A Spanner in the Works – Section 899

I was born in England, and as I was growing up, the tool used to tighten bolts wasn’t called a wrench, as our Canadian cousins know it. It was a spanner. The name comes from the German verb spannen, meaning to stretch, fasten, or connect.

But a “spanner (or wrench) in the works” is an idiom that refers to something that causes disruption or prevents plans from proceeding smoothly. A recent example is now impacting Canadians and other non-U.S. investors who hold assets in the United States. The latest U.S. budget, renamed by Trump supporters as the “Big Beautiful Bill,” includes a section called Section 899. It could carry serious tax consequences for foreign investors with U.S. holdings.

This budget, recently passed by the U.S. House of Representatives, is one of the most aggressive peacetime spending plans in American history. We raised related concerns about U.S. debt and deficits in a recent newsletter: Dead Cat Bounce or Real Recovery? Lessons from 1930. However, that article was written before Section 899 was passed by the US House of Representatives on May 22, 2025.

The U.S. Senate has not yet approved the bill, and several Republicans are pushing back against its projected deficit of nearly 7% of GDP. For comparison, Canada’s combined federal and provincial deficits are expected to reach about 3.5% of GDP in 2025 and 2026. Despite the resistance, it seems likely, in my opinion, that the tax measures in Section 899 will be approved.

What is Section 899 and why now?

As the images below explain, the U.S. is upset with countries that raise taxes on U.S. businesses through either a digital services tax (DST), diverted profits tax (DPT), or an undertaxed profits rule (UTPR). In Canada, we imposed our own DST in June of 2024 and proposed draft legislation with respect to UTPR in August of 2024.

Here is an explanation of both DST and UTPR as they apply to Canada.

As of now, there are approximately 38 countries that have implemented either a DST, UTPR, or DPT, or some combination of the three. This is important because Section 899 would apply only to residents of countries that have chosen to levy these types of taxes on U.S. persons, which the U.S. views as discriminatory. There are exceptions for certain U.S.-owned or controlled entities.

Interestingly, before Canada imposed DST, a number of organizations from within Canada expressed their objections to it and felt it was unreasonable or would invite retaliation.

Before we examine whether rescinding DST and UTPR would be an appropriate path to follow, we should consider how Section 899 would impact not only Canadian individual and corporate taxpayers but also the damage it could do to tax-exempt entities such as pension plans, registered assets and nontaxable foundations.

Since the image above was shown at our Strategic Insights event on May 29 in Vancouver, additional aspects of Section 899 have been clarified:

• It is likely that many debt instruments owned by foreigners will be treated as portfolio debt and therefore exempt from Section 899 taxes.
• Our tax advisors believe the Canada Revenue Agency will generally allow these new U.S. taxes to be claimed as a credit against Canadian taxes. However, there are exceptions—such as certain corporate scenarios where credits on dividend withholding taxes may not be permitted.
• Ultimately, the creditability of these taxes depends on each taxpayer’s specific situation. In some cases, the U.S. withholding tax could exceed the total Canadian tax otherwise payable.
• Early estimates suggest that total tax exposure could exceed 50% on certain types of income and gains.

As of now, we are working with our own tax advisors to bring clarity to outstanding issues related to Section 899.

This brings us to consider two courses of action.

Should we actively lobby the federal government to drop the current DST and the proposed UTPR, and therefore seek to ensure all Canadians-individuals, corporations, pension funds and foundations- are unimpacted by Section 899? Would we be caving in to intimidation from the United States, or besting the Donald at the "Art of the Deal"?

Can we mitigate and defend against the potential impacts of this legislation through portfolio design? Examples might include reducing taxable net rental income through depreciation, generating higher levels of portfolio interest returns and lower levels of taxable dividends, refinancing real estate assets, and focusing on long-term capital gains on public and private shares.

Early analysis is telling us that a significant portion of our U.S.-dollar assets will not be subject to Section 899.

Of course, one solution would be to sell all U.S.-based assets. This would likely work, but at a price:

It would trigger gains unnecessarily on both sides of the border.

It would remove access to a very deep, complex and sophisticated asset market for us in debt instruments, real estate, and private and public assets.

Before we recommend this scorched-earth approach to U.S. assets, let's first examine what could happen politically and through portfolio design.

We measure our strategic asset allocation models in terms of decades. In Charles Darwin's seminal work of 1869, The Origin of Species, he never used the phrase "survival of the fittest." What he did say is that survival belongs to those organisms best able to adapt to their environment.

Perhaps that is where we are now.