Category Archives: Canada/US tax issues

INTERNATIONAL TAX ASPECTS OF CANADIAN TAX PROPOSALS RE PRIVATE CORPORATIONS

On July 18, 2017, Canada’s Finance Minister Bill Morneau released a document entitled Next Steps in Improving Fairness in the Tax System by Closing Loopholes and Addressing Tax Planning Strategies.

This was no surprise-the Minister had hinted at this some months ago at a tax conference.

In a nutshell, the Minister, and his many left-leaning compadres in the Liberal government, don’t like the fact that generally well-to-do taxpayers have been using creative tax planning to mitigate the effects of Canada’s generally high personal tax rates. Such planning helps to reduce the real personal tax rate, which in Ontario can be as high as 53.5% thanks again to Trudeau, to a somewhat less confiscatory level.

Much of this planning is tied into the use of private corporations.

That is not nice, they say, because the average Joe Blow cannot avail him or herself of such tricks because they don’t have a private corporation to use.

There are three types of planning that are the focus of this document:

Income Spitting-they really hate this, and are going to KO it mainly by extending the “kiddie tax” concept to folks of all ages. In addition, they are going to cut the tap, mercifully with some grandfathering for pre-2018 gains, on the multiplication of the “capital gains exemption” (“CGE”) within the family. Forget about giving any to those lazy kids! If you go through these mind-boggling provision, you are going to need either some Tylenol, or something stronger that goes in a glass. I predict it is going to be weeks before tax pros begin to fully appreciate the implications.

Capital gains strips-Under the current system, it is possible to extract corporate surplus at capital gain rates (or equivalent). There are two main approaches that can be used:

  • “Crystallizing” a capital gain within the corporation and utilizing the resulting “capital dividend account” (“CDA”) to make much of the distribution tax-free, and
  • “Bumping-up” the adjusted cost base (“ACB”) of shares sold between family members, and using that increased ACB to create a tax-free “pipeline” to remove surplus. As long as the selling shareholder did not use the CGE, section 84.1 of the Income Tax Act (“the Act”) did not apply to treat the payments as deemed dividends.

The document proposes to put an end to such fun and games. In case of the former, kiss the CDA goodbye; in the case of the latter, welcome to the new expanded section 84.1

Earning Passive Income on Corporate Tax DeferralPrivate corporations have billions of dollars in retained earnings that result from active business income taxed at relatively low corporate tax rates.

The humorless mandarins at Finance don’t like the fact that, what they view as largely deferred taxes, is earning passive investment income for the benefit of the company and its shareholders, and not them

They are not even sure about what to do about this, they just know that they don’t like it!

They have even resorted to looking at an approach that was added to the Act in 1972, I believe as Part V tax, to deal with “non-qualified investments”-that was repealed a few years later.

Believe me, they will do something, and it will not involve giving medals to corporation who benefit from such planning.

 

But I am not here to write about any of the above in great depth. What I am here to focus on are the international tax aspects of the proposals.

What international tax aspects? There is nothing about that in Bill Morneau’s document.

However, they are there, but under the surface, and neither he nor the Prime Minister would ever want to acknowledge it.

Namely, with proposals like those, which will substantially remove the ability of high-income Canadians to soften the tax rates they pay, many such taxpayers will head for the nearest exit and do whatever they can to become non-residents. Remember, unlike the situations with our brethren to the South, Canadian citizens can completely say “bye bye” to Canadian taxes by becoming nonresidents. Remember the line in the 1976 film Network, “I am mad as hell and I can’t take it anymore!”. I also submit that, with the world of the internet and the “cloud”, it is easier and more feasible for Canadians to follow that path, even if they maintain business interests in Canada.

Furthermore, if Finance does bad things to corporate surplus invested in passive assets, corporations may well be inclined to shift their business offshore, unless Finance closes that too!

But, you won’t catch me complaining about any of this! After all, I specialize in helping Canadians individuals become non-resident-I even wrote a book about it! I also help Canadian companies to shift business offshore. Thanks so much Bill and Justin!

CANADIANS MOVING TO U.S. WITH CANCOS SHOULD CONSIDER “S CORP. BAILOUT”

Many Canadians who move to the U.S. are the sole shareholders of a Canadian corporation (“Canco”) that is either used for investment purposes, or which has substantial retained earnings generated from an active business. In such cases, they will generally face a Canadian tax hit when they leave (“departure tax”) in the form of a… Continue Reading

TRUMP CORPORATE TAX CUTS COULD TRIGGER CANADIAN TAX ON DIVIDENDS FROM U.S. SUBS

Shhhh! There is a dirty little secret that not many people know or talk about. A large percentage of U.S. subsidiaries (“Usco”) of Canadian companies (“Canco”) are actually resident in Canada based on traditional rules for determination corporate residency that are mainly derived from UK tax cases. This is because their “central management and control”… Continue Reading

TRUMP’S CORPORATE TAX PROPOSAL MAY HAVE FAPI CONSEQUENCES FOR CANADIANS

Donald Trump’s proposal to lower U.S. federal corporate tax rates to 15% will be welcome news for Canadians who are shareholders of a profitable U.S. corporation (“Usco”). However, in certain cases, the Canada Revenue Agency will have its hands outstretched for a piece of the tax savings. In cases where Usco is a “controlled foreign… Continue Reading

CANADIAN CORPORATIONS DOING BUSINESS IN U.S. VIA LLCs FACE BIG TAX PENALTY!

A Canadian corporation (“Canco”) which earns profits from carrying on business in the U.S. through a “permanent establishment” (“PE”) there will generally be subject to US federal taxes on its income derived from that PE. In addition to the normal federal income taxes on that income, as well as possibly state taxes, there is the… Continue Reading

CANADIANS CAN DEDUCT US TAX PAID RE LLCs EVEN IF NO INCOME REPORTED

As a general rule, a Canadian resident can claim of credit against his/her/its Canadian income tax liability for foreign income taxes paid (“foreign tax credit”-“FTC”). The rules relating to claiming FTCs are generally found in section 126 of the Income Tax Act (“the Act”). Unless the foreign tax is related to a business carried on… Continue Reading

CANADIANS WITH FOREIGN REAL ESTATE CORPORATIONS CAN FACE SURPRISING FAPI ISSUES

A Canadian resident who is a shareholder of a “controlled foreign affiliate” (“CFA”) will have special Canadian tax issues if that CFA earns “foreign accrual property income” (“FAPI”). Any corporation that is not resident in Canada (“Forco”) will be a CFA of a particular Canadian resident if it is controlled by that Canadian resident.  However,… Continue Reading

U.S. RESIDENTS PROVIDING SERVICES IN CANADA CAN HAVE A DEEMED PE

As a general rule, a U.S. resident carrying on business in Canada will be exempt from Canadian income tax on any profits from that business unless there is a “permanent establishment” (“PE”) in Canada. This is provided in Article VII(1) of the Canada-U.S. Tax Convention (“the Treaty”). There are exceptions to this general rule. The… Continue Reading

CANADIAN TAXATION OF DEATH BENEFITS FROM A U.S. IRA

A Canadian resident would not normally expect to pay any Canadian income tax on an inheritance received from a family member living in the U.S. However, that is exactly what can happen if a Canadian resident receives a payment as a beneficiary of a (conventional) Individual Retirement Account (“IRA”). That is because of the fact… Continue Reading

CANADIAN TAX ISSUES WITH CROSS-BORDER SHARE EXCHANGES

As a general rule, where a Canadian resident exchanges shares of a corporation for shares of another corporation, that exchange will constitute a “disposition” of the original shares for the purposes of the Income Tax Act (“the Act”), and the “proceeds of disposition” will be equal to the fair market value of the shares received… Continue Reading