Navigating uncertainty: What expiring U.S. tax provisions mean for Canadian businesses

Several U.S. tax provisions are set to expire at the end of 2025, with changes impacting both individuals and corporations. For Canadian enterprises that export to the U.S., operate in the U.S., or have cross-border operations, the expiration of certain tax provisions could have major implications on their business. This is particularly the case for enterprises in sectors that are heavily tied to the U.S. economy, such as manufacturing, automotive, technology, renewable energy, and media and telecommunications.

However, it’s unclear which direction U.S. tax policy will take in 2025 and beyond. One possibility is that U.S. corporate or individual tax rates, including rates imposed on capital gains, will increase. However, this is unlikely. More likely is that tax relief measures enacted by the U.S. in 2017 will continue after next year or even be enhanced. Canadian businesses―and indeed the Canadian government―may need to deploy different strategies to drive Canada’s growth, depending on the direction of the Republican leadership.

One thing is certain, however: Canadian small and mid-sized enterprises (SMEs) are concerned about Canada’s tax competitiveness relative to our trading partners. Nearly nine in 10 (87 per cent) of leaders at Canadian SMEs surveyed in the 2024 KPMG Private Enterprise™ Business Survey agree that if the U.S. introduces major tax cuts in the future, Canada’s higher personal and corporate tax rates and tax policies will seriously damage our competitiveness.

87% of leaders at Canadian SMEs agree that if the U.S. introduces major tax cuts in the future, Canada’s higher personal and corporate tax rates and tax policies will seriously damage our competitiveness

Canadian enterprises that are active in the U.S. are already navigating the rise of protectionism and the possibility of new tariffs, with the potential for further changes to trade policies. Those looking to prepare for the coming expiration of tax provisions—and mitigate added costs—may be wondering what’s changing, what the potential impact will be on their business, and what they can do about it.

Many of the provisions set to expire at the end of 2025 will impact individuals. For example, individual tax rates will increase, with the top federal rate set to increase from 37 per cent to 39.6 per cent and the estate and gift tax exclusion amount will decrease from $13.6 million to approximately $5 million. On the other hand, individuals will no longer be limited in the amount of state income taxes they can deduct from their federal taxable income (the current deduction is limited to $10,000).

The QBI deduction is also set to expire. This deduction reduces individual-level taxes—by way of a 20 per cent deduction—on certain qualified business income earned by pass-through entities such as partnerships, limited liability companies (LLCs), S corporations, and sole proprietorships. That means pass-through business income will then be taxed based on individual income tax rates, without a deduction for QBI.

Deductions for charitable contributions will revert to a cap of 50 per cent, from 60 per cent of adjusted gross income.

The 21 per cent federal corporate tax rate is not set to expire and the Republicans are dedicated to maintaining it. In fact, U.S. President Donald Trump has discussed reducing this rate to 15 per cent for taxpayers that manufacture property in the U.S.

The Tax Cuts and Jobs Act (TCJA) of 2017 doubled the bonus depreciation deduction for qualifying fixed assets (such as machinery) from 50 per cent to 100 per cent, but the bonus depreciation started phasing out after 2022. Qualifying assets received a 60 per cent deduction in 2024; in 2025, it’s being reduced to 40 per cent, and in 2026 it will be reduced to 20 per cent. Unless Congress decides to enact new tax law changes, the deduction will be completely phased out by 2027.

Prior to 2022 taxpayers were permitted to deduct their research and experimental expenditures as such amounts were incurred. The TCJA changed this and required the expenditures to be capitalized and amortized over a 5-year period beginning in 2022.

The TCJA imposed new restrictions on interest deductibility that generally limited the deduction for business interest expense to 30 per cent of earnings before interest expense, taxes, net operating loss deductions and depreciation or amortization deductions. Beginning in 2022, this restriction was further tightened by eliminating depreciation and amortization from the formula, thus decreasing the deduction limit.

The FDII benefit is set to decrease in 2026. The TCJA allows U.S. companies to effectively pay a lower tax rate on export income derived from certain U.S.-based assets. By permitting a 37.5 per cent deduction on the taxes levied on FDII, companies pay an effective 13.125 per cent tax rate instead of the 21 per cent rate. In 2026, the value of the deduction will decrease, meaning the effective tax rate on FDII will increase. The deduction amount will be reduced to 21.875 per cent, leading to an effective rate on FDII of 16.4 per cent.

The GILTI tax is set to increase. TCJA requires domestic companies to include GILTI—which represents business income earned by controlled foreign subsidiaries—in their taxable income. The tax rate on GILTI is 10.5 per cent, achieved by allowing a 50 per cent deduction from the statutory corporate tax rate of 21 per cent. 80 per cent of taxes paid in other countries on GILTI can be applied as a foreign tax credit to reduce the U.S. tax on the GILTI, meaning that some income under GILTI may effectively be taxed twice. Any unused GILTI foreign tax credits cannot be carried forward. The tax rate on GILTI is scheduled to rise in 2026, from 10.5 per cent to 13.125 per cent, since the deduction on GILTI will decline from 50 per cent to 37.5 per cent.

The BEAT rate is also set to increase. The TCJA levies a minimum tax, called the Base Erosion and Anti-Abuse Tax, on large companies that meet a certain threshold that make deductible payments to foreign affiliates or subsidiaries. The BEAT rate functions as a backstop of sorts to limit base erosion payments that reduce U.S. tax. The BEAT tax rate, which is currently 10 per cent, is scheduled to increase to 12.5 per cent in 2026.

The Republicans now control both the House and the Senate. In theory, this should simplify the legislative process. However, because the Republicans control only by a slim majority, they will be challenged to manage the budget process and will need to build consensus within their own party to ensure they have enough votes. It is likely the Republicans will need to utilize a legislative process referred to as “budget reconciliation” to implement changes to tax law and this process will require internal agreement among Republicans to ensure proposed tax changes receive sufficient votes to pass. The negotiation process will likely be lengthy and complex.

Based on comments made by President Trump during his election campaign, tax policy proposals include the following:

• Imposing broad tariffs on goods imported to the U.S.
• Eliminating clean energy tax credits from the Inflation Reduction Act of 2022
• Restoring the immediate deduction of research and experimental expenses that the TCJA required to be capitalized and amortized over five years to promote innovation and reduce compliance burdens
• Reducing the corporate tax rate from 21 per cent to 15 per cent on U.S.-based manufacturing activities
• Retaining or extending personal tax reductions under TCJA.

Further reductions in U.S. tax rates combined with new tariffs will significantly challenge Canada’s competitiveness as a place to do business. Manufacturers will be specifically challenged, particularly if the U.S. provides enhanced tax benefits for U.S. based manufacturers and/or implements tariffs on Canadian products, but any Canadian enterprise with U.S. customers or activities will face changes and will need to assess how to continue to attract investment capital, skilled labour, and remain competitive.

The Republican platform also aims to reduce government regulation in order to attract investment of capital and business expansion in the U.S. As a result, Canada may face a disadvantage given the relatively higher level of regulation within Canada.

89% of SMEs agreed that Canada needs to do more to keep pace with the U.S. on transitioning to the new economy

85% of leaders at Canadian SMEs are revisiting their business strategies to prepare for a change in U.S. leadership—both to mitigate risks and to take advantage of any emerging opportunities

KPMG in Canada’s U.S. Corporate Tax of team more than 225 professionals across Canada can dispense timely advice and provide professional guidance on tax issues and cross-border investments, enabling rapid responses to changes in legislation, laws, rules, and regulations. Contact us to find out how we can help.