On Guard for Thee: US Tariffs and the Road Ahead for Canada

Photo Credit: UBC

All references to the ‘Act’ mean the Income Tax Act, RSC 1985, c. 1 (5th Supp.), as amended. All references to the ‘Regulations’ mean the Income Tax Regulations. The following should not be construed as legal nor tax advice. Consultation with your usual tax/legal professional is advised.

Good morning Toronto! On 1 February 2025, US President Donald Trump signed Executive Order 14193, Imposing Duties to Address the Flow of Illicit Drugs Across Our Northern Border. As Canadian businesses and consumers alike brace for the impact of these measures, today, we will look at how the new tariffs function, what effect they will have, and what we can do to lessen their impact.

Tariffs are a form of taxes that are paid to the government on imported goods. In the US, the list of goods subject to tariffs are listed on the Harmonized Tariff Schedule (HTS). The executive order will apply a tariff of:

• 25% on “all articles that are products of Canada” (§2(a))
• 10% on “energy or energy resources”, such as (but not limited to) gas, natural gas, crude oil, and coal. (§2(b))

For the purposes of §2(a), products of Canada refer to all goods that originate from Canada. Note that a ‘product of Canada’ for the purposes of these tariffs is different from a ‘Product of Canada’ for classification purposes under other trade agreements, such as the USMCA, and/or labelling purposes for product packaging, which will be covered later.

While the United States, Mexico, and Canada Agreement for Free Trade (USMCA) is supposed to specifically exempt goods that originate in the Contracting States (the US, Canada, and Mexico) from tariffs between these Contracting States from tariffs, the US administration has cited Article 32.2 of the USMCA, which states:

Nothing in this Agreement shall: preclude a Party from applying measures that it considers necessary for the fulfilment of its obligations with respect to the maintenance or restoration of international peace or security, or the protection of its own essential security interests.
- Article 32.2 §(1)(b), USMCA

The administration has justified these tariffs by citing national security concerns pertaining to Canada, specifically that a great deal of illicit drugs enter the US through the border with Canada. As has been pointed out by traditional news outlets, Canada amounts to an extremely low percentage of the illicit drugs that have been imported into the US. This EO has been seen by many as violating the spirit of the USMCA. Considering that the USMCA is up for agreement in the next 12 months, it is expected the new agreement (if any) will not be as favourable to Canada and Mexico.

The tariff also includes a provision pertaining to the import of certain low-value goods. Specifically §2(h) states that:

For avoidance of doubt, duty-free de minimis treatment under 19 U.S.C. 1321 shall not be available for the articles described in subsection (a) and subsection (b) of this section.
- §2(h), EO 14193

Effectively, the duty-free de minimis provisions under §321 of the Tariff Act, will no longer apply to Canadian goods and energy products. The de minimis treatment is a legal doctrine which provides an exemption for products under US$800/day for each receiving American business/customer from duty taxes on shipments arriving in the US. It is because of this preferential treatment that companies that ship from foreign countries, such as Temu and Shein, can be profitable.

The imposing of these US tariffs, and our retaliatory tariffs on American goods (also set at 25%) will have marked consequences for both Canadian businesses and the Canadian consumer as a whole. At the minimum, Canadian businesses can expect that:

• Companies with operational presence in the US will face significant supply chain disruptions due to the new need to clear previously tariff/duty-free shipments with US Customs & Border Protection.
• As Canadian goods no longer qualify for the de minimus treatment, businesses will incur new costs associated with brokerage fees for customs processing and the new tariffs, increasing the cost of doing business for companies with operational presence in the US. More specifically, sellers on digital platforms, such as eBay, will be especially affected as they navigate these new changes, particularly as they lose tariff-free status under §2(h) of the EO.
• The tariffs will increase the cost to export/import goods to/from the US. The cost of the tariffs is such that businesses will have no choice BUT to pass on the costs to the consumers. Canadian products will become less competitive and less popular in the American market.
• There will be significant volatility in the USD/CAD FX rate. The tariffs have already prompted security concerns about the Canadian dollar, which has affected its stability and purchasing power.

And so, the question becomes: What must we do, as Canadians and as a nation, to fight back? Without intervention, the tariffs will significantly affect the cost of importing/exporting goods between Canada and the US. The US is our biggest trading partner, with preliminary estimates by PricewaterhouseCoopers indicating that the US-imposed tariffs on Canadian goods will result in about US$86 billion of tariffs paid to the US government annually. The average Canadian consumer will pay about CA$1,300 more on tariffs annually, and the average Canadian business can expect their costs to increase anywhere from 10-50% depending on their overall reliance on the US.

Canada’s priority should be to reduce her reliance on the US and invest in greater self-sufficiency. In regards to fuel, while Canada has some refining capacity, we fall far short of meeting domestic demand. Currently, we send a significant portion of our crude oil to the US, only to import it back as finished products. Beyond energy, sectors such as defense see Canada beholden to the US for defence technology and parts. To mitigate these ‘loose ends’, Canada must diversify her trade partnerships, strengthen domestic production capabilities, and work towards eliminating interprovincial trade barriers. Thankfully, significant progress has been made on all of these fronts since 1 February.

On that note, Canadian businesses should also work towards reducing reliance on the US for parts and sales. Canada has access to other agreements such as the Canada-European Union Comprehensive Economic and Trade Agreement (CETA) with the EU and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which includes 12 countries in Asia, Europe, and Oceania. These agreements provide for lower or tariff-free access to large, growing markets. On that note, there has also been a growing domestic trend to buy from and support Canadian businesses, which has had a significant positive impact on domestic sales for many businesses.

And finally, for consumers, please support and buy from Canadian businesses. However, keep in mind that goods that claim to be a “Product of Canada” or “Made in Canada” are two different claims that are subject to different criteria. According to the Competition Bureau, Products of Canada must have had at least 98% of the ‘total direct costs’ of producing the product to have been incurred in Canada, while this is only 51% for Made in Canada claims. The ‘Made in Canada’ representation must also be accompanied by a statement that speaks to where the parts were from, such as “Made in Canada with domestic and imported parts”.

In both cases, both goods must have undergone a Substantial Transformation in Canada within the meaning of §2.3 of the labelling guidelines, meaning that they underwent a fundamental change in form, appearance, or nature in Canada. Goods that are physically produced in Canada will almost certainly meet the Substantial Transformation requirement.

In the face of this unprecedented challenge, Canadians and Canada have demonstrated remarkable unity. Former Prime Minister Jean Chrétien humorously suggested that he would nominate President Trump to the Order of Canada for uniting us ‘like never before.’ Fellow Canadians, our solidarity is our strength. Together, we shall come out from this unscathed, and stronger than ever before.

Vive le Canada!

A bit about us: KLee Tax specializes in filing tax returns for individuals, businesses, and corporations. Whether you are working your first job, running a business, or an NPO looking to make a difference, you can be sure that KLee Tax will be there for your tax needs, when and where you need us.

Unsure of where to start? Be sure to reach out below!