‘The whole point here is to force Canada to cave on the taxes that the US thinks are discriminatory’, says cross-border tax lawyer
US President Donald Trump’s proposed “One, Big, Beautiful Bill” promises to boost the US economy, according to the White House administration. For pensions, and indeed, the Canadian economy, however, things won’t be all that beautiful.
As Max Reed explains, the legislation, if passed, could upend decades of planning for Canadian investors with exposure to US markets.
Reed laid out the foundation of Donald Trump’s proposed tax bill with clear concern over its long-term implications, particularly for countries like Canada. The legislation - already passed in one chamber of Congress but not yet through the Senate – would essentially authorize Trump to identify and retaliate against nations that impose so-called “discriminatory taxes” on American companies.
Chief among these is Canada’s digital services taxes (DSTs) introduced a few years ago. The measure targets tech giants such as Meta, Google, and Netflix that generate ad and subscription revenue in Canada without paying equivalent taxes on that income.
“This is what Trump, and the Americans are unhappy about,” underscored Reed, cross-border tax lawyer and founder of Polaris Tax Counsel. “What they have done is they have said, ‘If you’re a country that has a tax we consider discriminatory, we are essentially going to increase the US tax that residents of your country pay on all sorts of US investments. ‘Tax the foreigners’ is an easy sell because the bill includes basically no other provisions to actually raise revenue to offset the proposed massive tax cuts.”
That tax hike would apply incrementally, 5 per cent annually starting from zero and over time could reach as high as 50 per cent, explained Reed. This marks a sharp departure from the current regime, where most Canadian pensions and institutional investors pay no US tax on portfolio income.
He pointed to a lesser known but critical component of Trump’s proposed tax bill: the implications it could have on governmental entities like the Canada Pension Plan. Under the current rules, such entities benefit from tax exemptions on certain types of US income. But that could change dramatically if Canada is designated as having "discriminatory" tax policies.
“They’re going to turn off the tax exemption from governmental entities also,” Reed said. This means that entities which previously paid no US income tax could find themselves subject to the full rate, depending on their classification.
He was clear that pensions wouldn’t be spared either. “Pensions are not exempt,” he said, underscoring that their US tax exposure could also escalate by 5 per cent annually if the bill passes and targets Canada. This would represent a significant cost increase for major Canadian institutional investors.
This begs the question as to whether pensions and institutional investors should shift allocation away from US. It’s an all too familiar story, notably how investors are already weighing investment decisions around Trump’s tariffs to Canada.
While Reed believes the proposed tax changes could lead to significantly higher US tax bills for Canadian pensions and institutional investors, he’s quick to note that several hurdles still stand in the way, pointing to three conditions must be met: the bill must clear the US Senate and be signed into law, Canada must be officially designated as a country with discriminatory taxes, and Canada must refuse to withdraw those policies.
“The whole point here is to force Canada to cave on the taxes that the US thinks are discriminatory,” Reed explained. “If Canada caves, then this tax doesn’t apply.”
For now, Reed cautions against making any drastic investment shifts, urging investors to hold steady.
“We’re early days, it’s way too speculative to do anything right now,” he said. But if the tax becomes reality, the cost differential could start driving portfolio decisions.
“If you're paying 10 per cent tax on a US government bond but you pay no tax on a UK government bond, presumably you will favor the UK government bond,” he noted. “In reality, I don’t think people are going to exit the US stock market just because of this. That seems crazy.”
Reed doesn’t expect Trump’s tax plan to produce immediate backlash from investors. In his view, any fallout will unfold slowly, because of how taxes operate and how investment decisions are made, noting that “tax moves slowly,” and emphasized that market reactions won’t be swift or sweeping.
“No one is going to unload their positions in Nvidia all at once, just because the dividends have some tax attached to them,” he added.
Instead, Reed sees the greatest potential impact in areas with higher tax sensitivity - particularly private investments and real estate. These sectors, he explained, face a starker shift in after-tax returns.
“The tax delta between zero and paying a lot is significant,” he noted, suggesting that investors are more likely to adjust exposure in those asset classes than in public equities.
What brings the most uncertainty for Reed is how Canada or any other targeted country will react.
“Is Canada going to say, ‘OK, fine, we’ll get rid of the DST,’ or is Canada going to do something similar to what they did with the tariffs, which is like, ‘If you want to break the treaty, we are also going to break the treaty," he noted.
That uncertainty is the thread running through the entire discussion. However, Reed also sees it as a key reason not to make knee-jerk investment shifts.
“We still have some time,” said Reed. “This is probably a 2026 issue.”
