canadian businesses, investors, investment funds, certain trusts, private foundations and the Canadian government. U.S. citizens in Canada would not be affected.
The section hikes U.S. withholding tax rates on a Canadian resident’s U.S.-source income, including dividends, interest, royalties and rent, and on effectively connected income (ECI) — income related to a U.S. trade or business, including capital gains from U.S. real property.
The proposed increase to tax rates is five percentage points per year (starting at treaty rates),* up to a maximum of 20 percentage points above the statutory rate.
For example, dividends paid to a Canadian parent company from a U.S. subsidiary would be subject to greater withholding tax, as would dividends paid to Canadian investors from their U.S. investments. (See table below for rates.)
“With Canada being only 3% of the world market, so much of us are invested and our clients are invested in U.S. stocks,” Altro said. For now, “we’re not going to be changing all of our clients’ portfolios out of U.S. stocks,” he said, but he’s informing clients of the potential changes.
As the bill makes its way through the U.S. Senate, modifications could be made, said Laura Gheorghiu, partner with the national tax group at Gowling WLG in Montreal.
Still, the proposed tax hikes on U.S.-source income would be significant, given foreign tax credits on the Canadian side would no longer mitigate the U.S. tax.
“That’s the big issue — the credit being limited,” Altro said. “That would be very punitive. … You have a misalignment now,” of U.S. tax and Canadian tax credits, and it’s unclear whether Canada would adjust the foreign tax credit higher, he said.
Non-U.S. citizens living in Canada who hold U.S. individual retirement accounts (IRAs) could be hit hard, Phil Hogan, cross-border tax partner with Beacon Hill Wealth Management Ltd. in Victoria, B.C., wrote in a blog post: “Unlike smaller dividend or interest payments, IRA distributions are often much larger, amplifying the impact of any tax hike.”
While Canadian registered retirement accounts such as RRSPs aren’t subject to withholding tax on U.S. dividends given the accounts are tax-deferred, the proposal may change that, Altro said. If so, Canadians would be paying tax twice on those dividends: once in a given tax year on the U.S. side with no credit to offset it, and again on withdrawal.
If that’s the case, the proposal targets “a pretty broad part of the population,” he said, and is “disincentivizing” Canadians from investing in U.S. securities.
“Understanding your [U.S.] exposure is really important,” Gheorghiu said. However, she suggested investors and business owners be patient. U.S. legislators “are overriding [tax] treaties, and that’s a big deal,” she said, potentially requiring negotiations and changes.
On Wednesday, a U.S. federal court ruled that Trump has no authority, through a national security statute, to wield the sweeping tariffs imposed on dozens of countries in April.
The proposed tax rate increases, if enacted, could apply to Canada 90 days after enactment. Proposed rate increases would remain in effect until Canada’s “unfair” taxes were dropped.
Transitional relief of penalties and interest would be provided through Dec. 31, 2026, for withholding agents, assuming best efforts to comply.
While uncertainty remains about the U.S. tax bill and how section 899 would interact with the Canada-U.S. tax treaty under U.S. law, what’s clear “is that third-party withholding agents will err on the side of caution and withhold at the new, higher penalty rate regardless of any treaty-based position,” said a blog post by Polaris Tax Counsel in Vancouver.
“We’re not in this alone — I think that’s an important thing to keep in mind,” Gheorghiu said. “These rules apply to a very large number of countries,” requiring a concerted response to address U.S. concerns.
*A previous version of this story stated that rate increases would be applied for four years. That time frame is incorrect and has been removed from the text and table. Return to the corrected sentence.