Canada should reconsider to avoid retaliation, experts say
Section 891 states that when a president finds such discrimination, the tax rates should “be doubled in the case of each citizen and corporation of such foreign country.” Trump’s memo calls for his officials to deliver a report to him on these “discriminatory” and “extraterritorial taxes” by April 1.
Canada’s controversial digital services tax (DST), which came into effect last year, imposes a three per cent tax on digital service providers with revenue exceeding $20 million. Eighteen other countries have similar tax laws, but Canada’s DST was met with dissent from both American and Canadian politicians and trade experts.
Matthew Kronby, partner, competition, trade and foreign investment, and Patrick Marley, partner, tax at Osler, Hoskin & Harcourt LLP, said in an email to Financial Post that there is “more than a theoretical chance” Trump could use Section 891 in response to Canada’s DST.
Kronby and Marley wrote that the Biden administration clearly considered the DSTdiscriminatory against American companies, noting that last August, the U.S. had requested dispute settlement consultations with Canada under the Canada-United States-Mexico Agreement (CUSMA) on that basis.
“There’s no reason to think that the Trump administration takes a different view nor — as the Jan. 20 America First trade policy memo reflects and the actions of the first Trump administration demonstrated — that it would refrain from acting unilaterally rather than using the dispute settlement mechanism available in the CUSMA,” they said.
The UTPR was proposed as part of Canada’s adoption of the OECD’s Pillar Two framework, which is aimed at ensuring large multinational corporations pay a minimum level of tax in all jurisdictions in which they operate.
Warner said it’s important to take Trump’s bluster with a grain of salt, especially since Section 891 has never been used — but not to ignore the potential of some very real consequences.
Warner believes Trump is using Section 891 to show Canada that the U.S. can go beyond 25 per cent tariffs to hurt Canadian businesses.
“The threat of Section 891 is a way of bringing the parties to the table to either negotiate a better agreement or to not overreact if he does use Section 301 and everybody will breathe a collective sigh of relief that he just imposed tariffs.”
Warner thinks this is not an imminent problem and that Trump could also face legal or constitutional challenges about the propriety of using Section 891 in such a context.
Tariq Nasir, a partner with Ernst & Young’s indirect tax group, said his clients aren’t as concerned with the possibility of double taxes right now because the threat of 25 per cent tariffs being imposed in February feels much more immediate and detrimental to their businesses.
Still, the potential impact to Canadian businesses that are based in the U.S. would certainly be adverse.
Warner pointed to banks being more vulnerable, since it would be harder for these institutions to distance themselves from their Canadian parents, compared to, say, a tech company.
“Canadian consumers and businesses will continue to pay a heavy price for the federal government’s inaction,” Brandon-Jepp said, adding that Ottawa needs to “remove these irritants now and focus on providing certainty and clarity to businesses at home.”
Kronby and Marley felt Canada should reconsider its approach to the DST, particularly the retroactivity of the tax back to 2022.
“It would be more constructive to negotiate an acceptable outcome with the U.S. in a manner that better aligns with international norms,” they wrote.
The Osler partners also said Canada should pause the implementation of the global minimum tax (and the UTPR in particular) until the U.S. adopts the rules as well. They felt this tax would reduce the competitiveness of Canadian based multinational enterprises, especially compared to those based in the U.S..
Warner, too, cautioned that Canada needs to be careful in how it responds.
He believes the first step is to get rid of the DST to avoid the threat of doubled taxes on Canadian businesses and individuals situated in the U.S., and to avoid the retaliation route.
“The further this tit-for-tat retaliation game plays (out) with Canada … (it’s) ultimately a game that Canada will lose,” Warner said.