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.
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.
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.
On November 2, 2017, the US House of Representatives unveiled the Tax Cuts and Jobs Act which contains the most sweeping changes to US tax law in 30 years. While it remains unclear whether, when, or in what form the new bill will become law, but if it passes in its current form Canadian businesses with US operations will want to revisit their cross-border tax and business plans.
Many Canadian start-ups, whether junior mining, biotech, or tech, receive funding from investors in the United States (or from US taxpayers who reside in Canada). If the proper steps are not taken, a punitive US tax regime (the passive foreign investment company or “PFIC” rules) may increase the tax cost on an exit of these investors. Amongst other things, the PFIC regime can easily double the tax cost on exit from the investment. These adverse tax consequences can be mitigated if addressed in the first year the investment is owned. Consequently, to ensure tax efficiency for investors and avoid potential civil liability, early stage companies should make US investors aware of the potential application of the PFIC regime and take the steps necessary to address it.
By Max Reed and Charmaine Ko, US Tax Lawyers
Last May, the U.S. Department of Justice sued Jeffrey P. Pomerantz — a Canadian resident, US citizen — for over USD $860,300 in penalties and interest for failing to file his FBAR bank disclosure forms. This case is one of the first known instances of the enforcement of FBAR penalties against a US citizen living in Canada. US citizens who have bank accounts abroad are supposed to file an FBAR each year if they have over USD $10,000 in the aggregate in bank accounts outside the United States. The penalties for failing to file an FBAR are very harsh – ranging from USD $10,000 per account to the greater of $100,000 or 50% of the balance of the account if the violation was willful.
Whether for ideological reasons or tax complications, many people want to shed their U.S. citizenship. There are two ways to do so: renunciation and relinquishment. Renunciation requires swearing an oath at a U.S. consulate. A person who renounces is no longer a U.S. citizen from the date of that oath onward. Meanwhile, relinquishment refers to losing U.S. citizenship due to a prior external event called an “expatriating act.”
This article will focus on relinquishment. It is possible – although not without tax risk – to have lost U.S. citizenship for both tax and immigration reasons due to an “expatriating act” that occurred prior to 2004. The tax and immigration consequences of relinquishment are complex, so professional advice is a must.
Many Canadians inherit money from relatives in the United States. There are generally no issues on either side of the border if a Canadian inherits property or money through a will. That being said, many U.S. residents plan their estates by using a trust rather than a will for the purpose of avoiding probate. U.S. tax law pretends this trust does not exist. As such, there is a bump in cost basis when the person who set up the trust dies so there is no capital gains tax when the assets are later liquidated.
Canada takes a different view, however, and this can cause tax problems for Canadian residents who inherit from U.S. trusts.
Canadian residents who aren’t U.S. citizens may be surprised to know that U.S. estate tax can apply to them.
That’s because U.S. estate tax applies to any assets that are considered to be located in the United States. 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 2016 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. Canadians get an increased estate tax credit thanks to the Canada-U.S. Tax Treaty, which is more complicated than meets the eye.