Any changes to U.S. trade policy would inevitably impact Canadian foreign tax policy due to the countries’ deeply intertwined trade relationship.
Here is a look at how Canada could respond to potential scenarios—particularly in the real estate sector—once Donald Trump assumes the presidency for a second time.
Impact on Canadian exports
Canada remains heavily reliant on the U.S. market for key construction materials like iron, steel, aluminum and wood. The U.S. accounts for over 80 per cent of Canada’s exports of these materials.
When Trump imposed steel tariffs in May 2018, Canadian exports of primary metal manufacturing to the U.S. plummeted by 21 per cent until the tariffs were lifted in May 2019. Although Canada responded with tariffs of its own, the impact was still notable.
A repeat of such disruptions would pose trouble for Canadian construction goods. The U.S. remains Canada’s primary buyer—but Canada is just one supplier among many for the U.S. market, underscoring the imbalance in trade dependency.
Tariff uncertainty looms
Trump has a history of introducing tariffs in certain situations. In a social media post on Nov. 25, he stated his intent to raise tariffs on goods from Canada as a means of compelling Canada to address immigration and drug trafficking problems harming the United States. These potential changes to economic and tax policies in the U.S. could have wide-reaching implications on Canada, including further interest rate cuts, a weaker Canadian dollar and a shift by U.S. businesses toward domestic markets.
The federal government’s fall economic statement (FES) indicated that Canada is prepared to swiftly respond to any economic changes, including U.S. tariffs. The FES specifically referenced reciprocal tariffs Canada imposed on U.S. steel, aluminum and other products in 2018 as part of its preparation for potential scenarios.
Consumers should be aware that higher tariffs on U.S. imports may lead to higher prices that add to inflationary pressures, including on housing.
The federal government has tried to alleviate the cost of constructing new homes and improve affordability for purchasing or renting a home by:
Depending on the policies that emerge from the Trump administration, Canada may feel the need to respond. Domestically, these changes might require expanding existing relief programs—such as a further increase to the HBP withdrawal limit—and increasing enforcement efforts regarding new measures that seek to reduce housing that is not rented or lived in, such as the UHT.
Lower corporate income and capital gains taxes
Lower U.S. corporate and capital gains taxes may be part of the Trump administration’s strategy to spur more commercial activity and free up more capital for reinvestment.
Conversely, Canada proposed increasing the capital gains inclusion rate and the withholding tax rate on the disposal of taxable Canadian property by foreign owners—predominantly real estate and immovable property—in the 2024 Federal Budget.
To stay competitive, Canada could consider providing an additional form of incentive for foreign entities that deploy capital in Canada for residential real estate development beyond targeted exemptions for PBRH.
The federal government may also consider reducing existing compliance requirements to encourage domestic and foreign real estate development for the country’s growing population.
However, it may be less likely that Canada refrains from enacting a higher capital gains rate and the commensurate withholding tax increase.
Higher deduction limit in interest denial rules
A business interest expense limitation under section 163(j) of the U.S. Internal Revenue Code is a significant balancing factor when considering investment in new real estate projects for U.S. investors.
If the Trump administration increases the current cap on interest expenses in the U.S., this would permit additional interest deductibility against taxable income in real estate projects.
Canada adopted a similar excessive interest and financing expense limitation (EIFEL) framework—but has not signalled an intent to deviate from this framework or increase the ratio of deductible interest expenses as it currently exists domestically.
The federal government did propose an exclusion from the EIFEL rules for arm’s length interest related to building or acquiring PBRH in Budget 2024. This exemption could be made more attractive to foreign real estate investors by expanding the exclusion to non-arm’s length interest, covering scenarios where capital of a foreign parent is invested in Canada as debt.
In this scenario, the subsidiary would not typically be entitled to one of the exclusions from EIFEL due to foreign ownership. An option could be to elect out of EIFEL for certain real estate businesses—like the U.S. rule.
Canadian immigration restrictions
Immigration restrictions could somewhat mitigate the housing shortage in Canada next year—but they won’t solve the problem. The housing shortage is a supply issue; a demand-side solution will not fix things if there are no shovels in the ground.
Canada could consider expanding domestic tax rules—like the HBP, FHSA or exemptions related to PBRH—to improve housing affordability for buyers and lower development charges for developers.
This approach is similar to considerations for general inflationary pressures that would come as a result of potential U.S. tariffs.
The takeaway
Actions by the incoming Trump administration could lead the Canadian government to provide additional federal relief to the real estate sector.
While uncertainty remains, even moderate U.S. changes may result in higher costs of living for Canadians, higher prices in supply chains and increased urgency to remain competitive with the U.S. globally.
Larger companies may be better positioned to handle these disruptions through strategies like vertical integration, economies of scale or long-term supplier contracts. Smaller and mid-size companies would likely face more severe challenges, including higher logistical costs and extended lead times if they turn to alternative suppliers.
These pressures could reduce competition and drive costs up across the construction industry.
Canadians should also be mindful that any federal tax relief measures would result in a trade-off between an increase to Canada's tax expenditures—impacting the federal deficit—and capital investment into the real estate market.
