U.S. tax reform has implications for some Canadians

Canadians, also lie in the estate tax regime.

To be sure, the basic exemption has doubled from inflation-indexed US$5.49 million to US$11.18 million — meaning Canadians will be subject to estate tax on U.S. property only if their worldwide net worth at death exceeds US$11.18 million.

But there’s a ointment.

“A separate law enacted last year imposes a penalty if the estate does not file a tax return,” Berg explains. “Previously, there was no such penalty.”

And the penalty is harsh: where a tax return is not filed, the cost base for assets as of the date of death is zero rather than fair market value.

“There’s no disadvantage in filing,” Berg says. “But filing does force disclosure of the estate’s worldwide holdings, which creates an opportunity for an audit to see if things have been done right.”

There are also consequences for Canadian entrepreneurs seeking to finance startups.

“The one thing that hasn’t got enough attention is the behaviour of U.S. capital and what choices it will make about investing,” says Paul Seraganian, a tax partner in Osler, Hoskin & Harcourt LLP’s New York office.

That’s important when the non-resource portion of the Canadian economy, particularly emerging technology companies, are looking for capital. Traditionally, much of that capital comes from or is managed by U.S. pools or venture capital funds.

“Tax reform has dealt these sources a set of cards that will change conventional thinking, to the detriment of Canadians’ ability to attract capital,” Seraganian says.

Historically, these pool structured their portfolios by setting up foreign parent companies in jurisdictions that offered lower tax rates than those in the U.S.

“The ‘inversion’ wave we saw was driven by the fact that, from a tax perspective, it was better for the parent company to be a foreign company rather than a U.S. company,” Seraganian says. “But tax reform has made that thinking a lot more choppy by creating a host of reasons that favour having U.S. parents.”

The upshot in the medium and long term may be that more and more Canadian businesses will be housed in U.S. corporate solutions.

“There could well be a hollowing out of emerging companies,” Seraganian says. “The jury’s still out on this, but the conditions are set.” fly in the