Section 899: What Canadian Businesses with U.S. Ties Need to Know

In response to Canada’s proposed Digital Services Tax (DST) and global efforts like the Undertaxed Profits Rule (UTPR), the U.S. is considering a countermeasure: Section 899.

This proposed section of the Internal Revenue Code would allow the U.S. to raise taxes on foreign companies from countries that impose what it sees as discriminatory taxes on U.S. businesses. 

Canada, currently moving forward with its DST retroactive to 2022, is squarely in the crosshairs. While Section 899 hasn’t been enacted yet, it signals a new era of retaliatory tax policies. 

For Canadian businesses with any U.S. exposure, that could mean double taxation, compliance headaches, and costly restructuring down the line.

Let’s delve into Section 899, why it’s being proposed, and, most importantly, what Canadian businesses can do now to stay ahead of the curve.

What Is Section 899? Why Was It Proposed?

Section 899 is a new U.S. tax rule being proposed to counter other countries, like Canada, that are taxing American companies in ways the U.S. sees as unfair.

Here’s the simple version:

If your Canadian business earns money in the U.S., you could end up paying higher U.S. taxes if Section 899 becomes law.

Why now? Countries around the world, Canada included, are introducing new taxes on digital services and large global businesses. 

The U.S. feels these taxes primarily target American tech giants like Google, Meta, and Amazon. 

So now, the U.S. wants the power to “return the favor” by taxing foreign companies that do business in the U.S.

What’s the Trigger?

• Canada’s Digital Services Tax (DST) applies to tech and digital companies, even if they are not physically in Canada.

• The OECD’s global tax rules (like the UTPR) are meant to prevent big companies from avoiding taxes altogether.

• However, the U.S. disagrees with how these rules are being rolled out, especially if its own companies are hit first.

Section 899 is the U.S. government’s way of saying, “If you tax our companies, we’ll tax yours too.”

Bottom line? If your business is based in Canada but earns revenue from the U.S., Section 899 could affect your tax bill. Even if it’s not the law yet, it’s a wake-up call to get prepared.

The Digital Services Tax and UTPR: Canada’s Role in the Retaliation

Canada’s Digital Services Tax (DST) is a 3% tax on revenues from digital services earned in Canada. 

It mainly targets big, foreign-owned tech companies that make money from Canadian users, even if they don’t have a physical presence in Canada that are mostly american.

In addition, the Undertaxed Profits Rule (UTPR) is part of the OECD’s Pillar Two global tax reform. Its goal is to stop multinational corporations from shifting profits to low-tax countries. 

Under the UTPR, if a company doesn’t pay at least 15% in tax somewhere, other countries can step in and collect the difference.

Canada plans to implement this too, but again, the U.S. feels it places disproportionate pressure on American companies, many of which already follow different tax rules.

From the U.S. perspective, Canada (and other countries) are introducing taxes that hit American companies hardest, without waiting for global coordination. 

The OECD tried to build a global agreement, but delays and disagreements have led countries like Canada to act alone.

How Section 899 Could Affect Canadian Businesses

If Section 899 becomes law, it could create a ripple effect for thousands of Canadian companies doing business in the U.S. 

This proposed law would target Canadian businesses earning U.S. income. In short, your tax bill could go up, and so could your compliance burden. 

• Double taxation: Income could be taxed in both countries with fewer credits or relief.

• Compliance overload: More paperwork, filings, and legal fees.

• Business restructuring: You might need to rethink how your U.S. operations are set up.

Let’s break down what that could look like in real life:

Example 1: A Canadian SaaS Startup Selling to U.S. Customers

You sell software to U.S. customers through your website. Even though you don’t have a physical office in the U.S..

Section 899 could classify your income differently, possibly leading to double taxation or more aggressive tax treatment.

Example 2: Canadian Holding Company with U.S. Real Estate

Your company owns a few rental properties in Florida. Under normal circumstances, your tax obligations are split between the U.S. and Canada per treaty terms. 

But Section 899 may strip those protections, leading to higher U.S. taxes and more complex filings.

Example 3: E-Commerce Business with U.S. Warehouses

If you fulfill U.S. orders through an Amazon FBA warehouse in Texas, Section 899 applies. 

This means your operation is treated as more “U.S.-based” than before, increasing your exposure to U.S. taxes and triggering additional reporting requirements.

Basically, if you have U.S. customers, property, or operations, Section 899 could change the rules overnight. 

Now’s the time to review your structure and stay proactive before the IRS comes knocking.

Preparing for Impact: Action Steps for Canadian Entities

Section 899 isn’t law yet, but waiting for it to pass could leave your business scrambling. If you’re Canadian business owner, start asking yourself these 5 questions right now:

• Do I earn income from U.S. customers or assets?

• Is my business relying on the U.S.-Canada tax treaty to reduce taxes?

• Have I filed all required U.S. forms (5472, 1120, etc.)?

• Do I know how Section 899 could impact my structure?

• Am I working with a partner that understands cross-border compliance?

If you’ve answered yes to any of the questions above, now is the time to get ahead, not fall behind. 

Even if Section 899 never becomes law, the questions it raises are the right ones to ask today.

Here’s how you can start preparing confidently with doola:

Near-Term: Stay Informed and Watch for Updates

• Monitor legislation: Section 899 is still a proposal. Follow U.S. Treasury updates or work with an expert who does.

• Talk to a tax advisor: Especially one with U.S.-Canada cross-border experience.

• Identify your U.S. exposure: Sales, assets, warehouses, customers, map out how much of your business touches the U.S.

💡 How doola helps: Our team stays ahead of U.S. compliance developments and can flag risk areas for founders early.

Mid-Term: Review and Optimize Your Current Structure

• Assess your entity setup: Are you using a Canadian parent? U.S. LLC? Pass-through structure?

• Analyze your tax risk: Would Section 899 reclassify your income or remove treaty protections?

• Audit your compliance: Ensure U.S. filings (like 5472, 1120, state taxes) are accurate and up to date.

💡 How doola helps: We offer full U.S. compliance support from bookkeeping, tax filings to registered agent services.

Long-Term: Build Flexibility Into Future Plans

• Plan for restructuring: If Section 899 passes, you may need to adapt. Forming new U.S. entities or changing ownership layers could be necessary.

• Reconsider market strategy: Does it make sense to expand U.S. operations or diversify into friendlier markets?

• Future-proof your formation: Set up your next U.S. entity with tax and treaty changes in mind.

💡 How doola helps: Our Business-in-a-Box™ platform makes it easy to form, manage, and restructure U.S. entities, with global founders in mind.

How Section 899 May Override the Canada–U.S. Tax Treaty

Treaties aren’t bulletproof. And if Section 899 passes, it could override key protections that Canadian entities currently rely on.

Tax treaties are designed to prevent double taxation and encourage cross-border trade. But U.S. Congress can pass new tax rules that take precedence over older treaties.

Section 899 is just that: a retaliatory tool. It explicitly aims to counteract what the U.S. sees as unfair tax targeting from countries like Canada (due to the DST and UTPR). 

That gives lawmakers grounds to bypass treaty provisions. It may reclassify income, deny deductions, or change how U.S. taxes apply regardless of what the treaty says.

Now is the time to revisit your structure and compliance strategy. And if you’re not sure where to begin, sign up (for free) today at doola!

Looking Ahead: Planning for Uncertainty

Section 899 isn’t law yet but waiting until it is could cost you. For Canadian founders with U.S. exposure, now is the time to scenario-plan. Once new rules kick in, you could face:

• Higher U.S. tax bills

• Reduced treaty protections

• More paperwork and penalties for getting it wrong

And restructuring after the fact will be expensive, messy, and time-consuming. That’s why smart founders have already started thinking about an alternative plan.

You don’t need to overhaul everything today but you do need to know your options:

• Exploring alternative entity structures (like U.S. C-Corps vs. Canadian LPs)

• Considering tax-friendly U.S. states (like Wyoming or Delaware)

• Separating IP or service operations into new legal entities

• Working with cross-border advisors to build flexibility into their setup

Why Work With doola for Business Formation & Compliance

With changes on the horizon, now’s the time to review your setup and reduce risk before it’s too late.

Tax rules are tightening. Structures that worked yesterday may not work tomorrow. That’s where doola can be your ideal partner in these uncertain times.

We can help you build, manage, and adapt their U.S. presence without the stress of doing it alone. Our team can guide you through:

✅ U.S. entity formation (LLC or C-Corp)

✅ EIN acquisition and bank account setup

✅ Annual compliance and registered agent services

✅ Bookkeeping and tax prep

✅ Sales tax and multi-state reporting guidance

No complex paperwork. No chasing down advisors. Just one point of contact, one all-in-one platform built for international founders.

Sign up with us today and get your cross-border strategy ready for what’s next.

FAQs

What exactly is Section 899? Who does it affect?

Section 899 is a proposed U.S. tax rule that could raise taxes on companies from countries that impose digital or global minimum taxes on U.S. firms. 

It mainly affects Canadian businesses earning income from U.S. customers or owning U.S. assets.

Why is the U.S. targeting Canada’s Digital Services Tax with this proposal?

The U.S. sees Canada’s Digital Services Tax as unfairly targeting American tech companies. Section 899 is a proposed countermeasure designed to “level the playing field.”

Could Section 899 really override the Canada–U.S. tax treaty?

Yes. If passed, Section 899 could override treaty protections because newer U.S. tax laws can legally take priority over existing agreements even if a treaty says otherwise.

How will this affect my company’s U.S.-source income?

You could face higher tax bills, more reporting requirements, and fewer treaty benefits. For some businesses, it may lead to double taxation or restructuring needs.

What should Canadian businesses do if they operate across borders?

Start by reviewing your U.S. structure, consult a cross-border tax expert, and monitor Section 899 developments. Flexibility is key and now’s the time to prepare, not panic.

Will foreign tax credits offset these increased U.S. taxes?

Not always. Section 899 may limit how much you can claim in foreign tax credits, depending on how it’s implemented. That’s why proactive planning is so important.