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.

    Continue reading

    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.
      Continue reading

      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.
        Continue reading

        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.

          Continue reading

          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. 

            Continue reading

            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.

              Continue reading

              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.

                Continue reading

                US Tax Reform Presents Opportunities for Canadian Businesses

                US Tax Reform Presents Opportunities for Canadian Businesses

                  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.

                  Continue reading

                  The Application of the US PFIC Regime to Canadian Start-Ups

                  The Application of the US PFIC Regime to Canadian Start-Ups

                    Written by Max Reed

                    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.

                    Continue reading