How the US election could affect Canadian tax and trade

Canada’s Digital Services Tax (DST) was enacted in June 2024 and is viewed to target large US-headquartered technology companies. The US is already challenging this measure under the Canada-United States-Mexico Agreement (CUSMA) and could impose further tariffs against Canadian companies. The possibility of US tariffs may, therefore, impact the Canadian government’s commitment to the DST.

A reduction to the corporate tax rate for US domestic manufacturing to 15% could negatively impact Canadian companies and push them to move production into the US from Canada. The Canadian government has previously implemented tax policy changes in response to legislative changes south of the border. Canada’s clean economy tax credits are often considered a response to the US Inflation Reduction Act. It’s unclear whether Canada would try to compete with a rate reduction by introducing a similar reduced corporate tax rate for domestic manufacturing.

The Trump administration and Republicans in the US Congress are expected to oppose the OECD’s two-pillar deal, particularly the reallocation of profits under Pillar One and the Undertaxed Profits Rule (UTPR) and treatment of tax incentives under Pillar Two. The US could impose measures against companies based in jurisdictions enforcing such taxes. Canada has already enacted the Global Minimum Tax Act to address the income inclusion rule and domestic minimum top-up tax in Pillar Two. However, the UTPR still remains in draft legislation. We don’t expect any material changes to Canada’s position on Pillar One and Pillar Two. But the evolving political landscape over the next several months will play a critical role in shaping the future of these tax policies.

US legislators are expected to debate changes to energy credits and incentives in the Inflation Reduction Act but appear unlikely to fully repeal and replace these measures. As a result, we expect that Canada will likely continue to focus on providing tax incentives to companies engaged in the clean economy transition.

President-elect Trump is likely to impose tariffs of 10% on goods from some countries and up to 60% on Chinese goods shortly after his inauguration. As an example, on November 25th, he announced a potential increase in tariffs to 25% on goods from Mexico and Canada unless there was improved security at their respective borders. Further, Trump’s proposed tariffs and trade policies are likely to significantly impact foreign-origin goods shipped from Canada to the US. While Canada may be exempt from these tariffs for products that qualify for duty-free status under the CUSMA, targeted tariffs on various Canadian goods could still be levied through executive orders. This includes orders under Section 232 of the US Trade Expansion Act, which allows the president to adjust imports, including by using tariffs, if excessive imports are deemed a threat to US national security. If the US imposes such tariffs on Canada, the two countries would enter a 60-day negotiation period to find an appropriate resolution.

Stricter customs regulations and more rigorous enforcement measures at the US-Canada border could lead to delays and increased compliance costs for cross-border trade. Businesses may need to re-evaluate their supply chains, find alternative markets or suppliers and navigate varying regulatory requirements.

President-elect Trump may use his ability to terminate CUSMA as leverage to obtain concessions from Canada ahead of the 2026 renegotiation of the agreement. This would particularly impact Canada’s top non-resource exports to the US including vehicles, machinery, plastics, electrical equipment and aluminum products. Softwood lumber, steel, aluminum and dairy products have historically been contentious in US-Canada trade relations and are expected to remain focal points for the new administration.