Tax Insights: US to impose reciprocal tariffs ─ How will it affect Canadian businesses?

February 18, 2025

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Issue 2025-09

In brief

What happened?

On February 13, 2025, US President Donald Trump signed a memorandum¹ ordering the development of a comprehensive plan for reciprocal tariffs to restore fairness in US trade relationships and counter non‑reciprocal trading arrangements. The US intends to examine all non-reciprocal trade relationships and perceived unfair trade practices with its trading partners, including Canada, and determine the equivalent of a reciprocal tariff for each foreign trading partner. The US plans to implement new tariffs on a country‑by‑country basis to rebalance international trade on what it perceives to be unfair trade relations. The memorandum does not specify a date for these tariffs, but does provide a timeline for the examination, recommendations and fiscal impact assessments.

Why is it relevant?

Canada imposes various tariffs on goods imported from the United States. Under the Most Favoured Nation (MFN) tariff, standard tariffs apply to goods from the US and other World Trade Organization members. Many agricultural products have zero tariffs under MFN, but the average duty rate is 6.5% on goods imported into Canada. This average includes a range of products, with some having zero tariffs and others, particularly in the agricultural and dairy sectors, having higher rates. If goods qualify under the Canada-United States-Mexico Agreement (CUSMA), the duty rate is reduced to zero. Due to CUSMA, tariffs imposed by Canada on US goods are generally similar to those imposed by the US on Canadian goods, with certain exceptions (e.g. dairy products, which are not duty-free under CUSMA). Therefore, US reciprocal tariffs aimed at restoring fairness in trade relationships are not expected to significantly affect Canada in respect of tangible goods.

However, the accompanying fact sheet² to the memorandum specifically mentions Canada’s recently enacted Digital Services Tax (DST) as an unfair trade practice (i.e. the US views this as a breach of the CUSMA and has previously threatened to impose retaliatory tariffs on other countries with similar taxation rules). In addition, a US executive order that was signed on inauguration day had signalled that the Trump administration is unwilling to support extraterritorial or discriminatory taxes levied on US companies. Accordingly, the US might consider measures against Canada to counter the DST using tariffs or, as discussed below, under section 891 of the US Internal Revenue Code (IRC), which could negatively affect Canadian companies and executives that operate in the United States.

Actions to consider

While awaiting the results of the investigations and reports, Canadian businesses and their US‑based Canadian executives should evaluate the impact of these potential actions by the US on their tax profile. Taxpayers should monitor ongoing developments and conduct scenario planning to prepare for changes.

In detail

US orders examination on the use of reciprocal tariffs

The February 13, 2025 memorandum introduces the “Fair and Reciprocal Plan” and orders an examination on the use of reciprocal tariffs on imports from countries that apply tariffs or other unfair barriers on similar US exports. All non-reciprocal trade relationships with trading partners will be examined, including:

tariffs imposed on US products
unfair, discriminatory or extraterritorial taxes imposed by US trading partners, including a value‑added tax
costs arising from non-tariff barriers or measures and unfair or harmful acts, policies or practices, including subsidies, and burdensome regulatory requirements on US businesses operating in other countries
policies and practices that cause exchange rates to deviate from their market value, wage suppression and other mercantilist policies
any other practice that imposes any unfair limitation on market access or any structural impediment to fair competition with the US market economy

The Commerce Secretary and the US Trade Representative, in consultation with other relevant officials, will conduct this examination and propose remedies, and the Director of the Office of Management and Budget will assess the fiscal impacts of the plan within 180 days. The plan does not include a specific date for implementing the reciprocal tariffs. This plan follows executive orders signed on:

February 1, 2025 that was to impose, starting February 4, 2025, a 25% tariff on imported goods from Canada and Mexico (except that the rate on Canadian‑origin energy products is 10%); these orders were delayed temporarily for 30 days
February 10 and 11, 2025 that will impose, starting March 12, 2025, a 25% tariff on imports of steel and aluminum products from all countries, including Canada³

Section 891 of the US IRC

Background

On January 20, 2025, US President Trump signed an executive order⁴ that directed the relevant US government agencies to undertake reviews and propose recommendations on a broad range of trade issues (e.g. tariffs, trade deficits, economic security). One specific clause in the order asked the Treasury Secretary to “investigate whether any foreign country subjects United States citizens or corporations to discriminatory or extraterritorial taxes pursuant to section 891” of the US IRC, and to deliver a report of its findings by April 1, 2025.

What is section 891 of the US IRC?

Section 891 states that when a “President finds that, under the laws of any foreign country, citizens or corporations of the United States are being subjected to discriminatory or extraterritorial taxes,” certain tax rates can “be doubled in the case of each citizen and corporation of such foreign country.”

The potential application of section 891 could allow President Trump to double taxes on Canadian companies operating (and Canadian executives working) in the United States as a retaliatory measure against Canada’s DST (or any other taxes that the US considers discriminatory, such as certain aspects of the UTPR⁵ imposed under the Organisation for Economic Co-operation and Development’s [OECD] Pillar Two project).

What is Canada’s DST?

The DST is a 3% tax on Canadian‑sourced in‑scope digital services revenues earned by large domestic and foreign taxpayers (which includes many multinational enterprises [MNEs]). The DST is part of a complex set of international tax rules and was created to ensure that the Canadian‑source revenue earned by large corporations that may not have a physical presence in Canada, but have a significant economic presence, is subject to taxation in Canada. The DST became effective in the 2024 calendar year, but is retroactive to January 1, 2022, and is intended to apply only until an acceptable multilateral approach is implemented by members of the OECD/G‑20.

What taxpayers are subject to Canada’s DST?

Taxpayers are subject to the DST in a particular year if they meet both of the following revenue thresholds (to be calculated on a consolidated group basis):

global revenue from all sources of €750 million or more in a fiscal year of the group that ends in the previous calendar year
Canadian digital services revenue of more than CAD$20 million in the particular calendar year

The 3% tax is to be levied on the amount by which Canadian digital services revenue for the particular calendar year exceeds CAD$20 million (which is prorated among consolidated group members).

What are in‑scope Canadian digital services revenues?

In‑scope revenues are generally comprised of Canadian-source digital services revenue arising from:

online marketplace services
online advertising services
social media services
the sale or licensing of user data obtained from an online marketplace, a social media platform or an online search engine

For more information, see our Tax Insights “Canada’s Digital Services Tax Act is now law: What is next and how can you prepare?Opens in a new window” (July 5, 2024 update).

The takeaway

The US’s examination of its trading relationship with Canada could potentially highlight several issues that it views as unfair trade practices or discriminatory against US companies, the most notable being Canada’s DST. Because the DST is expected to apply disproportionately to businesses operating in Canada that are US‑based MNEs (relative to domestic Canadian companies and other foreign MNEs), the US could view the DST as discriminatory against US companies and potentially apply both retaliatory tariffs and section 891 of the US IRC. Any response by the US using reciprocal tariffs or the doubling of tax under section 891 would be extremely punitive to Canadian businesses, especially Canadian companies (and their executives) operating in the United States. These businesses and their executives should monitor ongoing developments, understand their potential exposure and start scenario planning to have better awareness of possible end results.

PwC can help your business navigate this current tariff situation. See our: