Drawing the line in the U.S. tax raid on Canada

The U.S. tax reform enacted last December is reaching a long arm into Canada — to grab retirement funds that have accumulated within private Canadian corporations that are owned by socalled “U.S. persons.”

This unfortunate club includes Canadians with dual citizenship, American citizens living in Canada and U.S. Green Card holders.

It sweeps in Canadians who have lived and earned a living in Canada for their whole adult lives — Canadians who are “U.S. persons” only because their Canadian parents happened to be in the U.S. when they were born.

Yet they are being caught up in a U.S. “repatriation tax” that is ostenstibly aimed at forcing U.S. corporations to bring trillions of dollars of foreign earnings home.

The United States is not home for thousands of affected Canadians who have incorporated a small business, farm or professional service here and who are being told by U.S. tax authorities they must pay a 15.5 per cent tax on retained earnings accumulated in their company since 1986. Self-employed owners typically retain these earnings as a retirement fund. Many Canadians affected will have to substantially reduce their savings to pay the massive U.S. tax bill and will incur a Canadian tax liability, too, when they take funds out of their companies to do so. Some Opposition MPs have been calling on the Trudeau government to ensure Canadians in this situation are not double-taxed. They want Ottawa to have the Americans agree to credit any Canadian taxes paid against the U.S. repatriation tax liability. That would be the usual arrangement under the Canada-U.S. tax treaty.

Ottawa should take a stronger stand than that. The Trudeau govenment should make it clear it will not permit this violation of Canada’s economic sovereignty and what amounts to abuse of its citizens in their own country.

The supposed purpose of the repatriation tax was to fix a broken system that penalized U.S. firms for bringing home the earnings of foreign subsidiaries. If they did so, they were taxed at the full U.S. rate of 35 per cent. The U.S. is now transitioning to an exemption for foreign earnings taxed abroad. In the meantime, the 15.5 per cent one-time tax on past offshore earnings was conceived as a break for firms like Apple, Google and the U.S. banks with large foreign cash holdings. It’s half what they would have paid in the past for bringing these funds to the U.S. It’s also, of course, a huge windfall for the U.S. Treasury.

But applying the same rule to Canadian small-business owners is anything but a tax break. Here, the U.S. is raiding the retirement savings of Canadian citizens and long-time residents in Canada and claiming a right to tax income that was earned in Canada and saved in Canadian companies. To call this a “repatriation” of income is nonsense. These savings have no connection whatsoever with the United States. They are already home, right here in Canada.

It would be a travesty for Finance Minister Bill Morneau to allow the U.S. to force the liquidation of savings held in Canadian companies — and for Ottawa to collect its own tax on this forced sale. The Trudeau government should draw a line here. This “unintended consequence” raid is an unacceptable export of U.S. tax law to Canada.