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Kim G C Moody’s Musings – 1-1-1 Newsletter For May 28, 2025
One Comment About Taxation – Canada May Soon Be a “Bad Country” in the Eyes of the U.S. Tax Code
When Donald Trump won the U.S. election last November, many in the Canadian tax community were concerned that Canada would become even less competitive than we already are. I wrote about that days after the election win and encouraged the Canadian government to proactively react. Obviously, nothing has happened since that time.
Last week, the U.S. House of Representatives passed the Trump administration’s “One Big Beautiful Bill Act”. The bill is a voluminous and complex piece of proposed legislation that contains numerous tax amendments such as making permanent certain personal tax rate reductions (which were set to expire at the end of this year), a permanent estate tax exemption of $15M (annually indexed to inflation thereafter), tax exemptions on tips and overtime pay (I’m surprised this is moving forward), increases to the state and local tax deduction and a variety of business tax proposals including immediate expensing for certain capital assets.
One thing the bill does not contain, however, is a reduction in the statutory corporate tax rate which had been promised by Trump during the election for companies that manufacture their goods in the U.S.
One new proposed section introduced by the bill, section 899, introduces retaliatory tax measures targeting foreign individuals, entities, and governments that impose what the U.S. deems “unfair foreign taxes” on American companies such as digital services taxes or global minimum tax top-ups. If enacted, it would override existing tax treaties and impose significantly higher U.S. tax rates – ranging from 5% to 30% on affected foreign investors – on passive income, real property gains, and business profits. For countries like Canada, the implications could be severe if they fall within Washington’s definition of a “discriminatory foreign country” or what I refer to as a “bad country”.
The digital services tax that Canada recently implemented (and other countries too) is certainly one of the reasons for the introduction of section 899. The U.S., even under the Biden administration, made it clear that they believed that the introduction of DSTs by foreign countries unfairly attacked many American companies.
The U.S. has also not been impressed by the OECD’s push for a so-called “global minimum tax,” which Canada has embraced. This regime empowers countries to impose top-up taxes on the income of large multinational corporations even if that income was earned and already taxed elsewhere simply because the foreign tax rate was below a 15% global minimum. While sold as a fairness measure, the reality is that it allows high-tax jurisdictions like Canada to reach beyond their borders and tax profits that have little or no real connection to their economy. It’s no surprise the U.S. sees this as an aggressive tax grab. The Biden administration also had concerns about this.
Given the above, it would not surprise me – and many other tax practitioners – if the U.S. targets Canada. The negative fallout for Canadians would be tremendous. For example, Canadian individuals and entities (corporations, trusts, and partnerships) could face increased U.S. withholding tax rates of up to 30% or more on U.S. source dividends, interest, rents, royalties and capital gains on U.S. real estate. If you’re a business owner and have U.S. operations through a corporate subsidiary, any dividends paid to a Canadian parent would be targeted. If your U.S. business is operated directly through a Canadian company, you could face higher branch profits tax.
But wait! Some tax geeks reading this will ask how that is possible? Canada and the U.S. have a tax treaty that limits the rate of withholding tax to something far less than the section 899 proposals. And such an analysis would be correct but section 899 is designed, as referred to above, to explicitly override such treaties if you’re a resident of a “bad country”. Yikes! Not good! If caught, would Canada grant “extra” foreign tax credits so as to ensure that the recipient of the affected income would not be subject to double taxation? Under current Canadian law and administrative practice, that would be doubtful.
Another possible impact would be on the Canada Pension Plan and other normally tax-exempt pension funds. Section 899 could impose withholding tax on any U.S. source income received by the CPP. This could have a material and negative impact on the entire CPP and indirectly to pension holders. Again, not good.
So, what does Canada do next? One would logically think that it would drop its admiration for the DST and the global minimum tax and repeal such provisions. But Canada has a long history and is a proud member of the OECD. To drop such provisions to appease the U.S. would not be a good political look, especially with this “elbows up” government. It might also affect future OECD tax policy development / contributions by Canada.
At a minimum, Canada – and all Canadians – will need to follow the movement of this “beautiful” bill closely. No doubt the bill will face hurdles in the U.S. Senate. However, should section 899 get passed in its current form, Canada may indeed be designated a “bad country”. If so, further tensions will arise that may be on par with that of tariffs. Diplomatic negotiations will be a must.
If Canada chooses to not try to resolve being a “bad country”, then one can expect Canadian investment in the U.S. to shrink significantly. Will the U.S. care? Doubtful. But the shrinking exposure of investment by Canadians into the U.S. should be of major concern to all. The U.S. is a monstrous investment target. Canada is not. Expect investment returns for all Canadians to shrink dramatically.
PM Carney has recently suggested that Canada must “reimagine” its economy in response to shifting global dynamics. But if Section 899 passes and Canada is designated a bad country, the fallout will be anything but imaginary: higher U.S. withholding taxes, pension fund exposure, and serious disruption to cross-border investment. Treaty protections would be ignored, and our loyalty to OECD tax policies will be tested. There’s nothing “beautiful” about that. Elbows up? Hardly. How about some overall proactive tax measures before Canadians feel the hurt.
One Comment About Leadership – The Life Circle
Recently, I participated in a peer-to-peer session where we got into a rich discussion about habits and what it takes to live a good life. We touched on James Clear’s “Atomic Habits”—a great book if you haven’t read it—and other valuable principles.
One theme that stood out was the importance of fitness, exercise, and good nutrition. These aren’t just about looking good—they boost your energy, physical health, and mental well-being. That increased vitality improves how you show up in relationships, both personally and professionally. And strong, meaningful relationships often spark a hunger for growth and continuous learning.
After the session, I used ChatGPT to sketch out a simple graphic to keep this concept front of mind. I call it “The Life Circle.” I share it below as a simple visual cue—a nudge to prioritize your own health, energy, and mindset.
Maybe someone has already captured this concept in a similar way, and if so, credit to them. But for now, I share it with you as a reminder: Take care of yourself. The people you love and lead will thank you for it—and you’ll be better equipped to lead them well.
One Comment About Economics – The Throne Speech
Yesterday, King Charles III delivered the Throne Speech, Canada’s ceremonial kickoff to a new Parliament, in a predictable display of sovereignty. The full speech can be accessed here.
In short? A word salad of progressive platitudes and a rehash of Liberal election promises. Among them: a 1% personal tax cut for the lowest bracket and GST elimination on new homes for first-time buyers.
What was missing? A commitment to present a real budget soon and thus we’ll get no transparency about the fiscal mess we’re in and no credible plan to fix it.
Instead, the government trotted out the same vacuous phrase from the campaign: “spend less so Canadians can invest more.” I’ve written before about how hollow that is. It’s baffling that this recycled political language still convinces some Canadians. Let’s be clear: “Spending less to invest more” usually means more spending, more taxes, and more creative accounting.
The speech also claimed:
“Day-to-day government spending – the government’s operating budget – has been growing by nine percent every year. The Government will introduce measures to bring it below two percent… The Government will balance its operating budget over the next three years…”
Sounds nice. But separating “operating” from “capital” spending is an old trick. I’ve called it out before—it’s a deceptive move that hides real deficits and confuses the public. Sure, I welcome cuts to waste and the bloated civil service. But government finances should be transparent. Not massaged.
I have zero interest in hearing that the “operating budget” will be balanced. I care about overall balance. So should you.
Bonus Comment – Quote From Roman Emperor (A.D. 161-180) / Philosopher – Marcus Aurelius – About Being Grateful For Being Alive
“When you arise in the morning, think of what a precious privilege it is to be alive—to breathe, to think, to enjoy, to love.”
Absolutely agree!
Hope you enjoyed this edition of 1-1-1. If you’re not already part of the In the Mood Network, now’s the time. Please sign-up today. Whether it’s through consulting, coaching, speaking, or writing, my work is about planting acorns: deliberate, principled actions that challenge the status quo and grow into something far bigger. The goal? Bold reform. Stronger foundations. And a country that values hard work and common sense.
