Staff Writer
A Perfect Storm for Canada
For many Canadians, 2025 started as a year to look forward to. Interest rates were expected to come down, inflation seemed to be under control, and the housing market was expected to rebound from months of sluggishness. Unfortunately, things have not played out as expected. Thanks to efforts south of the border, Canada and Canadians have been faced with some fundamentally difficult realities.
To put it frankly, Canada is under pressure.
For decades, our biggest trading partner and ally was the U.S., but today that relationship has been dealt a sever blow as Canada is faced with increasing pressure.
Earlier this year, the Trump administration made good on its promise of imposing Tariffs on countries with unfair trade policies. These were sold as reciprocal tariffs, and many believed a means to bring trade partners to the negotiation table. At the same time, a 25% tariff on most Canadian goods (10% on energy and potash) was imposed, threatening to choke off billions of dollars in trade. Now, this past week, the U.S. House of Representatives passed the “One, Big, Beautiful Bill,” a massive tax and spending package that is expected to hammer Canadian businesses and investors with steep tax hikes. Together, these moves are forcing Canada to decide: integrate more deeply with the U.S. economy or pivot to new markets and partners.
Let’s break it down simply to understand what’s happening, why Canada’s being targeted, and what it means for our future.
What’s in the “One, Big, Beautiful Bill”?
President Donald Trump’s bill is a bold, America-first plan to boost the U.S. economy, cut social programs, and push back against trading partners. Here are the major themes:
• Tax Cuts for Americans: It locks in the 2017 tax cuts, keeping rates low for individuals and businesses, doubles the standard deduction, and raises the child tax credit to $2,500 until 2028. It also eliminates taxes on tips and overtime and gives seniors a $4,000 deduction.
• Business Boosters: Companies get incentives like 100% bonus depreciation and an expanded small business deduction to spark investment and job growth.
• Spending Cuts: It slashes $625 billion from Medicaid, adds work requirements, and trims food stamps, saving over $1 trillion over a decade. Those savings fund border security, like wall construction and $10,000 bonuses for border agents.
• Targeting Canada: Section 899 goes after Canada’s 2024 Digital Services Tax (DST), which hits U.S. tech giants like Google and Amazon. It proposes raising withholding taxes on Canadian companies’ U.S. dividends from 5% to 50% and on individual investors’ U.S. securities from 15% to 50%, potentially costing Canadians $81 billion over seven years.
In sum, the bill aims to make America wealthier and tougher on allies seen as taking advantage—like Canada. But it’s risky: the bill is projected to add $3.3–$5.3 trillion to the U.S. deficit, banking on economic growth to cover the gap.
The bond market responded with sharp increases to the 5, 10, 20, and 30 year US Bond yields as the perception of risk increased. Rising yields spill over into increased borrowing costs with speculation of recession on the horizon.
Why Is Canada the Target?
Why is the U.S. focusing on Canada when countries like France or the UK have similar digital taxes? Here’s why we’re in the spotlight:
• We’re Vulnerable: Canada relies on the U.S. for 75% of its exports, unlike the EU’s broader markets. This gives the U.S. leverage to pressure us without major global fallout.
• DST Timing: Canada’s DST, launched in 2024, came later than others, annoying the U.S. during Trump’s protectionist push. It’s seen as a direct challenge to American tech companies.
• Political Strategy: Trump portrays Canada as exploiting U.S. trade and security (like NATO spending). Targeting us scores points with his voters and warns other allies to toe the line.
• Border Issues: The U.S. claims Canada’s border allows drugs and migrants, justifying tariffs. Our proximity and trade surplus make us an easy scapegoat.
Other allies like France face less pressure because their economies are less U.S.-reliant, and the EU’s size makes it a tougher target. Canada’s dependence makes us the perfect example for Trump’s tough-on-trade stance.
How Bad Will the Trade Hit Be?
If the bill passes the Senate as is and tariffs remain, Canada-U.S. goods trade—worth $1.15 trillion—could take a big hit. Here’s the estimate:
• Canadian Exports to the U.S.: Likely to drop 10–20%, or $71.5–$143 billion annually. Energy could fall 10–20% ($13–$26 billion), autos 20–40% ($11–$22 billion), and metals 20–40% ($3–$6 billion). Additionally, the bill’s tax hikes could worsen this by limiting investment in export industries, adding $5–$10 billion in losses.
• U.S. Exports to Canada: Canada’s counter-tariffs could cut U.S. exports by 10–25%, or $43–$108 billion, affecting consumer goods, steel, and autos.
• Total Trade Decline: Overall, goods trade could fall 10–15% ($115–$172 billion) in the best case, or 20–30% ($229–$344 billion) in the worst case, based on economic models from TD Economics and others.
Best Case vs. Worst Case
• Best Case: Canada negotiates to limit Section 899’s tax hikes to 10–15% and secures tariff relief through the USMCA. Canada’s $40 billion relief fund and new trade deals with Asia or Europe keep GDP growth at 1.5–2%. A recession could be avoided, but inflation remains with prices continuing to rise.
• Worst Case: The bill passes unchanged, tariffs persist, and Canada’s counter-tariffs escalate. Some estimates present trade falling by 20–30% ($229–$344 billion), GDP shrinks 2.6% ($78 billion), unemployment hits 7–8%, and a recession starts by mid-2026. What’s worse? Pension funds lose billions, and the Toronto Stock Exchange drops up to 10%.
Canada’s Big Choice: Integrate or Diversify?
All of that to say, is seems as though the American administration is pushing Canada into a crossroads and here are some of the decisions it has to make:
1. Tighter U.S. Integration:
• What It Means: Scrap the DST, align with U.S. tax and trade demands, and negotiate exemptions to ease tariffs and taxes. This could preserve some trade access, especially for USMCA-compliant goods.
• Upside: Keeps our $715 billion U.S. export market stable, avoiding immediate economic pain.
• Downside: Gives up control over our tax policies and ties us closer to an unpredictable U.S. agenda, risking future conflicts.
2. Pivot to New Partners:
• What It Means: Boost trade with Europe, Asia, or Latin America, focusing on energy, minerals, and autos. Shift investments from U.S. markets to places like the EU or Japan.
• Upside: Builds a stronger, more independent economy, less vulnerable to U.S. whims.
• Downside: No market matches the U.S.’s size or proximity. New trade deals take time, and investment shifts could mean lower returns for pensions and savings.
What Can Canadians Do?
We’re not helpless. Here’s how we can respond:
• Government: Push for USMCA talks to reduce tariffs and limit tax hikes. Consider tweaking the DST to calm tensions, but protect our sovereignty. Expand support for sectors like autos ($2 billion fund already in place) and invest in trade infrastructure for Asia and Europe.
• Businesses: Seek new markets—Asia for energy, Europe for autos. Source more from Canada or Mexico to avoid U.S. tariffs. Protect against a stronger U.S. dollar, which could raise import costs.
• Investors: Cut back on U.S. stocks and bonds to dodge tax hikes. Look at Canadian or European investments for safer returns. Check https://waysandmeans.house.gov for updates on the bill’s Senate progress.
• Everyday Canadians: Expect higher prices for U.S. goods like groceries or electronics. Support local businesses and urge the government to act through groups like the Canadian Chamber of Commerce.
The Short Position
Sometimes external forces and pressure are necessary to see internal progress. Pressures from the U.S. administration have renewed the vigor of Canadians to develop stronger ties within the country and remove trade barriers. But more needs to be done. The U.S. is using Canada’s reliance to force compliance, picking us over other allies because we’re an easier target. The direction we choose will have a lasting impact on generations to come.
Sources:
• The Globe and Mail, “Trump’s new bill threatens major tax increases for Canadian companies”
• Wealth Professional, “Trump’s new bill builds a bigger tax burden for Canadian portfolios”
• Beaconhill, “Understanding Section 899: How the New U.S. Tax Bill Could Impact Canadians”
• The Globe and Mail, “Canadian business groups press Ottawa on digital tax as U.S. bill targets investors”
• BMO ETFs, “What Section 899 of the ‘One, Big, Beautiful Bill’ Means”
• PBS NewsHour, “House Republicans narrowly passed Trump’s ‘big, beautiful’ bill”
• The White House, “WHAT THEY ARE SAYING: Pass the One, Big, Beautiful Bill”