Eliminating US Tax for Canadian Tax-Exempt Investors

    Max Reed

    Many Canadian tax-exempt organizations invest in the United States as part of a diversified portfolio. As these investors are exempt from tax in Canada, any US tax paid on the investments is a net cost to them. Thus, eliminating US tax is an important step to maximizing investment returns. This article provides a high-level overview of the US tax exemptions available to Canadian tax-exempt investors, the scope of those exemptions, as well as refund opportunities for prior tax paid. To start out, however, consider why Canadian tax-exempt investors may be paying taxes to the US.

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    IRS allows 50% deduction against GILTI for Individual Taxpayers

      In recently released proposed regulations related (see pages 49-50, 53, 70-71) to the impact of GILTI on individual US taxpayers, the IRS has surprisingly taken a taxpayer friendly position. They are allowing the 50% deduction against GILTI income if an individual taxpayer makes a 962 election. For a Canadian resident US citizen, this has significant implications. Put simply, the 962 election allows an individual US taxpayer to be taxed as a US domestic corporation. This means a) the tax rate on net GILTI is reduced to 21% b) the taxpayer can take an 80% foreign tax credit against GILTI income for corporate tax paid to Canada and now c) only 50% of the GILTI income is taxable. Taken together these factors indicate that all Canadian resident US citizens with corporations should make a “962” election on an annual basis to mitigate GILTI. From an integrated Canada-US tax perspective, the 962 election can also preserve the Canadian small business rate and still result in zero GILTI inclusion. For instance, assume that for 2018 Dr. Jones was a US citizen living in Toronto. She had a medical corporation through which she earned CAD $250,000 and qualified for the small business deduction. She sought to defer all of that income in the corporation. Making the 962 election on her 2018 US tax return would allow her to utilize the small business deduction and not have any excess US tax owing.

      This won’t be true in all provinces. In BC, for example, the small business tax rate is 12%. Assuming Dr. Jones lived in Vancouver, instead of Toronto, and made the same amount of money. Her 962 election would not cover off all of her US tax exposure. She would owe .9% on the total corporate gross income to the United States, which would represent (marginal) double taxation. With proper advice, she could generate tax in Canada to offset this. This is a substantially better outcome than some of the other GILTI planning ideas.

      Regardless, the proposed regulations represent good news for Canadian resident US citizens with corporations.

      Avoiding Double Taxation After the 965 Regulations

      Avoiding Double Taxation After the 965 Regulations

        Written by Max Reed and Charmaine Ko.

        This article addresses complex topics in a summary fashion and does not exhaustively discuss all potential issues. It is not intended to be legal advice and cannot be relied upon as such. 

        On August 1, the IRS released 250 pages of explanations and proposed regulations (the “Proposed Regulations”) related to the transition tax that is found under Code section 965 of the Internal Revenue Code (the “Code”). The most important part of these regulations relate to how US citizens in Canada, that are subject to the transition tax under Code section 965, can use taxes paid to Canada to minimize their double tax exposure. Continue reading

        US Estate Tax Exposure for Canadians After US Tax Reform

        US Estate Tax Exposure for Canadians After US Tax Reform

          Written by Max Reed

          Canadian residents who aren’t U.S. citizens may be surprised to know that U.S. estate tax can apply to them. Newly enacted U.S. tax rules have increased the exemption amount, but there are still pitfalls to be aware of.

          The way U.S. estate tax works has not really changed. The tax applies to any assets that are considered to be located in the United States (such assets are called “U.S. situs assets”). This includes U.S. real estate, stocks in U.S. corporations (such as Apple, Exxon or Walmart), and personal property located in the country.

          The top U.S. estate tax rate is 40% of the value of the property. This could create a sizable tax bill when any Canadian resident who owns U.S. real estate or a large U.S. stock portfolio dies: under domestic U.S. law, only US$60,000 of U.S. property is protected from estate tax. Note that RRSPs offer no protection from the U.S. estate tax. While Canadians get an increased estate tax credit thanks to the Canada-U.S. Tax Treaty, this is more complicated than meets the eye.

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          Renouncing US Citizenship After US Tax Reform

          Renouncing US Citizenship After US Tax Reform

            Written by Max Reed

            The new U.S. tax rules are likely to increase the number of Canadian resident US citizens who want to renounce. US tax reform did not change the rules around renunciation very much, but it did expand the category of people who are able to renounce U.S. citizenship without paying an exit tax. The reason for this is that the US estate and gift tax threshold has increased significantly to USD $11.2 million per US citizen. This allows a US citizen to reduce his or her net worth significantly to get under the US exit tax threshold. This means that most US citizens in Canada should be able to renounce without paying the exit tax. Renouncing is a personal decision – but there are a number of general pros and cons. Consider those first.
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            Pleading Not GILTI – Deferral Strategies for Canadian-Resident US Citizens

            Pleading Not GILTI – Deferral Strategies for Canadian-Resident US Citizens

              Written by Max Reed

              eae recently passed US tax law makes it more complicated for American citizens outside the United States to run businesses, because their income may be “GILTI”. GILTI is an acronym for “Global Intangible Low-Taxed Income”. Under the new US corporate tax system, US corporations are now generally only taxed on the income of the US company itself; dividends received from a foreign subsidiary are tax-free. The GILTI rules were enacted to ensure that companies do not then try to shift all profits to foreign subsidiaries in low-tax countries to then be repatriated tax-free. But these rules also apply to US citizens in Canada who own Canadian corporations. They make it more difficult to defer income from personal tax. That means that the immediate personal tax bill will increase. There are five different ways to plead not GILTI to try and maximize the deferral and minimize the personal tax bill. Each has pros and cons.
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              New US Tax Rules will Encourage Americans Abroad to Renounce

              New US Tax Rules will Encourage Americans Abroad to Renounce

                Written by Max Reed and Charmaine Ko

                The newly passed US tax law (the Tax Cuts and Jobs Act (“TJCA”)) makes it much more complex for American citizens outside the United States to run a business. Specifically, there are two new complex tax regimes to consider: 1) the one-time mandatory repatriation tax and 2) the annual GILTI rules. The one-two punch of these two tax regimes may drive US citizens to renounce their citizenship. They are discussed below along with a brief discussion of renunciation.

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                The Grind down of Foreign Tax Credits and the Code Section 965 Inclusion

                The Grind down of Foreign Tax Credits and the Code Section 965 Inclusion

                  Written by Max Reed and Charmaine Ko

                  This blog post addresses a very technical question about the new US repatriation tax. It will only be of interest to US tax advisors. It is not meant as legal advice and cannot be relied upon as such. It involves complex US tax concepts so advice specific to the situation is required. Note that this post assumes that all Canadian corporate and tax law formalities have been followed to declare a dividend effective as at December 31, 2017. It does not comment on those requirements and US tax advisors should verify with Canadian corporate and tax advisors to make sure this is possible. 

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                  Code Section 965 and Individual Taxpayers – a technical explanation

                  Code Section 965 and Individual Taxpayers – a technical explanation

                    Written by Max Reed and Charmaine Ko

                    This blog post addresses a very technical question about the new US repatriation tax. It will only be of interest to US tax advisors. It is not meant as legal advice and cannot be relied upon as such. It involves complex US tax concepts so advice specific to the situation is required.

                    With the enactment of the Tax Cuts and Jobs Act, Code Section 965 imposes a “one-time tax” on US taxpayers that own controlled foreign corporations (“CFC”). The rules are very complex and the results can be quite punitive. What follows is our attempt to distill some of the key points of the application of Code section 965 to US citizens resident in Canada who own CFCs. The post is intended as a guide for tax advisors and so relies on some understanding of basic US tax terminology.  It is not exhaustive and should not be relied on as a substitute for a detailed examination of Code section 965. Nevertheless, we provide our views on some of the key issues.

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                    The new US “one-time tax” on US citizens who own foreign corporations

                    The new US “one-time tax” on US citizens who own foreign corporations

                      Written by Max Reed

                      The United States is in the throes of the most comprehensive tax reform since 1986. On November 16, the House passed its version of the Tax Cuts and Jobs Act (“TCJA”). The Senate passed its version on December 2. While there are significant differences, both versions of the TCJA include what we will refer colloquially to as a “one-time tax” for US citizens that own foreign (including Canadian) corporations. If the TCJA  is enacted, US citizens with foreign corporations will owe a 14% tax on the total cash and investments owned by the corporation to the United States. The tax also applies, albeit at a reduced rate of 7%, to illiquid business assets.

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