Most Canadian preoccupation with "Trump 2.0" has been focused on the manufacturing and raw materials sectors. Historically, these sectors have been more exposed to tariff and trade action. However, Canadian software companies also rely on bilateral regulatory frameworks to operate across the Canada-US border and access the US market. Any significant regulatory change – whether emanating from the US or Canada – creates the potential for disruption.
This article outlines the key regulatory frameworks that support the ability of Canadian software companies to work in an integrated North America market.
Tariff-free digital economy
Under the USMCA (formerly NAFTA) and the WTO Information Technology Agreement, software and digital products transmitted electronically between Canada and the US face no tariffs. While physical media containing software may face nominal duties based on the carrier medium's value, the intellectual property itself flows freely across the border. This may change as the US government has invoked USMCA provisions that permit actions considered necessary to protect the "essential security interests" of the United States. The US has significant latitude in invoking this exception, and does not require that security-based actions be proportional to the threat. The security exceptions apply to all chapters of the USCMA, including those covering digital trade and IP.
It is currently unclear whether proposed US tariffs will cover software. On February 1, 2025, Trump issued an executive order1 (the Executive Order) pursuant to emergency powers granted to the President under the International Emergency Economic Powers Act (the IEEPA) that imposed a 25% tariff (in addition to any pre-existing tariffs) on all "articles that are products of Canada" and which are imported into the US. The term "products of Canada" is to be defined in a Notice issued by the US Customs and Border Protection and published in the US Federal Register.2 When the Notice is published, it will set forth the actual HTS Codes that are covered and not covered by the Executive Order. The 25% tariff will apply to software if the HTS 8523.49 code is included in the Notice: "85" is the chapter for electrical machinery, "23" is the heading for media, and "49" is the subheading for software.
Even if the 25% tariff applies to software generally, certain types of software that constitute information or information materials may be exempted on free speech grounds. The terms of the Executive Order indicate that the goods affected by the tariffs "exclude those encompassed by 50 USC. 1702(b)". § 1702(b) expressly limits the president's powers with respect to certain types of materials. Among the items shielded from presidential power are "the importation from any country ... whether commercial or otherwise, regardless of format or medium of transmission, of any information or informational materials, including but not limited to, publications, films, posters, phonograph records, photographs, microfilms, microfiche, tapes, compact disks, CD ROMs, artworks, and news wire feeds." The intent of this exception is to respect US constitutional protections for freedom of speech. In the past, it has included films and broadcast materials, written materials, and software for personal communication - but not all types of software, and not all entertainment. In the current context, a specific challenge is that US Customs typically evaluates imports on the basis of tariff codes alone, rather than the more "use based" exclusions under IEEPA.
Canada's first wave of retaliatory tariffs do not include software products.
Export controls
The US and Canada maintain harmonized export control systems with special provisions for bilateral technology transfers. Importantly, export controls don't just apply to the export of physical media. Canadian SaaS providers may need to comply with Canadian and/or US export controls when their software or services use encryption beyond basic authentication; serve military/defense, nuclear, advanced aerospace, quantum computing, or critical infrastructure sectors; provide advanced technical capabilities like high-performance computing or sophisticated AI/ML; handle controlled technical data; interact with sanctioned jurisdictions or restricted parties; or facilitate the development, manufacturing, or testing of controlled technologies.
While export controls apply to both physical and digital transfers, Canadian companies do benefit from streamlined regulatory requirements and/or exemptions:
- Software export provisions under the Export Administration Regulations (EAR). Export license exceptions exist which benefit Canadian companies, depending on industry and product:
- The License Exception Technology and software – unrestricted (TSU), which permits export of operations technology and software, sales technology, software updates, and mass market software (except for encryption).
- The License Exception for Encryption commodities, software and technology (ENC), which permits export of common encryption technologies for private-sector end-use and for subsidiaries.
- The US government recently eliminated license requirements for spacecraft and related items (such as software) exported, reexported, or transferred (in-country) to and within Canada.
- Technical data exchange related to defense articles (ITAR Canadian Exemption). This exemption enables streamlined exchange of technical data across the Canada-US border for dual-use technologies. A license is not required under the ITAR export unclassified defense articles and services (which include technical data), provided the Canadian company is registered in Canada's Controlled Goods Program.
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A license is not needed solely for the export of unclassified technical data. The exemption framework simplifies both software sales in the US market and cross-border development collaboration for Canadian companies. The new US administration has not yet announced any changes to the export control regime with Canada.
Investment review benefits
1. Special status under CFIUS
Canadian investors enjoy certain advantages under US foreign investment review processes. While the Committee on Foreign Investment in the United States (CFIUS) has broadened its scrutiny of foreign technology investments, Canadian investors receive certain exceptions due to the close security relationship between the two countries. These include exemptions from mandatory filing requirements for certain transactions involving critical technologies or sensitive personal data. This can be particularly valuable for Canadian software companies, VCs or PE firms that seek to acquire or invest in US technology companies. Other countries that currently enjoy excepted status are the United Kingdom, Australia and New Zealand, aligning with the "Five Eyes" intelligence alliance.
2. Investment Canada Act
Similarly, US investors benefit from the highest general review thresholds under the Investment Canada Act (the ICA). The highest threshold for review is CA$1.989 billion in enterprise value for the investment, which is applicable to acquisitions of control of non-cultural Canadian businesses by investors from certain countries that maintain trade agreements with Canada (including the USMCA). For US acquirers to continue to benefit from this high threshold, the USMCA will need to continue in effect in some form. For investments above the applicable thresholds, the non-Canadian investor is required to obtain approval by the Minister responsible on a "net benefit" to Canada basis before being permitted to close. Investments below the threshold are subject to notification, which can be filed before or within 30 days of closing.
The ICA can also subject any investment in a Canadian business to review on the basis of national security, regardless of whether relevant dollar value thresholds are exceeded. Even investments to acquire less than control can be reviewed on the basis of national security. The national security review provisions of the ICA permit the Government of Canada to ultimately block a proposed investment, require a divestiture, require undertakings from a foreign investor to address national security concerns, or otherwise permit an investment subject to terms and conditions. In its Guidelines on the National Security Review of Investments - Investment Canada Act, most recently updated on August 2, 2022, the Government of Canada highlighted factors that may lead to the national security review of an investment by a non-Canadian. These factors include several that are relevant to the technology sector, including:
- the potential effects of the investment on the transfer of sensitive technology or know-how outside of Canada;
- the potential impact of the investment on the supply of critical goods and services to Canadians, or the supply of goods and services to the Government of Canada; and
- the potential impact of the investment on the security of Canada's critical infrastructure.
It should be noted that the ICA was recently amended and in coming months, foreign investments into certain industries (yet to be defined) – that are below the "net benefit" thresholds – will be required to be notified to the Government of Canada in advance of closing, permitting early national security scrutiny in sensitive fields as a matter of course.
Absence of foreign ownership restrictions for software
Canada imposes limitations on the level of foreign ownership in a number of sectors that are essential to Canada's economy, national security or culture, including: telecommunications and broadcasting; airlines; publishing of books, films and music; and uranium mining. Foreign banks and financial services companies are restricted in their operations in Canada and regulated when they enter Canada, and large banks in Canada must be widely held. Ownership restrictions of this type of have not been applied in the software sector. In particular, fintechs operating in Canada are not subject to foreign or other ownership restrictions, as long as they do not engage in regulated financial services.
Tax framework
The Convention between Canada and the United States of America with Respect to Taxes on Income and on Capital provides several mechanisms to prevent double taxation and ease cross-border operations:
- Withholding tax reductions (or elimination) for software licensing payments
- Clear rules for when each country can impose tax on companies from one country carrying on business in the other country including limiting taxation to where the company has a permanent establishment in the other jurisdiction
- Establishment of a framework and competent authority mechanism to deal with transfer pricing guidelines and adjustments that recognize integrated North American operations
A significant Canadian tax incentive for software companies is the Scientific Research and Experimental Development (SR&ED) programme. The SR&ED programme provides tax credits and/or a reduction of taxes payable on eligible research and development work done in Canada. US companies can access this program, although enhanced benefits are only available to Canadian-controlled private corporations.
Canadian and US tax policies for the technology sector have significantly diverged over the past year with the introduction of the Canadian Digital Services Tax (DST). The DST is a 3% tax on revenue from certain digital services earned by the largest non-Canadian tech companies operating in Canada, typically those originating from the US The US Government has objected to the DST on the basis that it violates international tax agreements and could lead to double taxation of US companies. The US has threatened a retaliatory tariff in response, which may affect Canadian software companies.
Cross-border mobility
1. Business visitors
The USMCA preserves and enhances NAFTA's immigration provisions that facilitate business travel. Canadian software professionals (e.g., computer systems analysts, software engineers, etc.) may enter the other country as business visitors without work permits for certain activities that are not considered gainful employment in the United States, such as attending meetings, negotiating contracts, and after-sales service.
2. USMCA professional visas
Canadian software engineers, computer systems analysts, and other technology professionals may qualify for TN status, if they satisfy the minimum credential requirements, which allows them to work across the border with reduced immigration processing compared to other foreign nationals.
Intellectual property protection
Both countries maintain robust IP protection systems with significant harmonization:
- Similar patent eligibility standards for software innovations
- Reciprocal copyright protection
- Coordinated trademark systems
- Effective enforcement mechanisms
The US is often preferred by Canadian software companies as the jurisdiction of choice for patenting and patent enforcement.
Processing personal information of Canadians in US data centers is permitted
Many Canadian customers of US-based SaaS providers will accept the processing of the personal information of Canadian customers in data centers in the US, with appropriate safeguards. Canadian federal privacy legislation (PIPEDA) does not currently prohibit cross-border transfers - it focuses on ensuring comparable protection through contractual or other means.
In determining whether appropriate protections exist in another country, Canadian privacy regulators and legislation consider the regulatory environment in the receiving country. In 2009, the Office of the Privacy Commissioner of Canada issued Guidelines for processing personal data across borders. They state that the duty to ensure comparable protection includes the requirement for organizations to "take into consideration all of the elements surrounding the transaction [including] the uncertain nature of the foreign regime or that in some cases information is so sensitive that it should not be sent to any foreign jurisdiction". The Québec Act respecting the protection of personal information in the private sector formalizes this requirement. It subjects the communication of personal information outside Québec to a privacy impact assessment establishing that the personal information would receive adequate protection in the jurisdiction of destination, "in particular in light of generally recognized principles regarding the protection of personal information."
Harmonized securities laws
The Multijurisdictional Disclosure System (MJDS) was established in 1991 between the US SEC and Canadian securities regulators to allows eligible Canadian companies to access US capital markets using primarily Canadian disclosure documents. The MJDS is a unique and highly successful accommodation between the US and Canada, and has made US stock exchanges such as NYSE and Nasdaq an attractive destination for Canadian technology companies.
Practical implications
The deep integration of the Canadian and US software sectors rests on a foundation of bilateral and multilateral agreements that reduce barriers to cross-border business. Any significant changes to these frameworks could be expected to create adaptation challenges for Canadian software companies.
For any questions, please reach out to Andrea Johnson (Corporate), Paul Lalonde (Trade and export controls), Bob Tarantino (Trade in copyrighted materials), Adam Goodman (Investment Canada Act), Henry Chang (Business mobility), Chantal Bernier (Privacy) and Jennifer McKay (Intellectual property).
Our integrated team of legal and public policy professionals across Canada and the US is actively tracking developments, and we are here to help you anticipate and respond to changes. For any questions, please reach out to Paul Lalonde and Sean Stephenson in Canada and Michael Zolandz and Susanne Cook in the United States.
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Footnotes
2. While a draft notice was released for public inspection on February 3, 2025, the draft was subsequently withdrawn in light of the announced pause in implementation of the tariffs.
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