Written on behalf of Feigenbaum Consulting
CBC News reports that the Canadian government is in discussions with Washington about the impact of the Republican’s Tax Cuts and Jobs Act.
Retroactive Repatriation Tax
Part of the U.S’ $1.5 trillion tax overhaul package was a one-time retroactive Transition Tax, also known as the Repatriation Tax. This provision was intended to discourage U.S. multinational companies, such as Microsoft and Apple, from leaving their money in foreign subsidiaries.
However, this provision is affecting Canadian residents with U.S. or dual citizenship who own Canadian corporations/have incorporated in Canada. It affects earnings going back to 1986. This includes celebrities and professional athletes who have set up Canadian companies to handle their endorsement revenue and Canadians who have been using their small businesses to save for retirement. Many individuals are now facing several hundreds of thousands or millions of dollars in tax bills.
The tax itself would be levied against revenue sitting in a Canadian corporation, but it would be the corporate owners who would have to declare the money on their 2017 tax returns. In June, those affected were given more time to file returns and make their first payments owing.
Newly Imposed Regulations Heighten the Impact
Since then, regulations issued in a guidance document released last week by the IRS and the U.S Treasury Department have threatened to intensify the financial impact on Canadians even more.
While many Canadians affected by the repatriation tax were planning to use a long-standing American tax deduction to ameliorate the effect of the tax, the newly announced regulations will permit only a portion of that deduction.
In addition, the new regulation stipulates that anyone who wants to avoid a U.S. tax obligation by renouncing their American citizenship will have to pay taxes owing immediately. Previously, those who were owing U.S. taxes could pay them over a period of eight years.
In order to mitigate the U.S. tax burden the affected Canadians may need to pay more in Canadian income tax.
Some experts believe that the new regulations violate the Canada-U.S. Tax treaty intended to prevent double taxation.
Discussions with Washington
Finance Minister Bill Morneau has said:
We’re continuing to consult with Americans to make sure that we fully represent the challenges that these changes have made for Americans or dual citizens living in Canada…[t]hat’s an ongoing process. We certainly hope that we can make progress.
This marks the first time that the Canadian government has indicated that it is taking steps to address the impact of the tax reforms south of the border.
Morneau did not answer reporters when they asked whether he thought the new regulations violated the Canada U.S. tax treaty.
We will continue to monitor the cross-border discussions as they unfold, and will provide commentary as more information becomes available. In the meantime, if you have questions about your personal tax planning or corporate tax planning, contact Feigenbaum Law. We regularly assist business owners with tax returns and complex tax planning, including cross-border planning. We have been leaders in cross-border tax services for many years.
Mark Feigenbaum brings practical business knowledge, gained through roles in the entertainment industry, manufacturing, retail, public accounting and education, to all aspects of his law practice. We follow developments in the law on both sides of the border and understand the issues our clients face as a result. We can often anticipate problems and address them before they even arise.