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US Tax Reform Bill Appears To Confiscate 12% of Retained Earnings of Certain Canadian Controlled Private Corporations



Kudos to Max Reed for his quick analysis on how the proposed U.S. Tax Reform bill may affect Canadian citizens/residents who also hold U.S. citizenship.

Reed’s analysis, which has been widely discussed at the Isaac Brock Society includes provisions that are very damaging to those who are the owners of Canadian Controlled Private Corporations (noting they are also under assault from Messrs. Trudeau and Morneau). The damaging provisions are both prospective and retrospective.

First, the prospective as described by Reed:

New punitive rules that apply to US citizens who own a business. Currently, most US citizens who own a Canadian corporation that is an active business don’t pay tax on the company’s profits until they take the money out. The House plan changes this. It imposes a new, very complicated, set of rules on US citizens that own the majority of a foreign corporation. The proposal would tax the US citizen owner personally on 50% of the entire income of the Canadian corporation that is above the amount set by an extremely complex formula. At best, this will make the compliance requirements for US citizens that own a business extremely complicated and expensive. At worst, this will cause double tax exposure for US citizens who own a Canadian business on 50% of the profits of that business.

Second, the retrospective as described by Reed:

Imposition of a 12% one-time tax on deferred profits. Under the new rules, the US corporate tax system is transitioning to a territorial model. As part of this transition, the new rules impose a one-time 12% tax on income that was deferred in a foreign corporation. Although perhaps unintentional, since US citizens will not benefit from a territorial model, the new rules impose a 12% tax on any cash that has been deferred since 1986. Take a simple example to illustrate the enormity of the problem. A US citizen doctor moved to Canada in 1987. She has been deferring income from personal tax in her medical corporation and investing it. Now, 12% of the total deferred income since 1986 would be subject to a one-time tax in the US. That may be a significant US tax bill.

In other words, the U.S. as part of a transition to “territorial taxation” for U.S. corporations is proposing to confiscate 12% of the retained earnings of Canadian Controlled Private Corporations that are owned by Canadians who hold U.S. citizenship. At first, I found this difficult to believe. It’s bad enough to do this to U.S. residents. But, the U.S. tax bill, if read literally, is broad enough to extend to Canadian Controlled Private Corporations. Could this really be happening? Would the U.S. effectively “Cyprus” the retained earnings of CANADIAN Controlled Private Corporations?

Although hard to believe, it’s worth noting that the main effect of the U.S. S. 877A Exit Tax is to confiscate non-U.S. assets (including Canadian pensions) which were accumulated after a person moves away from the United States. It’s also true that the Obamacare surtax applies to distributions from Canadian RRSPs but does not apply to distributions from IRAs.

My Thoughts

When one reads this, it seems clear that the lawmakers are visualizing U.S. residents who are individual shareholders of CFCs or other foreign corporations. They seem to be completely oblivious to the fact that this provision – taken literally – would apply to citizen/residents of other countries who have corporations in those countries. These corporations are obviously not foreign to those individual shareholders.

This is probably one more unintended consequence of citizenship-based taxation. That said, it is taking citizenship-based taxation to a new and heightened level of obscenity that has never before been contemplated. In short, the United States of America is seriously proposing to confiscate the retained earnings of Canadian Controlled Private corporations which are owned by Canadian citizen/residents.

The time has come for the Government to take a principled stand against this absolutely “over the top” intrusion into Canada. The United States is in fact turning all U.S. citizens residing in other countries into instruments of confiscation.

Under no circumstances can this be tolerated. Those who are concerned about this should write your MP and contact Finance Minister Morneau. It seems clear that the United States is looking to increase its tax base beyond its borders. FATCA and the FATCA IGAs play a major role in helping the United States identify “U.S. citizens”. The IGAs also help identify those “entities” (including corporations) that are owned by Canadians who also hold U.S. citizenship.

It is increasingly clear that survival as a U.S. citizen outside the United States is impossible. I expect that this provision will encourage even more renunciations. Even if the provision is corrected, it demonstrates that the United States has no regard whatsoever for its citizens abroad or for the sovereignty of other countries.

Closing Thoughts

The “centerpiece” of the Tax Reform bill is a move away from the taxation of “worldwide income” earned by U.S corporations, to “territorial taxation” for those corporations.

For most countries a move to “territorial taxation” means that the country taxes ONLY income earned in its “territory” (in this case the USA).

When the USA moves to “territorial taxation” it means that it now claims the right to impose taxation on more income earned OUTSIDE its territory in Canada!

This shows you the perverse effects of U.S. “taxation-based citizenship”.

Seriously, “you can’t make this up!”

Have a question? Contact John Richardson

Your comments are welcome!

 

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The Reality of U.S. Citizenship Abroad

My name is John Richardson. I am a dual citizen. I am a lawyer – member of the Bar of Ontario. This means that, any counselling session you have with me will be governed by the rules of “lawyer client” privilege. This means that:

“What’s said in my office, stays in my office.”

I am also a member of the American Citizens Abroad Professional Tax Advisory Council (PTAC). This is an advisory panel focused on assisting American Citizens Abroad in an FBAR and FATCA world.

The U.S. imposes complex rules and life restrictions on its citizens wherever they live. These restrictions are becoming more and more difficult for those U.S. citizens who choose to live outside the United States.

FATCA is the mechanism to enforce those “complex rules and life restrictions” on Americans abroad. As a result, many U.S. citizens abroad are renouncing their U.S. citizenship. Although this is very sad. It is also the reality.

20 thoughts on “US Tax Reform Bill Appears To Confiscate 12% of Retained Earnings of Certain Canadian Controlled Private Corporations

  1. Avatar Em R. says:

    Coupled with the injustice and insanity of citizenship-based taxation for individuals which Ways & Means has not yet redressed and likely will not, this repatriation tax is a doubling down of what looks like intentionally directed misery on a subset of Americans who merely dared to leave the plantation for a better life elsewhere. It’s also pure theft from the economies of the countries in which these Americans reside. Meanwhile the USA skates away as the one and only true tax haven in the world. It’s outrageous!

  2. This is obscene. It is one thing to force citizens to pay high compliance costs to file when they owe nothing. Add to that the second layer of unreasonable obligation-risk of fines for the information reporting forms and the completely punitive aspect of PFICs. Policies which prevent expats from responsible retirement planning. FATCA and the outrageous behaviour of the US to force countries to comply or else ruin them financially.

    But this crosses a line that is likely going to be the straw that broke the camel’s back. It is unacceptable for one country to reach into another and draw out its capital. How long will it be before countries find ways to push back, to refuse? I believe the US will find willful, outright refusal to comply with this tax. And what to say of those who are compliant and have paid their taxes all along. Is it reasonable to put a 12% tax on their retained earnings just because this is the method of shifting to a territorial system for corporations? Corporations who have not paid tax on their non-repatriated earnings?

    There are going to be a lot more formal renunciations; some where people just walk with their feet because they are already under the radar.

    So what if it makes them covered? Most do not have all that much anyway. As long as one has no US assets there is very little that can be done in terms of enforcement.

    FATCA is not finding everybody. No one in our community has reported being contacted by the IRS. In Canada for example, there have been 3 turnovers. And the data-mined info from the Swiss bank programs will only apply to people who have far more money than the average American abroad.
    People have figured these things out. What is easily apparent is that the people who are hurt the worst are those that have complied, who are in the system.

    Many people don’t care if they go back to the US. Many are people who do not have children or won’t have US heirs. After 6 long years of this, one would think the US would be getting the message. The objective of compliance cannot be achieved by penalties, scaremongering or assuming people will simply cave in to US exceptionalistic expectations.

    And to think this could all have been avoided had the US taken responsibility for the fact it had never properly informed people of these requirements. If only they had just asked, instead coming down upon all of us as if we were criminals.

    I will never understand why the tax compliance community, the people most likely to understand all this, do not come out against what many of them have privately voiced, is unfair. Maybe some of you could explain that someday.

  3. Avatar Karen says:

    If I were still a US citizen and had an interest in a corporation that the US considers a CFC, I would be busy right NOW making a renunciation appointment with some (any) consulate for as late in December as possible. Having the appointment would be an option which could be exercised or not depending on whether this provision is in a bill passed before the end of the year. With a 2017 renunciation date, you wouldn’t have to file 2018 US returns, so this “repatriation” provision would never apply. I foresee a rush for the exit if this becomes law – on top of the record numbers of renunciations under current law.

  4. Avatar jen says:

    So let me get this straight…

    The US chases its citizens living abroad to file and pay personal income tax to the US, even though they live legally and have a residency permit for the country they live and work in. So double taxes.

    Then if that US citizen owns their own company living abroad, again paying taxes into their local system as they are resident of that country, are now going to have to pay tax again on their business? Triple taxes.

    Meanwhile, Apple, Medtronic and numerous US corporations take advantage of inversion to incorporate overseas and avoid US tax. In fact many corporations are getting refunds.

    Got it.

  5. Avatar Suzanne says:

    My husband and I own a small Canadian corporation that makes TV commercials. This plan, if implemented as Mr Reed speculates, simply put, will destroy us and leave our retirement plans in ruins. We cannot pay any tax in addition to the tax we already pay the Canadian government, especially to a country where we receive no social benefits. We cannot repatriate a corporation to the US that was never based there, a company that was created by Canadians in Canada. US law won’t even allow us to open a bank account in the US as non-residents. This proposal would force us to shut down an award-winning company that contributes to the economy of several countries around the world, including the United States. This year in Florida alone we injected at least $.5M into the local economy and there are plans to bring more work to the state before year’s end. This hurts Americans in the US as much as it would hurt us if we were forced to shut our operations down.

    Will US lawmakers really put corporations ahead of the livelihoods of it’s citizens living beyond America’s borders? If so, it gives conflicting meaning to “corporations are people too”, when people aren’t as worthy of your thought and attention as corporations and deserve less than a fair shake in tax reform.

  6. Avatar Juan says:

    I’m not getting how this is an improvement.

    Many of us pay taxes in our countries of residence and then are double taxed on our income by the US.

    Also, many of us living overseas have our own businesses, as we often work as consultants rather than as employees. And we pay taxes on that in our countries of residence. Taxing our company in the US on top of what we already pay amounts to triple taxation. And triple compliance effort.

    Stop the insanity!

  7. Avatar Mg says:

    This is insanity. The majority of these people have no ties to the country other than a birth certificate. This is where we draw the line. Do not enter the tax system. Do not tell your bank you are a USP. . NOTPAYINGTHIS

  8. Avatar Karen says:

    I’d really like to see someone explain how this would be computed. Would it be based on prior filings of form 5471, or would it need to be re-calculated looking at annual income statements / tax returns? I presume the computation is done in USD on a year by year basis – or could a functional currency be used for all computations with translation of only the final amount to USD? It only applies to deferred foreign income; so if your small business has some US source income, I presume you would have to go back year by year and remove that from “deferred income”.

    The articles written so far seem to assume that retained earnings will be approximately equal to the deferred foreign earnings to be “repatriated” – this will not be the case if local currency cannot be used as a functional currency, if there are any US source earnings, or if the company was formed before 1986.

    Another question I have is how they will determine whether those deferred earnings are invested in cash (and taxed at 12%) or something else (business assets?). Is it based on the relative value of assets currently on the balance sheet? GAAP book value? IFRS book value? Tax book value? Market value?

  9. Avatar Laura says:

    I am curious as to how those in the tax compliance industry justify not lobbying as a group against this violation of other nations’ sovereignty, theft of assets the US is NOT entitled to and human rights abuse of the innocent without recourse.

    Certainly AICPA has clout in DC. If you are not fighting this then you are collusive in abuse. If you are profiting from this abuse may you rot in Hell along with US legislators that do NOTHING to stop this atrocity.

    It is beyond time for Americans abroad to just say NO; I refuse to pay a nation I DO NOT LIVE IN one single penny. Come and get 9M of us, good luck. Diasporas matter, you’ve squandered yours for a pittance.

    Local governments need to be lobbied hard to bypass US dollar thus rendering US unable to enforce FATCA extortion and global financial control. They have been poor stewards of reserve currency privilege.

  10. Avatar Juan says:

    I’m not getting how this is an improvement.

    Many of us pay taxes in our countries of residence and then are double taxed on our income by the US.

    Also, many of us living overseas have our own businesses, as we often work as consultants rather than as employees. And we pay taxes on that in our countries of residence. Taxing our company in the US on top of what we already pay amounts to triple taxation. And triple compliance effort.

    Stop the insanity!

  11. Em R, Patricia Moon and Karen:

    Thanks for those comments. It’s not even a question of whether those affected agree to pay the tax or not. For most, it would not even be an option. Where would they find the money?

    I suspect that this will be the thing that will finally wake these “FATCA Whipped foreign governments” into action. They will not permit the USA to simply reach in and steal a pool of capital that is rightfully theirs to tax – a pool of capital that has accumulated because of their own domestic tax policies!

    For those affected, it involves the outright “confiscation” of their retirement assets. Furthermore, there is no provision that would exempt these earnings from future taxation (although any tax payment might be added to the capital cost of the shares).

    It is extremely disappointing that the tax compliance community will not voice their opposition (if they oppose it) to this outraegeous, unjust and unexpected initiative to confiscate assets belonging to the residents (and usually citizens) of other nations.

    This has NOTHING whatsoever to do with the payment of tax. It has everything to do with the confiscation of assets.

    To add insult to injury, the owners of these “so called” foreign corporations do NOT even get the benefits of “territorial taxation” which is available only to U.S. corporate shareholders.

    Where are the voices of the opposition?

  12. The formula is a mystery for how this 12% will be calculated and applied to small non U.S. companies located in non U.S. countries with nothing to do with the U.S. yet run by a U.S. Person.

    As it will be a new tax that no other country has, no doubt it will sail straight through the tax treaties without any alleviating tax credit, as pure double taxation.

    Retained Earnings, sounds like this may include:
    – paying down the principal of a business loan
    – savings within the company for expansion
    – mismatch in tax codes with GAAP.
    – mismatch in tax years between a country and the U.S.
    – phantom retained earnings due to currency fluctuations.

    How fair is the above, especially in view that there are no U.S. resident services provided by the U.S. in exchange in the countries the 9 million U.S. persons live in outside of the U.S.?

    If a small business is not now compliant will they then have to redo their books for the past 11 years to conform to GAAP – tax law of foreign country – figure out the application of the U.S. law for each year?

    This could be the final straw for many far beyond any point of reasonableness from which they may be coaxed into compliance. It will reaffirm the notion that U.S. extraterritorial double taxation comprises tributary slavery.

  13. Avatar Carol T says:

    The US exceptionality nightmare and up’s and down’s for US-deemed US Persons Abroad is never-ending. I can’t claim to understand the latest chapter of this but wonder if somehow it can affect some of those on the infamous *Name and Shame* list, the definition of how many of our names were added to the Quarterly Publication of Individuals Who Have Chosen to Expatriate not clear to us.

    How our chosen countries of citizenship / residence allow foreign law that enables US Persons to be the means of US Trojan Horse theft from our countries and loss of our sovereignty is also a mystery.

  14. Avatar Charles Buckley says:

    These regulations correspond to a shift to a territorial model in name only. Dividends may no longer be taxed, but with these regulations, the complicated reporting requirements, and the taxation on money that a shareholder doesn’t have, and would have to go through another taxable event to obtain. Fundamentally, one should not be taxed on money one doesn’t have. This is just obvious.

    I see nothing in the Tax Cuts and Jobs Act that would be hurt by adopting my Respect of Sovereignty Law which essentially makes the entire US code inapplicable to bona fide residents of other countries. TTFI is too complicated for Congress to understand — there needs to be a simple exclusion that accomplishes the entire goal — Congress are simply not going to understand anything else.

  15. Avatar Stephen Kish says:

    It would be helpful if tax experts reading this blog would comment on the accuracy of the opinion of Mr. Max Reed on the 12% transition tax — namely that it is to be imposed not only on foreign subsidiaries of US domestic corporations, but is also aimed squarely at “local” (i.e., in Canada, UK, Australia) incorporated small businesses (e.g., doctor’s office) owned by a US person having, for example, no meaningful relationship with the United States other than tax citizenship by birth.

    Is the proposed House tax reform bill good news or bad for these small business owners?

  16. Update – November 9/17

    Today Chairman Brady concluded the “Mark Up” period of his proposed tax legislation. The “Mark Up” period contained NO move to “territorial taxation” for individuals. It did increase increase the “proposed confiscation” of the retained earnings of certain Canadian Controlled Private Corporation, from 12% to 14%.

    See the discussion of S. 4004 here:

    https://waysandmeansforms.house.gov/uploadedfiles/summary_of_chairman_amendment_2.pdf

  17. Avatar dave says:

    To remove all pretense, this should have been taken right back to 1984.

    That said, I am choosing to be hopeful that some degree of common sense will fall from the sky.

  18. Avatar Mike says:

    In the same way that FATCA has highlighted the human rights abusing and counter productive nonsense of citizenship based taxation and brought it out to the open, I’m wondering if a US tax on foreign companies, one that will be the death of some of them will finally wake foreign governments to what is going on here.

    Taxing entirely foreign companies because one owner may have had a parent born in the USA?

    WAKE UP WORLD!

  19. Avatar Francis says:

    This is why self employment is such a treacherous option for Americans abroad. We simply don’t know what random idea congress will dream up next.

    We can’t plan our retirement, children’s education overseas (even when they don’t have the right to enter the US), or other crucial aspects for a family’s future.

    Offshore superpac though, no problem.

  20. Avatar pete says:

    I thought Americans were meant to be free. We are forced to renounce citizenship as the majority of congress do not understand how the taxation on citizenship works.

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