ARE CANADIAN PROVINCES RECEIVING PART OF THE fEDERAL TARIFFS?

As we explained in a previous article, Canada recently imposed a sweeping set of Canada U.S. tariffs in 2025 — hitting everything from aluminum and steel to vehicles, machinery, and consumer goods. And the affected businesses should be able to claim Canadian tariff deductions to offset these new costs in computing their taxable income.

There may be more to this story than just Canada-U.S. politics. The new tariffs are likely to have ripple effects on federal and provincial tax revenues in Canada, raising deeper questions about fiscal policy.

Prime Minister Mark Carney recently issued a tariff announcement stating that “every dollar” raised from these tariffs would go to support affected Canadian workers. It’s a compelling political message, but it’s unclear what “every dollar” actually means.

There’s no formal announcement detailing how the funds will be distributed, and whether any portion of the tariff revenues will be shared with the impacted provinces. Specifically, the question that we raise is whether provinces will receive part of the tariff revenue sharing in Canada.

WHY SHOULD PROVINCES GET A SHARE OF THE TARIFFS?

Here’s where things get complicated: when Canadian businesses pay these tariffs, they should mostly be entitled to deduct them as business expenses. As we explained in our previous article, if the goods are inventory, the tariffs will be added to the cost of goods and deducted against income. If the goods are capital assets — like equipment or vehicles — the tariffs will become capitalized into the asset’s cost and deducted gradually through tax depreciation. These rules form the basis of how Canadian tax deductions for tariffs are handled under current law.

These business deductions will lower taxable income and, consequently, both federal and provincial tax revenues in Canada will decrease.

At the federal level, the reduction ties directly into Canada corporate income tax tariffs, where a 15% tax loss occurs for large corporations, and a 9% loss for small businesses of their first $500,000 of active business income.

Based on estimates that Canadian tariffs could raise $20 billion in the first year, this could translate into a $2–3 billion loss in federal tax revenues. This suggests that the federal government cannot pay the entirety of those funds to worker support without adding to the federal deficit.

Provinces are similarly affected. Every deductible dollar cuts into their revenue streams, exacerbating the tariff impact on Canadian provinces.

WILL THERE BE TARIFF SHARING?

While Ottawa collects 100% of the revenue from the Canada U.S. tariffs 2025, there has been no clear indication that a Canada tariff revenue sharing framework will be put in place. Without such a mechanism, provinces will likely bear a significant fiscal burden without compensation.

This could particularly affect Ontario, Quebec, and Alberta — provinces already facing concentrated exposure to the automotive, aluminum, energy, and manufacturing sectors. The Ontario Quebec and Alberta tariff impact is expected to be significant, given how integrated these regions are with U.S. supply chains.

Thus, if businesses in Ontario, Quebec, or Alberta deduct millions in tariff costs, these provinces could suffer corporate tax revenue losses — without receiving any corresponding tariff revenue in return.

In conclusion, unless a revenue-sharing mechanism exists or is introduced, these tariffs could evolve into a fresh point of federal-provincial tension in Canada. This being said, we hope that federal accounting will allow for the proper computation of what is truly available to be paid out.