GOOD NEWS FOR DOING BUSINESS IN THE U.S., BUT BAD NEWS FOR U.S. CITIZENS LIVING ABROAD
Download the PDF Version: TCJA – Impact on Canadians
Major tax changes approved by the United States Congress in the Tax Cuts & Jobs Act (TCJA or the Act) were enacted into law on December 22, 2017. TCJA will have a significant impact on:
- U.S. citizens living in Canada;
- Canadians that own property in the United States; and
- Canadian companies doing business in the United States.
General Highlights (or Lowlights, depending on your point of view) of the TCJA as it might apply to you as a Canadian resident:
- CORPORATE TAX: Further, U.S. corporations may once again be considered the entity of choice for Canadians investing in U.S. commercial and residential rental properties. Where limited partnerships have become the norm. For tax years beginning after December 31, 2017, the corporate income tax will be charged at a 21% flat rate. Previously, corporations were subject to graduated tax rates up to a maximum of 35%.
- ESTATE TAX: Although the U.S. estate tax exemption has been increased to $11.2 million, for Canadians the exemption level is still a measly $60,000, unless you file Form 706-NA with the IRS, disclosing your worldwide estate and making elections under the tax treaty. The 706-NA filing is still required in any event in order to obtain a Tax Certificate from the IRS to clear title to U.S. property before selling or transferring the property.
- INTERNATIONAL TAX: Individual U.S. citizens that own business in Canada through a corporation are subject to tax on future earnings and a one time transitional tax on retained earnings (15.5% on liquid assets and 8% on all other assets).
- The Transitional Tax (or Section 965 Tax) is based on post 1986 retained earnings as of December 31, 2017, and reported on the 2017 U.S. return (payable over 8 years).
- Future dividends paid out by foreign corporations to U.S. domestic corporations get 100% dividends received deduction; yet U.S. individuals of foreign corporations do not.
- U.S. Shareholder (defined term) is now 10% of vote or value of foreign corporation.
- CFC is foreign corporation controlled by U.S. Shareholders.
- Pay Transition Tax vs strip out retained earnings and pay dividend tax in Canada and U.S. – must do tax calculation and also must have ability under foreign corporate law to declare dividends.
- PENALTIES: Penalties for failing to file or filing late Form 5472 have been increased to $25,000 (from $10,000). Form 5472 is required to be filed by U.S. corporations owned by non-resident foreigners.
- PERSONAL: Lowered rates, wider brackets: TCJA keeps the current seven tax brackets, but reduces the rates. The top bracket will now be 37%, reduced from 39.6%. In addition, the brackets are wider, so that the top bracket will now apply to individuals at over $500,000 (from $418,400) and to married couples at over $600,000. For most taxpayers, therefore, more income will be taxed at lower rates. Additionally:
- Capital gains: The capital gains rate has not changed, and still includes the 3.8% net investment income tax.
- Standard deduction: The standard deduction has been increased from $6,500 for individuals and $13,000 for a married couple to $12,000 for individuals and $24,000 for a married couple.
- Personal exemption eliminated: The personal exemption has been eliminated.
- Mortgage interest deduction: For all new mortgages (beginning December 15, 2017), the mortgage interest deduction will only be allowed for the first $750,000 of the mortgage. This provision will not apply to existing loans. The home equity interest deduction has been eliminated for all existing and new loans. Property must be located in the U.S.
- State and local tax deduction: The deduction for state and local income and property taxes will be limited to $10,000 total in 2018. The TCJA also contains a provision prohibiting taxpayers from claiming a 2017 deduction for the prepayment of 2018 state income taxes. Property must be located in the U.S.
- Medical deduction: The medical deduction threshold is reduced to 7.5% of income for 2017 and 2018; in 2019-2025, it will return to the previous threshold of 10%.
- Miscellaneous itemized deductions: All miscellaneous itemized deductions (tax preparation fees, unreimbursed employee expenses, hobby expenses, gambling losses, investment advisory fees, etc.) have been eliminated.
- Alimony: For divorces finalized after December 31, 2018, alimony will neither be deductible for the payor or includible in income by the payee. Ex-spouses who modify their pre-2019 divorce decrees or separation agreements can elect to opt in to the new tax treatment of alimony.
- Individual mandate (ACA): The TCJA eliminates the individual mandate under the ACA (current penalty of $695) beginning in 2019.
- Pass-through entities: Many, but not all, owners of interests in pass-through entities, such as partnerships, LLCs, and sole proprietorships, will now be allowed a deduction equal to 20% of the entity’s income.
The changes in U.S. tax law will also present opportunities for new ideas and fresh thinking about how cross-border businesses and investments should be structured, capitalized and operated.
Contact Michael Kennedy today at email@example.com or 519-252-3888 to discuss how TCJA applies to you or to set up a U.S. corporation.
About Ingenuity Counsel & Michael Kennedy
Ingenuity Counsel, based in Windsor, Ontario, Canada, provides cross border tax & United States legal services to Canadians. Michael Kennedy, with 15 years of legal experience, and his team at Ingenuity Counsel Incorporated, assist companies and entrepreneurs with immigration, business, real estate and tax matters in the U.S. With his expertise, he is able to walk clients through the process of successfully setting up their business in the United States. Additionally, Ingenuity Counsel advises clients that own property in Florida, Michigan, Arizona & California with respect to income tax, estate planning & administration matters. Michael also handles wills & trusts, powers of attorney and probate administrations. Whether you have real property, financial accounts or business assets located in the United States, Michael and his team can help.
Michael is admitted to practice law in California & Michigan and permitted by the Law Society of Upper Canada to provide U.S. legal services in Ontario as a Foreign Legal Consultant. Prior to establishing Ingenuity Counsel in 2012, he practiced law in the United States for more than 10 years in California, Michigan and Florida. Michael has a U.S. law degree (JD) from Western New England University School of Law and his master of laws degree (LLM) from Georgetown University Law Center in Washington DC.
IRS Circular 230 Disclosure
To ensure compliance with requirements imposed by the U.S. Internal Revenue Service, we inform you that any tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, by any taxpayer for the purpose of (1) avoiding tax-related penalties under the U.S. Internal Revenue Code or (2) promoting, marketing or recommending to another party any tax-related matters addressed herein.
The information contained herein is for informational purposes only, and cannot be relied upon as legal advice. Every person’s needs and situation are different that must be analyzed independently. After reading this article, if you feel you have, or a client has, U.S. estate or gift tax exposure or any other U.S. tax or legal issue, you should promptly consult with an experienced U.S. lawyer in order to examine the situation. Your reliance upon any information contained in this article will not create an attorney-client relationship with the author.
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