As of January 1, 2018, most of the key provisions to the U.S. Tax Cuts and Jobs Act (the “Act”) have come into effect. But what does this mean for Canadians who have cross-border ties? This week we explore three key provisions of the Act that Canadians who own property or carry business in the U.S. must consider.
1) Transition Tax
This is a one-time tax that all U.S. persons, including corporations, must pay if they (1) live outside the United States, and (2) own at least 10% voting stock in a privately held, non-U.S. corporation, at 15.5% on cash assets and 8% on non-cash assets.
A recent CBC article highlighted a few Canadians this has impacted. One individual, Brian Arthur, a retired Queens University professor and doctor, is a dual Canadian-American citizen who estimates that the new tax will cost him anywhere from $200,000 – $300,000. Arthur claims that he will most likely have to sell investments held by his company to pay the tax. He also risks having to pay Canadian income tax on the money.
2) Estate Tax
If you’re a Canadian who owns U.S. situs property (real estate, stocks, and bonds), the estate tax reforms will be welcome news. Under the Act, you will only be subject to estate tax on U.S. property if your international net worth at death exceeds $11.18 million – double the former basic exemption amount. The catch, however, is that if you die holding on to these properties, your estate must file a U.S. estate tax return upon sale of the property or be subject to a hefty penalty that will give the U.S. federal government a significant portion of the proceeds.
Take, for example, a Canadian woman who owns a house in Florida valued at $200,000 USD. Upon her death, should her estate fail to file an estate tax return following the sale of the house, the estate could be on the hook for paying $50,000 USD to the U.S. federal government.
3) Changes to Corporate Tax
Effective January 1, 2018, the U.S. federal corporate tax rate has been reduced from 35% to 21%. This change may be seen as a negative to Canadian businesses, since Canadian companies will now be taxed at a higher rate than companies in the U.S., potentially impacting the ability to attract investment to Canada. Alternatively, for Canadians considering opening businesses or expanding their company into the U.S., the reduced corporate tax rate will be a welcome relief.
Ultimately, the new tax reforms will affect Canadians who own U.S., situs property, Americans who live abroad and own stock in foreign companies, and businesses in both countries. The U.S. Tax Cuts and Jobs Act is a complex tax policy and it is imperative to consult a legal professional with demonstrated experience in cross-border taxation should you believe that this will impact your personal or corporate tax planning and compliance strategy.
Mark Feigenbaum is uniquely positioned to provide tax advice to clients on both sides of the border.
Due to his vast knowledge of both American and Canadian tax systems, professionals in both countries, including other lawyers, accountants, financial planners, agents, and business managers, frequently refer complicated tax matters to the firm. Mark has developed a stellar reputation for the exceptional quality of his work and for finding creative solutions to seemingly unsolvable problems.