Vancouver Sun

Dra­matic tax re­form to bring dou­ble tax­a­tion to some Cana­di­ans

- JULIUS MEL­NITZER Business · Tax Credit · Finance · Taxes · Income Tax · Fraud · White-collar Crime · Crime · United States of America · Gartner Research · Canada · Google · Apple Inc · Steve Jobs · U.S. Internal Revenue Service · New York City · Harcourt, IA

While much of the com­men­tary on U.S. tax re­form has fo­cused on the im­pact on busi­ness, some nasty sur­prises are in store for in­di­vid­ual Cana­di­ans, par­tic­u­larly those with dual cit­i­zen­ship or who hold a U.S. green card.

“The Amer­i­cans have fun­da­men­tally changed the way that for­eign in­come is taxed for U.S. cit­i­zens and res­i­dents,” says Roy Berg, di­rec­tor, U.S. Tax Law at Moodys Gart­ner Tax Law LLP. “For ex­am­ple, a doc­tor who is a dual cit­i­zen and prac­tis­ing in Canada and has $2 mil­lion of ac­cu­mu­lated earn­ings in a pri­vate Cana­dian cor­po­ra­tion, would have a one-time U.S. tax li­a­bil­ity of $300,000 this year.”

The tax is part of the “par­tic­i­pa­tion ex­emp­tion sys­tem” that al­lows in­come earned abroad to be repa­tri­ated to the U.S. with­out penalty.

“What it means it that for­eign in­come is not taxed again when it comes into the U.S.,” Berg says. “That’s why Google, Ap­ple and a host of other tech com­pa­nies are bring­ing cash back in con­tainer loads.”

But there is a price, now known as the “tran­si­tion tax.” It im­poses a one-time levy on U.S. cit­i­zens and cor­po­ra­tions who own at least 10 per cent of the vote or value of a for­eign cor­po­ra­tion, in­clud­ing di­rect, in­di­rect or con­struc­tive own­er­ship of such stock.

“The tran­si­tion tax is par­tic­u­larly oner­ous be­cause it ap­plies not only to cash and cash equiv­a­lents held out­side the U.S., but also to non-cash as­sets re­al­ized from the in­vest­ment of busi­ness earn­ings,” Berg says.

And while U.S. cor­po­ra­tions are of­fered re­lief in the form of the tax-free repa­tri­a­tion pro­vi­sions in the Tax Cuts and Jobs Act, in­di­vid­u­als are ef­fec­tively sub­ject to dou­ble tax­a­tion. Even for­eign tax cred­its will not be avail­able in Canada be­cause the tran­si­tion tax is not im­posed on a for­eign (from the Cana­dian per­spec­tive) source of in­come. To make mat­ters worse, the In­ter­nal Rev­enue Ser­vice has re­cently is­sued a no­tice that it will dis­re­gard any trans­ac­tions un­der­taken for the prin­ci­pal pur­pose of re­duc­ing the tran­si­tion tax.

“Tax lawyers are try­ing to mit­i­gate the tran­si­tion tax, but cur­rently there is no vi­able so­lu­tion,” Berg says.

Traps for the un­wary, in­clud­ing non-dual cit­i­zen­ship hockey and maple syrup 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 fly in the 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

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

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 non­re­source por­tion of the Cana­dian econ­omy, par­tic­u­larly emerg­ing tech firms, 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.””

 ?? SAUL LOEB/AFP/GETTY IM­AGES FILES ?? The U.S. tax re­form will neg­a­tively af­fect some in­di­vid­ual Cana­di­ans, par­tic­u­larly those with dual cit­i­zen­ship or who hold a U.S. green card. “The Amer­i­cans have fun­da­men­tally changed the way that for­eign in­come is taxed for U.S. cit­i­zens and...
SAUL LOEB/AFP/GETTY IM­AGES FILES The U.S. tax re­form will neg­a­tively af­fect some in­di­vid­ual Cana­di­ans, par­tic­u­larly those with dual cit­i­zen­ship or who hold a U.S. green card. “The Amer­i­cans have fun­da­men­tally changed the way that for­eign in­come is taxed for U.S. cit­i­zens and...

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