The One Big Beautiful Bill Act that passed in the U.S. House of Representatives on July 3, 2025 did not include the proposed Section 899 Internal Revenue Code, which would have operated by increasing tax rates on U.S. source payments to Canadian resident companies, trusts, and individuals unless Canada removed the Pillar Two -Undertaxed Profits Rule ("UTPR") and digital services tax ("DST").
Section 899 proposed to increase withholding taxes on dividends, rents interest and royalties, income taxes on U.S. effectively connected income and tax on dispositions and distributions involving U.S. real property interests by 5% per year beginning in 2027. More details regarding the withholding tax aspects of the Section 899 proposal can be found in our analysis.
On June 28, 2025, The G7 members issued a joint statement to remove Section 899 from the Bill in exchange for members excluding U.S. headed groups from key aspects of Pillar Two.
In addition, on June 30th, the Canadian Department of Finance announced that it would rescind its DST and halt the June 30th, 2025 collection with a view to allowing parallel Canada-U.S. trade negotiations to proceed towards reaching a deal by July 21, 2025.
OECD BEPS Pillar Two and the UTPR
BEPS Pillar Two or "global minimum tax" is a tax regime agreed between the OECD Inclusive Framework to ensure that in-scope multinational enterprises ("MNEs") pay a minimum rate of corporate income tax. The regime applies to MNE groups with annual consolidated revenue of €750M or above.
Entities in an in-scope group must calculate their income and tax under special Pillar Two rules. Top-up taxes are usually payable if the effective tax rate (tax divided by income) for a jurisdiction is less than 15%.
There are three possible ways in which the top-up tax amount might be collected, one of which is to impose tax on a group entity tax resident in a jurisdiction where tangible assets and / or employees are located under the UTPR. The UTPR applies where the home country of the MNE does not apply Pillar Two, as is the case in the U.S., and considers the entire MNE group's tax even if only a subsidiary is located in a low-tax jurisdiction. Many countries, including Canada, had elected to apply the UTPR rule for financial years commencing on or after 31 December 2024.
The G7 members have agreed to a "side-by-side system" whereby the U.S. tax system (in particular, the global intangible low-taxed income regime ("GILTI)") will sit alongside Pillar Two rules. The statement sets out the following agreed features of the side-by-side system:
- U.S. parented groups would be fully excluded from the UTPR and the IIR in respect of both their domestic and foreign profits.
- A commitment to ensure any substantial risks that may be identified with respect to the level playing field, or risks of base erosion and profit shifting, are addressed.
- Consideration of changes to the Pillar Two treatment of substance-based non-refundable tax credits to ensure greater alignment with the treatment of refundable tax credits.
- Work on the side-by-side system would be undertaken alongside simplifications being delivered to the overall Pillar Two administration and compliance framework.
An open question is how a side-by-side system would apply to U.S. companies in non-U.S. headed groups where those U.S. companies own controlled foreign corporations ("CFCs"). It is unclear whether GILTI and Pillar Two would apply simultaneously in this scenario.
The Canadian Digital Services Tax
The Canadian DST imposed a 3% tax on Canadian-sourced revenues exceeding CAD 20M, derived from four principal categories:
- Online marketplaces, specifically fees earned by marketplace providers
- Digital advertising, encompassing revenues both from hosting advertisements and from facilitating their placement
- Social media services, including subscription fees for access to premium content and charges for premium services
- User data, referring to the sale or licensing of data collected from users of an online interface
As is the case of Pillar Two, the DST applies to MNE groups with annual consolidated revenue of €750M or above.
Notably, as a gross-revenue tax, the DST is levied irrespective of the MNE group's profit margins or whether the group is operating at a loss. The tax has been in effect since January 1, 2022, with remittance for the years 2022, 2023, and 2024 originally due by June 30, 2025.
The Canadian DSTs was meant to be a stop-gap measure aimed at encouraging international consensus on Pillar One of the Inclusive Framework. Consensus was not reached, and a number of other countries, including France and the U.K. also implemented domestic DSTs and, unlike Canada, have collected payments under those regimes.
More details on the Canadian DST as originally announced can be found here.
Although the Canadian Government has halted collection and the Canada Revenue Agency ("CRA") has waived the requirement for returns, the CRA has announced that it will not refund any anticipatory payments under the DST until Parliament passes the repeal legislation formally revoking the tax. The earliest that could happen is September 15, 2025 when the Parliament is scheduled to return.
What does this mean for affected businesses?
With respect to Pillar Two, the joint statement issued by the G7 countries is non-binding and will need to be approved by other members of the OECD Inclusive Framework. At the same time, further details of how the "side-by-side system" will work and the exemption for U.S. headed groups must be spelled out.
More broadly, many Canadian businesses and investors would have been affected by the tax proposals in Section 899. Particularly at risk were technology and life sciences companies that earned royalties revenues from U.S. sources. The broad impact of the rules on Canadians selling digital and physical goods and services to the U.S., operating in the US, lending or leasing to the U.S. or investing in U.S. real estate should not be under-estimated.
Although these proposals have been withdrawn, their introduction shows the willingness of the U.S. Government to challenge the application of long-existing tax treaties. This remains a good time to review and, where appropriate, renegotiate contracts with U.S. customers to incorporate gross-up clauses or other mechanisms to allocate the risk of any future increases to withholding taxes and to consider whether it is necessary to create U.S.-tax nexus.
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