The two nasty surprises for the NII are as follows:
1. No foreign tax credit for the NII.. this means the 3.8% tax will result in double taxation
2. As drafted, the NII rules will subject RRSP (and other CDN retirement plans) to the new tax:
a. Currently as income is earned in the RRSP; and
b. Upon distribution from the account.
Published on April 4, 2013 in Moodys Tax Advisors Blog:
New US tax law may negatively affect Canadian retirement plans
On April 2, 2013, Roy Berg and James Gifford were in Washington DC to present the Canadian perspective on the proposed regulations under IRC 1411, the provision that implements the 3.8% tax on net investment income that was enacted as part of the US health care overhaul in 2010. The IRS had requested public comments on the proposed regulations issued on December 5, 2012. Moodys submitted a comment articulating a number of our concerns.
Two areas of greatest concern are the treatment of Canadian RRSPs and pensions and whether foreign tax credits may be used to offset the NII. Unless the proposed regulations are modified a new 3.8% tax will likely apply to US citizens resident in Canada or Canadians who are resident in the US on the following types of income:
Income generated in Canadian retirement plans (including RRSPs, DPSPs, LIRAs, TFSAs, etc.), even though this income is not taxable under the Canada-US Treaty;
Even if #1 does not apply, distributions from Canadian retirement plans will likely be subject to the tax;
Payments made to retirees under the Canada Pension Plan (“CPP”); and
Recipients of government pensions.
Further, unless there are changes to the proposed regulations, Canadian snow birds that rely on the Treaty to “tie-break” back to Canada may have their net investment income subject to this tax.
Kudos to Roy Berg and Moodys for their efforts on this issue. The link to this article needs to go to the House Ways and Means committee on the tax reform issue.
At a minimum it demonstrates one more example of the “law of unintended consequences” as applied to U.S. citizens abroad.
It all just goes to show how absurd and unworkable citizenship based taxation is. One change in U.S. tax law is the beginning of a negative feedback loop for the U.S. tax system in that it will only accelerate U.S. tax complications at home and abroad. Local bank accounts for U.S. persons where ever they may live and complete freedom to operate under the tax laws of your country of residence, should maybe be our rallying cry?
There is a lot more to this tax than meets the eye… and there has been a dearth of professional commentary on the affect of this tax to: a) US citizens in Canada; and b) Canadian citizens resident in the US.
Bottom line: it is opprobrious to subject US citizens residing in Canada to double taxation to fund Obama Care, when we (yes, I am affected) will never avail ourselves to that benefit AND already pay for that benefit in Canada.
FWIW, no client or other party has underwritten either the direct or opportunity cost of our participation in the rule-making process. We have chosen to do so because it is the right thing to do.
Roy Berg. Thank you for your efforts; congratulations on your clear and persuasive testimony on this subject. I sincerely hope that this latest development–the (Congressionally unconsidered) application of the Obamacare tax to the legitimate retirement savings of US persons in their foreign countries of residence–is so clearly wrong and unfair that at last there may be some more general understandng of the negative implications of citizenship-based taxation for US persons abroad and for the competitiveness of the US economy. But after many years of following this issue (and also after reading some of the other topics on this site today), I have next to no hope.
The current protocol of the US-Canada tax treaty is that Social Security, CPP/QPP and the OAS are taxable only by the country in which the benefits are received. I renounced partly because I feared the US would either try to work around the protocol or effectively abrogate it.
this is not only a tax on the recipients but also a tax on the taxes paid by Canadians to fund our social programs.
“Never attribute to malice that which is adequately explained by stupidity”-Robert J. Hanlon
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