President Donald Trump has raised the tariff rate on US imports from Canada to 35 per cent from 25 per cent, effective on Friday.
The announcement from the White House late Thursday said Canada had failed to "do more to arrest, seize, detain or otherwise intercept ... traffickers, criminals at large, and illicit drugs".
Trump has heckled Canada for months and suggested it should become its 51st US state.
He had threatened to impose the higher tariff on Canada if no deal was reached by Friday, his deadline for reaching trade agreements with dozens of countries.
Earlier on Thursday, the president said Canada's announcement it would recognise a Palestinian state would "make it very hard" for the United States to reach a trade agreement with its northern neighbour.
Trump has also expressed frustration with a trade deficit with Canada that largely reflects oil purchases by America.
Prime Minister Mark Carney had tempered expectations over tariffs, saying Ottawa would only agree to a deal "if there's one on the table that is in the best interests of Canadians".
In a statement released early on Friday, he said he was disappointed by Trump's actions and vowed to diversify Canada's exports.
"Canada accounts for only one per cent of US fentanyl imports and has been working intensively to further reduce these volumes," he said, pointing to heavy investments in border security.
Carney added that some industries - including timber, steel, aluminium and motor vehicles - would be harder hit, but said his government would try to minimise the impact and protect Canadian jobs.
Canada was not included in Trump's updated list of tariff rates on other countries announced late on Thursday.
Those import duties are due to take effect on August 7.
Trump sent a letter to Canada a few weeks ago warning he planned to raise duties on many goods imported from Canada to 35 per cent, deepening the rift between the two North American countries that has undermined their decades-old alliance.
Some imports from Canada are still protected by the 2020 United States-Mexico-Canada Agreement, or USMCA, which is up for renegotiation in 2026.
The White House's statement said goods trans-shipped through Canada that were not covered by the USMCA would be subject to a 40 per cent tariff rate.