Trade with Canada Amidst Changing Economic and Political Landscape

At a glance

• The main takeaway: Recent political turnover in Canada and the proposed U.S. tariffs have sparked uncertainty amongst investors and businesses in the Canadian economy.
• The impact on your business: Companies that trade with Canadian entities may be affected by the country’s political and economic uncertainty and should prepare customs and transfer pricing policies accordingly.
• Next steps: Schedule a consultation with Aprio’s Transfer Pricing and Tariffs and Customs advisors to optimize your cross-border tax structures and develop a strategy that works for your business.

The full story:

Canada’s business landscape faces a confluence of challenges, creating a turbulent environment for cross-border companies. U.S. President Donald Trump’s recent proposal to impose a 25% tariff on all imported Canadian products adds another layer of complexity that raises concerns over trade disruptions and increased costs. These proposed tariffs echo prior trade tensions and amplify uncertainties in industries like manufacturing, automotive, and agriculture. 

In his first presidential term, Trump imposed a 25% tariff on steel and a 10% tariff on aluminum imports from Canada, which was met with tariffs on $12.6 billion worth of goods from Canada on imported U.S. goods. Tariffs from both sides were ultimately lifted a year later after extensive negotiations, though their impact on both countries’ economies remained pervasive. Given the broad sweeping nature of the newly proposed tariffs, the financial impacts could affect businesses and consumers on either side of the border.

Fallout of an unexpected resignation

Compounding the threat of external trade disruptions, the sudden resignation of several cabinet members has left Canadian leadership in a transitory state enshrouded with uncertainty regarding Canada’s future policy direction. Canada’s former Finance Minister and Deputy Prime Minister Chrystia Freeland declared her resignation December 16^th hours before she was due to release the country’s first economic plan ahead of Trump’s inauguration. In her resignation letter, Freeland attributed her disagreement with Trudeau’s response to the proposed tariffs as one reason for her departure.

After a decade-long premiership, Trudeau’s planned leave has further complicated Canada’s business and political landscape. Canada’s parliament is suspended until March 24^th while a new Prime Minister is chosen. Businesses should prepare for prospective shifts in trade agreements, taxation policies, and international relations that may occur under new leadership. 

Economic volatility

In addition to uncertainty from the pending elections, the Canadian economy also grappled with slower growth in 2024, which could further exacerbate troubles in the country’s financial landscape this year. While the Bank of Canada cut interest rates five times and the inflation rate decreased substantially in 2024, prices of common household goods are not expected to decline in 2025. In fact, Trump’s proposed tariffs are likely to drive prices higher.

The economic policy uncertainty index, which reflects apprehension amongst investors and business leaders, has reached near-record highs jumping to 650, compared to index scores of 200 and 350 in recent decades. As a result, companies and consumers may remain cautious in their trading and investments as they await clarity on Canada’s leadership and economic policies. 

Impacts on transfer pricing policy

Unfortunately, uncertainty amongst Canadian businesses and foreign investors may increase under Trump’s proposed tariffs, which can increase costs for cross-border transactions. Companies may need to review their transfer pricing policies to protect profit margins but should ensure they maintain compliance with the arm’s length principle without distorting comparability of pricing.

Although adjusting transfer pricing policies can minimize the impacts of the tariffs on your bottom dollar, doing so without professional guidance and a clear strategy will invite additional scrutiny from tax and customs authorities. If extensive policy changes are required, companies must maintain robust documentation to support their pricing policies and reflect the impact of tariffs on intercompany pricing. Businesses are encouraged to seek the help of knowledgeable advisors before making any significant policy changes.

Prepare for potential changes

Amid these challenges, companies trading with Canadian entities should prepare for the proposed tariffs. Aprio’s knowledgeable Tariffs and Customs advisors can provide strategic guidance that helps businesses adapt to new tariffs, optimize cross-border tax structures, and leverage available credits and deductions. They can also assist in scenario planning, perform impact analyses on profitability, and develop strategies that ensure compliance and financial resilience during economic and political ambiguity. 

Aprio’s Transfer Pricing team can help build a strategy for future cross-border and intercompany transactions, whether in Canada or abroad. Reach out to schedule a consultation today.

Related Resources

• Taxes & Tariffs: Preparing for the Incoming Administration 
• Tariffs Under the Incoming Administration: Projected Changes in Trade Policy
• The Simplified and Streamlined Approach: A New Method for Transfer Pricing