Cardinal Point Wealth Management Alerts Canadian Investors: Proposed Changes to US Tax Code May Punitively Discriminate Against Them

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Toronto, ON - June 18, 2025 - Cardinal Point Wealth Management, a leader in cross-border financial and tax planning, is advising high-net-worth Canadians to closely monitor the proposed Section 899 amendment to the US Internal Revenue Code. If passed, this legislation could introduce a new retaliatory tax regime targeting residents of countries, including Canada, that the United States claims follow taxation practices that discriminate against American businesses.

The implications of this proposal are far-reaching for Canadian individuals and entities with significant US investments. From real estate holdings and publicly traded securities to retirement plans and short-term work assignments, the adverse economic impact of Section 899 could be both swift and substantial-regardless of whether the taxpayer physically resides in the US.

Understanding Section 899

Section 899 is designed as a punitive measure, aimed at countries that have enacted extraterritorial digital services taxes or similar measures on US-based multinational corporations. Canada, along with the U.K. and several European Union members, falls within this scope.

The proposed law is set to introduce an additional penalty tax-escalating by 5% annually, up to 20%-on certain US source income earned by residents of designated "discriminatory" countries. These changes would apply irrespective of existing tax treaties and could drastically reduce net investment returns for affluent Canadians who rely on US assets as a core component of their wealth management strategy.

Affected Income Streams and Scenarios

The reach of Section 899 spans multiple asset classes and income types:

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Fixed, Determinable, Annual, or Periodical (FDAP) Income: US sourced dividends, interest, and royalties-typically taxed at 30% and often reduced to 15% or less under the Canada-US tax treaty-are proposed to be subject to incremental tax hikes of up to 20%, even when treaty benefits are claimed.

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Capital Gains on US Real Property: Canadians currently pay US taxes under FIRPTA (Foreign Investment in Real Property Tax Act) rules. Section 899 could impose further U.S. withholding tax based on Canadian residency status.

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Distributions from US Retirement Plans: Payments from 401(k)s and IRAs to Canadian residents are presently taxed as FDAP income. The proposed legislation could impose the additional U.S. withholding tax irrespective of treaty relief.

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Temporary US Assignments: Canadians in the US on short-term visas who are not US tax residents could see capital gains from US assets subjected to the increased rates under Section 899.

Enforcement via Withholding

Crucially, compliance with Section 899 would rely heavily on enhanced withholding requirements. Financial institutions, brokerages, and real estate buyers would be obligated to withhold the additional tax at source, potentially resulting in:

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Withholding rates exceeding 50% on certain US income types

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Higher FIRPTA withholding on gross real estate sale proceeds, which currently stands at 15%

Although transitional relief may be available until January 1, 2027, for withholding agents making good-faith efforts to comply, affected investors will have limited opportunity to restructure portfolios or adjust financial strategies in time to avoid adverse consequences and compliance responsibilities.

Treaty Relief and Strategic Considerations

While the Canada-US tax treaty provides for reduced withholding and includes residency tie-breaker provisions, Section 899 explicitly overrides these treaty benefits. As a result, Canadians who previously benefited from reduced tax rates could see their dividend withholding rate rise from 15% to 35% within four years.

Some investors may consider electing to be treated as US residents for tax purposes in order to sidestep Section 899. However, this option can trigger full taxation on worldwide income and should only be pursued with detailed cross-border modeling and legal guidance.

Planning Ahead: Key Recommendations

Cardinal Point encourages investors to consider the following proactive steps:

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Review all W-8BEN or W-8ECI forms with withholding agents to ensure correct application of treaty benefits.

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Evaluate the viability of electing US tax residency in specific cases.

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Advance the timing of liquidity events such as asset sales or retirement plan withdrawals to avoid post-enactment penalty rates.

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Where feasible, restructure ownership of US assets through tax-resident trusts or entities.

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Monitor IRS quarterly updates for changes to the discriminatory country list.

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Consult cross-border financial professionals to assess potential exposure and implement successful mitigation strategies.

About Cardinal Point Wealth Management

Cardinal Point Wealth Management is a cross-border financial advisory firm specializing in integrated tax, investment, and estate planning for Canadian and US citizens, expatriates, and dual-resident families. With deep expertise in cross-border tax planning [https://cardinalpointwealth.com/cross-border-tax-planning/], cross-border financial planning [https://cardinalpointwealth.com/cross-border-financial-planning/], and cross-border wealth management [https://cardinalpointwealth.com/cross-border-wealth-management-resource-hub/], Cardinal Point provides holistic and coordinated strategies tailored to each client's unique bi-national needs.

Disclaimer: This press release may contain forward-looking statements. Forward-looking statements describe future expectations, plans, results, or strategies (including product offerings, regulatory plans and business plans) and may change without notice. You are cautioned that such statements are subject to a multitude of risks and uncertainties that could cause future circumstances, events, or results to differ materially from those projected in the forward-looking statements, including the risks that actual results may differ materially from those projected in the forward-looking statements.
Media Contact
Company Name: Cardinal Point Wealth Management, ULC
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