Tax Insights: US tariffs and Canadian countermeasures ─ How will it affect Canadian businesses?

March 07, 2025

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Issue 2025-07R2

March 7, 2025 update: On March 6, 2025, US President Donald Trump signed two executive orders that, effective March 7, 2025 (and expected to apply until April 2, 2025):

exempt imported goods from Canada and Mexico that qualify as originating goods under the Canada-United States-Mexico Agreement (CUSMA) from the 25% tariff (this includes many materials used in the automotive manufacturing sector)
reduce the 25% tariff rate to 10% for imports of potash from Canada and Mexico

The US will continue to impose the 25% tariff (10% on Canadian energy products) that became effective March 4, 2025, on other imported goods from Canada and Mexico.

The Canadian government then announced that Canada will delay until April 2, 2025 (from March 25, 2025), its 25% surtax on $125 billion of US-origin goods. However, the 25% Canadian surtax (that became effective March 4, 2025) will continue to apply to the $30 billion of US-origin goods imported into Canada.* A remission of Canadian surtax may be available for eligible goods.

To take advantage of the benefits available under the CUSMA, the goods must meet specific criteria (such as being wholly obtained or produced, or produced of materials, from the originating area, or that meet product specific rules of origin). Importers must maintain records, such as the certification of origin, to prove that the goods meet the CUSMA requirements. Businesses should start reviewing their goods to determine their eligibility and compliance under the CUSMA.

As previously mentioned in our March 4, 2025 update, on March 3, 2025, President Trump confirmed the end of the 30‑day pause on his February 1, 2025 executive orders and announced that the US will impose tariffs on imported goods from Canada and Mexico, starting on March 4, 2025. However, those executive orders were amended on March 2, 2025, so that duty-free de minimis treatment (which allows shipments of goods with a total value of US$800 or less per person per day to be imported without duties) will continue to be available until the time that the US government has adequate systems in place to process and collect these duties and tariffs. Furthermore, Chinese‑origin imports will be subject to a 20% tariff (up from the 10% imposed on February 4, 2025 under an earlier executive order), on top of existing tariffs.

In addition, President Trump also signed two executive orders, on February 25, 2025 and March 1, 2025, that initiated investigations under section 232 of the US Trade Expansion Act of 1962 to determine the effects on the national security of imports of:

copper, scrap copper and derivative copper products
timber, lumber and their derivative products

The reports must be submitted by November 22, 2025 for copper and November 26, 2025 for timber and lumber, and will include:

findings of whether these imports threaten national security
recommendations on actions to mitigate these threats, including potential tariffs, export controls or incentives to increase domestic production
policy recommendations for strengthening the US supply chain through strategic investments and permitting reforms

As well, as previously discussed, President Trump signed:

executive orders on February 10 and 11, 2025 that will impose, starting March 12, 2025, a 25% tariff on imports of steel and aluminum products from all countries, including Canada (see our Tax Insights “US to impose tariffs on steel and aluminum imports from Canada”)
a memorandum on February 13, 2025 that orders the development of a comprehensive plan for reciprocal tariffs to restore fairness in US trade relationships and counter non‑reciprocal trading arrangements (see our Tax Insights “US to impose reciprocal tariffs: How will it affect Canadian businesses?”)

The remainder of this Tax Insights was published on February 4, 2025. Except for a minor revision to the title, it has not been altered to reflect the developments and announcements from March 3 to March 6, 2025 by President Trump and the Canadian government, and the executive orders on copper, lumber and timber.

^{* For more information, see:}^{- Department of Finance, Backgrounder “List of products from the United States subject to 25 per cent tariffs effective March 4, 2025,” Consultation notice “Notice of Intent to Impose Countermeasures in Response to United States Tariffs on Canadian Goods” and “Process for requesting remission of tariffs that apply on certain goods from the U.S. (released March 4, 2025) at www.canada.ca/en/department-finance.html}^{- Canada Border Services Agency, Customs Notice 25-10: United States Surtax Order (2025-1), March 4, 2025 at www.cbsa‑asfc.gc.ca/publications/cn-ad/menu-eng.html}

In brief

What happened?

On February 1, 2025, United States (US) President Donald Trump signed three executive orders that impose tariffs on imported goods, effective February 4, 2025, from:

Canada – a 25% tariff, except that energy products will be subject to a 10% tariff
Mexico – a 25% tariff
China – an additional 10% tariff on top of existing tariffs

However, on February 3, 2025, the US agreed to delay implementing these tariffs on Canadian and Mexican imports for 30 days to allow for further negotiations with Canada and Mexico on enhancing border security, among other issues. If Canada and the US cannot reach an agreement, the US could potentially start applying tariffs based on the executive order on Canadian-origin goods imported into the US in the near future. The executive order that applies to China remains in effect.

These orders, issued under the International Emergency Economic Powers Act (IEEPA), aim to pressure Canada, China and Mexico to take stronger measures against drug trafficking and illegal immigration, and are part of a broader strategy to protect American industries.

In response to the executive order on US tariffs, the Canadian government had announced a series of retaliatory measures, which would have included imposing its own 25% surtax on $155 billion worth of US goods. These countermeasures, which have also been paused for 30 days, are designed to protect Canadian industries and workers from the economic impact of potential US tariffs and to signal Canada's commitment to defend its trade interests.

Why is it relevant?

The potential US tariffs and Canadian surtax will increase costs for Canadian businesses, disrupt supply chains and reduce profit margins, all of which could transform the Canadian economy and may impede economic growth in Canada.

The US presidential executive order¹ that is focussed on Canada emphasizes the need for enhanced border security and increased inspections to prevent the entry of illegal aliens and the smuggling of illicit substances; this will have significant implications for cross-border trade and the efficiency of supply chains.

Actions to consider

All businesses (including each multinational business), even those that are not subject to the potential US tariffs, should assess the economic impacts of these potential tariffs, because every business will be affected. Businesses should use data driven decisions based on tariff/surtax impact assessments and modelling to make strategic decisions and determine viable options going forward. Aligning financial and business strategies to include supply chain, tax, customs and international trade can reduce risks and avoid unexpected costs. Companies should optimize their operations to mitigate the negative effects of these potential tariffs/surtaxes and increased border security measures, and consider exploring new markets. Adopting a coordinated approach will be crucial for businesses navigating this challenging trade environment.

In detail

US tariffs

The executive order signed by President Trump on February 1, 2025 was to have taken effect 12:01am EST on February 4, 2025, but it has been temporarily paused for 30 days. The executive order would have applied a US tariff of:

25% on a wide range of goods, including agricultural products, manufactured goods and consumer items, significantly affecting the cost of Canadian products entering the US market
10% on energy or energy resources (i.e. crude oil, natural gas, lease condensates, natural gas liquids, refined petroleum products, uranium, coal, biofuels, geothermal heat, the kinetic movement of flowing water and critical minerals)

We estimate that a 25% tariff on Canadian products would result in approximately $73 billion per year in tariffs and a 10% tariff on energy resource products would result in $13 billion worth of tariffs annually.

The US administration’s justifications for these tariffs are to protect American jobs and industries from unfair trade practices and curb the influx of illegal aliens and substances into the US. The tariffs are also viewed as a mechanism to pressure Canada into making concessions during ongoing and future trade negotiations. However, this tactic has been met with significant criticism both domestically and internationally, as it will disrupt highly integrated cross-border supply chains and create uncertainty in the global market.

The executive order

The executive order includes several critical provisions in Section 2 that directly affect trade relations and border security:

paragraph (d) states that, if Canada retaliates against the US by imposing import duties on US exports or similar measures, the President may increase or expand the scope of the duties imposed under this order to ensure their effectiveness; this provision underscores the US administration's commitment to maintaining the efficacy of its trade actions
paragraph (g) specifies that no drawback, or refund of duties, will be available for the tariffs imposed under this order; this eliminates any potential financial relief for businesses affected by these tariffs
paragraph (h) clarifies that duty-free de minimis treatment, which allows for goods below a certain value to be imported without duties, will not apply to the articles described in Section 2, paragraphs (a) and (b) of this order

PwC observes

The above provisions ensure strict enforcement of the new tariffs. Paragraph (d) is intended to discourage Canada from imposing retaliatory tariffs on US-origin imports, and paragraph (g) means that businesses operating in the US that could be affected by these tariffs will not have any opportunity to apply for certain relief, which is generally available for other tariffs or duties under the US drawback program.

Paragraph (h) is of particular significance as the language in this provision is also in the executive orders signed by President Trump relating to US tariffs on imports from Mexico and China. This provision will affect ecommerce shipments with a total value of US$800 or less per person per day that are distributed through Canada. These shipments will no longer benefit from duty-free entry into the US. This also affects Chinese-origin goods destined to the US from Canada. These shipments will now be subject to most-favoured-nation duty rates, or tariffs imposed under sections 201 or 301 of the US Trade Act of 1974, or section 232 of the US Trade Expansion Act of 1962, where applicable, plus other import costs (e.g. merchandise processing fee) and then the additional IEEPA 10% tariff on Chinese origin or, if the tariffs are implemented, a 25% tariff on Mexican or Canadian origin goods.

Canadian retaliatory surtax

On the same day that President Trump signed the executive orders on US tariffs, Canadian Prime Minister Justin Trudeau announced that Canada would impose its own 25% surtax on $155 billion worth of US goods. The imposition of this surtax will also be paused for 30 days and would only apply when the US applies its tariffs on Canadian goods.

The Canadian surtax would have targeted a broad range of American products, including agricultural goods, consumer products and industrial materials. For details, see Order in Council (#2025-0072)² dated February 1, 2025. The Canadian surtax would have been applied in stages, with 25% applying on $30 billion of US-origin goods imported into Canada on the same date that the US would have applied its tariffs on Canadian goods imported into the US. It would have included certain live poultry and other poultry products, certain dairy products, certain eggs and egg products, orange juice, peanut butter, wine, spirits, beer, coffee, appliances, apparel, footwear, motorcycles, cosmetics and pulp and paper (see the Department of Finance Backgrounder³ dated February 4, 2025 for a full listing of the affected goods). Then, after a 21-day public comment period, Canada would impose a surtax on a supplemental list of imported goods worth $125 billion.

The Canadian government has indicated that these measures are necessary, if the US were to impose tariffs, to encourage the US to return to fair trade practices and mitigate the adverse effects on Canadian businesses.

Canadian remission of surtax program

If the Canadian surtax is implemented, the Canadian government will have a framework and process for Canadian businesses to request remission of this surtax on certain goods imported from the US. This process will allow for relief (under specific circumstances) from the payment of surtax, or the refund of surtax that have already been paid.

Remission requests will be considered when:

goods used as inputs cannot be sourced domestically or reasonably from non-US sources
in exceptional circumstances, to be reviewed on a case-by-case basis, there could be severe adverse effects on the Canadian economy

The Department of Finance, in consultation with other relevant federal departments, will assess these requests and make recommendations to the Minister of Finance, who has the authority to recommend remission to the Governor in Council. This process aims to mitigate the economic impact of the US tariffs on Canadian businesses and ensure that they are not unduly burdened. Businesses would submit inquiries or remission requests to the Department of Finance.

PwC observes

The proposed Canadian retaliatory measures are intended to address the unfair behaviour from the US, if the US were to impose tariffs on imports of Canadian goods. However, they would also increase costs for Canadian companies and (ultimately) consumers. Of particular concern is the risk that this could escalate the trade dispute, because Section 2, paragraph (d) of the US presidential executive order states that the US can increase the tariffs or expand their scope should Canada retaliate.

Unlike the US, Canada will allow Canadian importers to mitigate the impact of any potential surtax on US-origin goods through a remission process; companies will need to navigate this comprehensive process.

Implications for Canadian businesses

The imposition of these US tariffs and the enhanced border security measures would have several significant implications for Canadian businesses engaged in cross‑border trade with the US:

Increased costs – The tariffs would raise the cost of exporting goods to the US, making Canadian products less competitive in the American market. This is particularly concerning for industries heavily reliant on US trade, such as manufacturing, agriculture and energy.
Supply chain disruptions – Many Canadian businesses operate within highly integrated supply chains that span the US-Canada border. The tariffs and increased border inspections would disrupt these supply chains, leading to higher production costs and potential delays.
Profit margins – Businesses may face reduced profit margins as they absorb some of the increased costs associated with tariffs. This could lead to lower business investment and slower growth.
Market diversification – Companies may need to explore alternative markets to mitigate the negative impact of tariffs. However, finding new markets can be challenging and time-consuming, particularly for businesses that have long-established relationships with US customers.
Currency fluctuations – The tariffs and border security measures may lead to fluctuations in the Canadian dollar, affecting the overall economic stability and purchasing power of Canadian businesses.

How to adapt to tariffs and enhanced border security measures

Several strategies can help Canadian businesses adapt to any new US tariffs (if they are implemented) and enhanced border security measures:

Implement cost-saving tactics and explore duty drawback programs – Renegotiating supplier contracts, optimizing production processes and reducing operational inefficiencies can offset increased tariff expenses. Additionally, duty drawback programs can refund duties paid on imported goods that are subsequently exported, notwithstanding the US’s restriction on using the drawback provisions for US tariff purposes.
Develop a deeper understanding of your supply chain risks and opportunities – Do you have a comprehensive understanding of your entire supply chain and how the tariffs will affect it? What is your position within the supply chain, and what does that mean for your options? To help answer these questions, map your supply chain, considering both upstream suppliers and ultimate downstream consumers. Then, evaluate the short- and long-term impacts, considering tariffs, demand and supply dynamics, capacity availability, alternative suppliers and substitute products.
Run a scenario analysis and strengthen your risk management program – Explore potential scenarios, including the potential length of the current trade dispute and possible end results. How does this affect your strategic options? This can also include larger questions, such as whether there is a risk to your business’s economic viability. In addition to scenario planning, consider contingency strategies and regular reviews of risk factors as part of your development of a comprehensive risk management plan.
Take advantage of trade instruments to diversify your supply chains – Alternative suppliers and/or manufacturing locations can reduce your dependency on cross-border trade. This can help mitigate the negative effects of any new tariffs and open new business opportunities. Consider sourcing from countries with favourable or free trade agreements and using foreign trade zones to defer, reduce or eliminate tariffs on imported goods.
Enhance compliance mechanisms – Accurate tariff classifications and country-of-origin determinations help avoid overpayments and penalties. Additionally, proper documentation and adherence to customs and border security regulations can reduce the risk of delays and penalties.
Assess and adjust tax strategies – Evaluate transfer pricing policies and transactional characterizations while considering the overall income tax implications and opportunities of supply chain decisions, including the mix of income, tax attributes and incentives.
Accelerate reinvention efforts – Identifying, developing and expanding into new markets will help companies reduce their reliance on the US market. Exploring the value-creation potential in adjacent sectors can help you capture opportunities in growth segments, such as in the defence industrial base sector.
Incorporate new risks and opportunities into your acquisition strategy – Consider opportunities to create economies of scale and reduce operational costs by acquiring companies that may have difficulty withstanding US tariffs. Other acquisition opportunities include companies that produce goods within the US or operate in other countries that are not subject to US tariffs.
Advocate and collaborate – Engage with industry associations and government bodies to advocate for fair trade practices, seek support for affected industries and encourage policies to remove interprovincial trade barriers.

The takeaway

PwC can help Canadian businesses respond to the current tariff situation. We have developed a proprietary Tariff Impact Assessment tool that can help your business examine or visualize its supply chain by using your historical import data. It provides insights into your business’s potential exposure to any US tariffs or Canadian surtax, helping to identify areas of risk and opportunity, as well as navigate the ethical sourcing landscape proactively.

Our multidisciplinary team has specializations in tariffs, economics, industry, supply and value chain, business strategy and tax. We can help you navigate this evolving complex situation by:

mapping out the supply chain from upstream to downstream and ultimate consumers
assessing the specific short- and long-term impacts on your business and developing a list of risks and opportunities specific to your business
developing a short-term strategy to minimize your potential tariff exposure
assisting you with obtaining support from the federal, provincial and territorial governments
given the risks and opportunities, helping you develop a long-term business strategy that adapts to the long-term reality that this situation may create
providing scenario planning and strategic options modelling

While the imposition of tariffs by the US and Canada’s retaliatory measures would present significant challenges, Canadian businesses can take proactive steps to mitigate the impact and adapt to the evolving trade landscape. By mapping supply chains and conducting a thorough tariff impact assessment, businesses can better understand how the tariffs could affect their business and develop strategies to effectively mitigate these challenges.

^{1. Executive Order “Imposing Duties to Address the Flow of Illicit Drugs Across our Northern Border” (February 1, 2025).

2. Government of Canada, Orders in Council, PC Number 2025-0072, February 1, 2025.

3. Department of Finance Backgrounder “List of products from the United States subject to 25 per cent tariffs effective February 4, 2025” (released February 2, 2025).}