One of the largest overhauls of the tax code in many years has finally passed through the legislative system. Normally changes have dramatic effect on those in the US, but rarely have significant effect on US citizens in Canada because generally our higher individual tax rates provide enough foreign tax credit to offset any US tax on foreign source earnings. However, in this round of changes, there are numerous additional provisions which would affect US citizens living in Canada.
Here is a brief overview of some of these changes which may or may not affect US citizens in Canada depending on the circumstance.
First there are changes to the top marginal tax rate which has been lowered from 39.6% to 37% and tax brackets have been modified. These changes are for tax years beginning after December 31, 2017 to before January 1, 2026, and then would return to the 2017 rates and brackets, as adjusted for inflation. Given that Canadian tax brackets are typically smaller, and Canadian tax rates are generally higher, it is unlikely that a US citizen in Canada will benefit much from these changes in tax rates, unless they also have US source income.
The Alternative Minimum Tax (AMT) provisions have been retained, but the AMT exemption amounts have been increased, and the phase out thresholds have been increased to $ 1 million dollars (MFJ filers) and $500,000 (for all others). In contrast, in the prior law, the exemption amounts were entirely phased out when income surpassed the phase out threshold ($254,450- $508,900, depending on filing status); thus, AMT should be a consideration for fewer taxpayers during tax years beginning after December 31, 2017 to January 1, 2026.
One major change is the elimination of personal exemptions for the taxpayer, spouse and dependents. In lieu of these personal exemptions, the standard deduction for filers have increased dramatically:
- Married Filing Joint $24,000 (was $13,000)
- Head of Household $18,000 (was $9,550)
- All others $12,000 (was $6500)
Another notable change is the Child Tax Credit is increased to $2000, with up to $1400 of this amount being refundable. The eligibility for the Child Tax Credit (CTC) amount has increased, as the income phase out range has increased, so more taxpayers will be able to benefit from the CTC. One change to the eligibility criteria, however, is that the qualifying child must have a social security number (SSN). Previously a qualifying child who did not have a SSN but did have Individual Taxpayer Identification Number (ITIN) would qualify for the CTC; this is no longer the case. Accordingly, US citizens with non-US citizen dependents may be ineligible for the CTC.
Alimony is no longer deductible by the payor and is no longer includable in income by the recipient. For US citizens living in Canada, this may have tax implications, as Canada permits a deduction for alimony payments, which may result in less Canadian tax being paid, and insufficient foreign tax credits to be used against a US tax liability.
Deductions for moving expenses are no longer permitted; similarly, moving expense reimbursements from employers are now a taxable benefit.
Some itemized deductions have been capped or eliminated entirely for tax years beginning after December 31, 2017 to before January 1, 2026:
- All miscellaneous itemized deductions are suspended (e.g. investment management fees, tax prep fees, employee business expenses)
- Personal casualty and theft loss itemized deductions are suspended
- State and local tax itemized deductions are capped at $10,000 ($5000 for MFS). Foreign real property taxes are no longer permitted as a deduction.
- The mortgage interest deduction is permitted only on indebtedness up to $750,000 ($375,000 for MFS), and the home equity indebtedness is suspended for tax years 2018-2025. There is a transitional rule for mortgage debt the existed prior to December 15, 2017 and for those who entered into a binding contract prior to December 15, 2017.
Other changes to itemized deductions:
- Cash donations to public charities and certain foundations is increased from a maximum of 50% of AGI to 60% of AGI; unused contributions would carry forward 5 years.
- The medical expense threshold is reduced to 7.5% of AGI from the current 10% medical expense threshold. This is retroactive to 2017.
The overall limitation of itemized deductions on higher-income taxpayers (commonly referred to as “Pease” limitation) are suspended.
For US citizens that are also shareholders of Canadian corporations, there are changes coming to the Controlled Foreign Corporation (CFC) rules and related Subpart F rules. Some notable changes include:
- Changes to CFC attribution are changing such that constructive ownership rules will consider stock that is owned by related foreign person will be attributed to a related US person for the purposes of determining whether the US person is a shareholder and whether the corporation is CFC. Accordingly, taxpayers should undertake a review of their compliance requirements, in light of these changes.
- The definition of a US shareholder is revised to include any US person who owns more than 10% of the total value of shares of all classes of stock of a foreign corporation
- The 30 day holding period for CFC stock is eliminated for the purposes to determining Subpart F income inclusions
- Certain income inclusion may be required of U.S. shareholders owning at least 10% of a foreign corporation may be subject to a deemed income inclusion on accumulated earnings and profits, to the extent such E&P has not been previously subject to U.S. tax. An election to pay the tax liability over a period of 8 years is permitted.
- A foreign tax credit is allowed for any Subpart F income that in included on a current year basis
- Sales of inventory will be sourced to the location of production, not where title of goods passes
These are serious changes which will affect many US citizens who have shares of private Canadian companies. They are complex rules and accordingly, US taxpayers should undertake an immediate review of their compliance requirements relating to their Canadian corporations, in light of these changes. Failure to plan for these changes may result in an unexpected US tax burden.
This is only a brief summary of a few of the many changes in this legislation. For more information, please contact Mark Feigenbaum.
Dr. Mark Feigenbaum is a US Attorney at law, Barrister and Solicitor, Certified Public Accountant, and Chartered Professional Accountant, practicing in Thornhill, Ontario specializing in cross-border taxation for individuals primarily in the sports, entertainment and music industries, and individuals moving to and from the U.S., businesses expanding to the U.S., estate planning, U.S. immigration, and tax litigation. He can be contacted at firstname.lastname@example.org or 905-695-1269.