Dividend disaster? Maybe not.

AP Photo/David Dermer) (David Dermer/AP

   By Guest Blogger Ryan Lewenza

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If US tariffs weren’t enough for Canadians to stress over, now Canadian investors need to worry about their US investments, and specifically the taxes around their American dividend income.

In the US tax bill that was just passed in the House called the One, Big, Beautiful Bill, it included a new section that will potentially increase withholding taxes on US dividend income for Canadian investors.

Currently, in non-registered cash accounts, Canadian investors incur a 15% withholding tax on all US dividend income. So, if you receive $100 in US dividend income, you only get to keep $85. The proposed tax bill would see the withholding tax rate increase from 15% to 20% effective January 1, 2026, and then increase 5% per year to a max of 50%. Thankfully, it looks like interest income from US bond investments will be excluded, with the focus on US dividends.

If the bill is passed this will reduce dividend income and overall returns for Canadian investors. For example, if you hold US stocks with a 2% dividend yield, your total return will be reduced by 0.1% in the first year, and by 0.7% annually once fully in place. While not a huge hit, the increase in withholding tax rates will still eat into dividend income that many investors rely on, and it will be a drag on portfolio returns over the long run.

New tax hit is retailiation for Canada’s digital levy

The US government is saying this is in retaliation against unfair ‘discriminatory’ taxes against US companies. An example of this in Canada is the recently implemented digital service taxes (DST) where Canada now charges large technology companies like Facebook a 3% annual tax.

This potential increase in withholding tax is clearly negative for Canadian investors but there are some important considerations.

First, the bill still needs to be passed by the Senate and signed into law by President Trump so it’s not a 100% done deal. Some US senators are opposing the ‘One, Big, Beautiful Bill’, which is estimated to add another US$3.7 trillion to the national debt, and they could tank or demand major changes to the bill.

Second, I suspect this would be addressed in the upcoming renegotiation of the USMCA free trade agreement. Prime Minister Carney wants to get moving on this renegotiation and they could work out a deal. Maybe Carney scraps the DST in exchange to keep the withholding tax at the 15%?

Third, this is only applicable to non-registered accounts. So, any dividends received from US investments in registered accounts like RSPs are not impacted.

Source: Wealthy Retirement

Fourth, dividend yields on US markets like the S&P 500 are fairly low these days, with most of the gains coming from price return. For example, the dividend yield for the S&P 500 is only around 1% these days. Same with small cap stocks at 1%. So, if this ends up getting passed, the hit to Canadian investors would be minimal given: 1) the lower dividend yields from US stocks; and 2) withholding taxes only impact holdings in non-registered accounts.

For dividend investments we focus more in Canada, where dividend yields are higher and we get the dividend tax credit. We currently hold a Canadian dividend ETF in our portfolio which yields an impressive 4.7%.

Overall, this proposed increase could be a negative for Canadian investors, but we’ll have to wait to see what actually gets implemented. And, as discussed above. the financial impact will be relatively minimal given the lower yields of the US markets. We focus our dividend exposure on the Canadian markets and look at the US more for long-term growth.

Ryan Lewenza, CFA, CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Investment Advisor, Private Client Group, of Raymond James Ltd.

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About the picture: US president Donald Trump appearing before steel workers in Pennsylvania late last week. In his speech he announced a doubling of impport tariffs on steel, from 25% to 50%. effective Wednesady. This is more devastating news for the Canadian industry.

Source: https://www.greaterfool.ca/2025/06/02/dividend-disaster-maybe-not/