Tax Alert - Canadian Implications of the Proposed U.S. Tax Reform

April 27, 2017


President Trump announced his blueprint for tax reform on April 26, 2017 (the Trump Plan) with the expectation that legislation will be enacted by the end of 2017. The Trump Plan has significant differences from the proposed plan released in June 2016 by the Republican leadership in Congress (the House Blueprint). Some of the proposals in the Trump Plan and the House Blueprint could have a significant impact on Canadian companies that do business in the U.S. and would also impact individuals subject to U.S. taxation. This would include U.S. citizens and green card holders living in Canada as well as U.S. residents working in Canada, who are generally subject to U.S. taxation on their worldwide income and assets. In addition, these proposals would impact Canadians living in the U.S. and investing in the U.S., such as those who purchase U.S. real estate.

BDO U.S. has prepared a detailed Tax Alert that fully addresses all of the proposals.

The Impact on Canadian Business

Lower Tax Rates

The Trump Plan and the House Blueprint propose to reduce the top corporate rate. The Trump Plan proposes a reduction to 15% for corporations and for income from pass-through entities such as partnerships and LLCs, and the House Blueprint proposes a reduction to 20%. Lower U.S. tax rates can be helpful to Canadian businesses, as they would be able to conduct more activity in the U.S. without attracting additional tax. Many politicians and economists think that the effect of these rate reductions are too significant on the annual budget deficit, and speculate that 25% is the lowest the top rate can go.

Canadian businesses need to continue to plan effectively when operating in the U.S. in order to minimize the U.S. corporate tax liability.

Border Adjustment Tax

The Trump Plan does not include the House Blueprint proposal for a Border Adjustment Tax (BAT). The House Republican leadership is intent on the BAT, as it will raise significant revenue and favour U.S. businesses over non-U.S. businesses. The BAT would apply to companies on their sales to U.S. customers while excluding foreign sales from U.S. tax entirely.

Canadian businesses exporting into the U.S. would be disadvantaged by the BAT proposal as Canadian goods would become more expensive in the U.S.

Interest Deductibility

The Trump Plan does not specifically address another controversial part of the House Blueprint for the elimination of the interest expense deduction and the immediate expensing of capital investments.

Canadian businesses that utilize debt to finance their U.S. operations, but do not have significant additional U.S. business investments, will be disadvantaged if the House Blueprint is enacted.

What should Canadian businesses do?

Canadian businesses should know that the legislative process in the U.S. works very differently from the process in Canada. The Republicans currently control the White House and Congress, however that does not guarantee that there will be tax changes. The press has been reporting many things regarding proposed U.S. tax reform and there is speculation that the Trump administration needs a “win” in Congress and may opt for a less comprehensive tax bill.

Canadian businesses operating in the U.S. need to make decisions based on current laws. This means that Canadian businesses need to maintain the same proactive approach to reduce U.S. income tax liabilities while the legislative process moves forward. Given the uncertainty on the timing of the enactment of proposed tax reform, any tax planning should be flexible to accommodate proposed changes in laws or regulations. Laws and regulations will continue to evolve and Canadian businesses need to take action only after it is clear that tax reform will pass and an assessment is made on its future U.S. tax position.

The Impact on Canadian Individuals

Lower Tax Rates

The top federal income tax rate for ordinary income is currently 39.6%. The Trump Plan proposes three individual income tax brackets of 10%, 25%, and 35%, down from the current seven tax brackets. The Trump Plan differs from the Trump election platform and the House Blueprint proposal rates of 12%, 25%, and 33%.

These changes would impact U.S. persons living or working in Canada as well as Canadian residents working in the U.S.

Changes to Deductions

The Trump Plan proposes the elimination of all itemized deductions for individuals aside from the home mortgage interest and charitable contribution deductions. The Treasury Secretary confirmed that the deduction for state and local taxes would be repealed.

The Trump Plan proposes to double the standard deduction, currently $6,350 for single individuals and $12,700 for married couples filing jointly. This is intended to benefit middle class taxpayers who do not itemize their deductions.

These changes could result in either a net increase or net decrease in deductions, and may be impactful for U.S. persons living in Canada, particularly those who have been paying U.S. income tax annually.

Elimination of the Alternative Minimum Tax (AMT)

The Trump Plan also calls for repeal of the AMT. U.S. persons living in Canada who have moderate to high income levels often find themselves being subject to AMT annually, even if most or all of their income is from Canadian sources. For these individuals, AMT is not creditable against Canadian taxes, so a repeal of the AMT would be particularly welcome for these taxpayers, and represent a reduction in their overall tax burden. Non-U.S. persons living in Canada are also subject to AMT, particularly those who sell U.S. real estate.

Regardless of their income level, these individuals are not eligible for the basic AMT exemption available to U.S. persons.

Elimination of Net Investment Income Tax (NIIT)

The Trump Plan proposes to eliminate the 3.8% NIIT that was implemented in 2013 to fund the Affordable Care Act (Obamacare). The tax currently applies only to U.S. persons with income levels above certain thresholds. It applies to income such as interest, dividends, capital gains, and rental income, irrespective of whether the income is from U.S. or foreign sources.

For many U.S. persons living in Canada, the NIIT has significantly added to their tax burden in recent years.

Elimination of the Estate Tax

The Trump Plan proposes a repeal of the estate tax. It is unclear at this time whether this tax will be replaced with a tax on unrealized capital gains at death, similar to the regime in place in Canada.

U.S. citizens living in Canada are potentially subject to estate tax upon death with respect to their worldwide estate that exceeds US$5,490,000. Other Canadian residents may be subject to estate tax as well if their worldwide estate exceeds this threshold. The estate tax is ultimately only applicable to their U.S. situs assets, which include U.S. real estate and U.S. marketable securities.

Canadians who have implemented or are considering implementing estate planning with the U.S. estate tax in mind should consider the impact of a potential change in estate tax law on their plan.

If you have questions regarding how the proposed U.S. tax reforms announced in the Trump Plan might affect you or your business, please contact our U.S. Tax practice Leaders in Canada:

Dan Lundenberg
Partner, U.S. Corporate Tax Leader
Jason Ubeika
Partner, U.S. Personal Tax Practice Leader
John McCrudden
Partner, GTA Group U.S. Corporate Tax Practice Leader
Gil Lederhos
Partner, West Group U.S. Corporate Tax Practice Leader

The information in this publication is current as of April 27, 2017.

This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.

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