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.
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.
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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