The specific problem in the U.S. tax reform bills related to U.S. person-owned incorporated businesses in Canada, Australia, France, UK, etc. appears to have been identified.
However, apart from the general solution of changing the bills’language to end U.S.-imposed worldwide taxation on individuals, WHAT IS THE ONE SENTENCE CHANGE IN WORDING OF THE TAX BILLS LANGUAGE THAT WOULD FIX THE PROBLEM IDENTIFIED IN THIS POST?
This one sentence change could be sent to the drafters and supporters-antisupporters of the bills.
IF YOU ARE INTERESTED, YOU CAN FORWARD OUR PRESS RELEASE WITH YOUR COMMENTS TO POLITICIANS AND OTHER ORGANIZATIONS IN U.S., CANADA, AND ELSEWHERE.
Tricia has some thoughts that you might include (in a comment below).
— In this press release we ask United States Congress to fix a problem in the present House/Senate tax bills that targets certain Canadian citizen/residents who own an incorporated business — and more broadly — to “stop imposing worldwide taxation on any Canadian resident”.
The press release is being sent in part to members of U.S. Congress and also to Canadian politicians who should be in the business of defending Canadian citizens from harm caused by a foreign state.
The focus of the press release is intentionally on “Canadians”. The word “American” is not mentioned. Our use in the text of the now-offensive term “U.S. person” (defined by the U.S. Internal Revenue Service) does not imply that U.S. person law applies to any Canadian resident or that any of these so-designated (by the U.S.) Canadians have ever consented to be U.S. persons.
Here is the link to the press release.
The text:
November 24, 2017
For Immediate ReleaseU.S. CONGRESS: DO NOT CONFISCATE OUR SMALL CANADIAN BUSINESSES AS PART OF YOUR TAX REFORM
Dear Congressperson,
On November 16, 2017 Rep George Holding, of the House Ways and Means Committee, in an exchange with Chairman Brady, urged that as part of tax reform that: The United States join the rest of the world by adopting “residence-based taxation”. This would END the U.S. current practice of imposing worldwide taxation on certain residents of other countries.
As U.S. law currently stands, many Canadian citizen/residents (who are deemed by the U.S. to be “U.S. Persons”) find themselves subject to U.S. taxation (ON THEIR CANADIAN INCOMES and CANADIAN ASSETS), even though they live in Canada and pay taxes to Canada.
The application of U.S. tax law into Canada – a principle enforced by FATCA – has profoundly negative consequences, some of which are intended and some of which are unintended.
This is a request that the wording of the United States “Tax Cuts and Job” bill be revised so as not to harm, even more, small Canadian businesses possibly included, we believe inadvertently, by your proposed tax reform legislation.
As your tax Senate and House tax reform bills are presently worded, Sec. 14103, for example in the Senate bill, might be interpreted to confiscate a significant percentage of the retained earnings of certain small “Canadian Controlled Private Corporations”. This is evidently part of broader legislation to implement “territorial taxation”, in order to enhance the competitiveness of publicly traded U.S. multinational corporations.
We believe that this section is intended to apply ONLY to the foreign subsidiaries of U.S. domestic corporations. However, a strict reading of the language of the bill suggests that this “transition tax” MIGHT also be paid by those who are deemed by your country to be “U.S. persons” living overseas who happen (as is common in Canada) to own an incorporated small business. The “minnows” swept up by your bill will then include small businesses such as a one-person incorporated medical doctor’s clinic, should the owner be designated by U.S. law to be a “U.S. person”.
We do not believe that this was your intention and ask that you fix the language of the bills accordingly. Surely you would agree that “territorial taxation” for U.S. multinational corporations does NOT mean that the United States should extend its taxable “territory” to Canadians who happen to own small Canadian Controlled Private Corporations!
As part of U.S. tax reform, we conclude by asking that the United States stop imposing worldwide taxation on any Canadian resident AND clarify that the “Tax Cuts and Jobs” Bill does NOT apply to Canadian residents who are shareholders of Canadian Controlled Private Corporations.
John Richardson
Carol Tapanila
Patricia Moon
Stephen KishOn behalf of the
Alliance for the Defence of Canadian Sovereignty (www.adcs-adsc.ca) Information@adcs-adsc.ca;
and
Alliance for the Defeat of Citizenship Taxation (www.citizenshiptaxation.ca)
Contact Mr. John Richardson at johnrichardson@citizenshipsolutions.ca
Alliance for the Defence of Canadian Sovereignty/Alliance for the Defeat of Citizenship Taxation 283 College Street, P.O. Box 67678 Toronto, Ontario, CANADA M5T 3M1
Karen – “I’ve also been trying to figure out how Article 23, Non-discrimination might apply. The US is discriminating against residents of Australia (who happen to also be US tax-residents) with local businesses relative to residents of the US with local businesses. Is there any way to argue that a US resident with an incorporated US business is “similarly situated” to an Australian resident with an incorporated Australian business? Or does the fact that the businesses are incorporated in different jurisdictions mean that the two taxpayers can never be considered “similarly situated”?”
Is there a Technical Explanation? That’s often where the US weasels out of stuff they don’t intend to honour.
Stephen,
This is just one more thing that we should be raising with our home governments.
Plaxy,
I think the non-discrimination article has been carefully crafted to allow the US to discriminate against its own citizens based on residence. I also think it doesn’t hurt to point this out to our home governments.
@Karen @Plaxy
From Article II of the Canada U.S. Tax Treaty – there is NO doubt that the treaty would apply to this. How the treaty would apply is a different issue.
@Stephen (and anyone else interested), re small business interests to raise these new US extraterritorial tax provisions with, perhaps:
The Ontario and other chapters of the Chambers of Commerce, who already object to FATCA, as recently as this year, ex.
http://www.occ.ca/wp-content/uploads/2013/05/OCC-NAFTA-Letter-with-CCC-July-2017.pdf
This organization also alerted its members re the impact of FATCA on small business owners. Perhaps they would also lobby Canadian government as to the newest US incursion.
http://www.cfib-fcei.ca/english/article/5325-us-law-could-erase-privacy-protections-are-you-affected.html
Perhaps also professional organizations like the OMA, and the CMA as well as other organizations who represent professions who might be affected? Is it all those who might be incorporated? I’m not entirely clear, but if you all who do want to write something, it could help me explain to my MP, who is a small business owner himself.
@Stephen, and @Karen, re treaty violations and double taxation gaps, Canada appears not to have reacted at all to help Canadians when the US enacted the ACA investment tax (and almost included those outside the US in having to enroll in the actual US healthcare or be penalized by the IRS, except for a last minute exclusion won by expat advocates outside the US) ;
http://business.financialpost.com/personal-finance/taxes/obamacare-could-cost-some-canadians-a-lot-of-money
http://www.canadianbusiness.com/blogs-and-comment/the-obamacare-tax-that-might-hit-canadian-pensions/
Badger,
Am already speaking to CFIB but will try OCC too — thanks.
Karen – “the transition tax works by imputing to the individual income earned by a separate taxable entity, ”
Does that mean that it won’t count as double taxation?
The US treaties allow the US to tax any USC income that isn’t protected from the savings clause and hasn’t already been taxed by the residence country. Since this “transition-tax” income is not real but only deemed, it’s not protected from the savings clause and it hasn’t been taxed by the residence country, so no double taxation has occurred? The tax is real but the income is not so can’t be taxed by the residence country. It’s sourceless.
It’s just insane, with no basis in reality.
@Plaxy
Article XXIV of the Canada U.S. tax treaty is exempted from the application of the savings clause.
I don’t see how this is not double taxation. All that is happening is that the USA is coming in and making a preemptive tax strike against what would be a distribution to the Canadian shareholder.
The are doing this by saying:
1. We are attributing the “retained earnings” earned by the company itself to the individual shareholder and taxing the shareholder on the income that is available to be distributed.
2. This means the USA is coming in and taxing distributions that would be taxable by Canada.
3. This is exacerbated by the fact that the USA is inventing a taxable event where there is none in Canada.
Pure theft!! Perhaps Canada should give Canadian shareholders a tax credit for any tax paid to the USA.
USCA – “the USA is coming in and making a preemptive tax strike against what would be a distribution to the Canadian shareholder”
It’s the “would be” that is the problem, it seems to me (I may be wrong).
Is it pre-emptive taxation of a future distribution (in which case double-taxing occurs if/when a distribution actually happens, unless Canada allows FTCs against the tax already paid to the US, which Canada may refuse to do since this is Canadian-source income on which Canada presumably has primary taxing rights)
Or is it taxation of phantom gain (in which case there’s no double-taxing)
Or perhaps “deemed income” rather than “phantom gain.”
“Deemed inclusion.”
http://taxprof.typepad.com/files/73ti0629.pdf
But these earlier discussions that seem to have contributed to the evolution of the transition-tax scheme, do always seem to refer to non-US subsidiaries of US corporations. It’s always in the context of partially recouping the “windfall” enjoyed by the US corporation as a result of not paying US tax on foreign E&P during the period from 1987 to the year of recoupment.
Would a USC shareholder of a Canadian corporation have enjoyed a “windfall” as a result of not paying US tax during those years? Or would no US tax have been due?
If the latter, then no “windfall” has occurred and (I suggest) the USC shareholder of the Canadian corporation should assume that the transition tax does not apply.
@Plaxy
First, there has never been ANY background discussion that suggests that a transition tax would apply to individual shareholders (whether in the US or abroad) of non-U.S. corporations.
Second, ALL of the discussion has been in the context of finding a way to impose taxation on the offshore trillions supposedly owed by the corporate shareholders of foreign corporations,
Third, notice that some of the discussion (for example in the two Morse articles) raises the question of how the tax should be designed (inside the income tax system, outside the tax system, subpart F, etc.).
What I think has happened is that, by making a subpart F inclusion the mechanism for taxing the “offshore trillions”, it has theoretically drawn individuals (and by extension Americans abroad) into harms way. Because the subpart F rules do apply to the individual shareholders of Canadian Controlled Private Corporations (even though originally intended for corporations), and the mechanism to capture the “offshore trillions” is subpart F, individuals have been drawn in.
Had the mechanism for inclusion been something other than subpart F, I suspect that we would not even be having this discussion. But, what discussion? What is generating the discussion?
Interestingly, the ONLY discussion of the impact of this on individual Americans abroad comes from the tax compliance industry in Canada (because they are the only group considering individual Americans abroad) and probably tax people in other countries.
There is no final legislation and the rules are complex. So, what happens is that one tax person says: “These rules apply to Americans abroad” and the rest follow. They have few (if any) independent thoughts on this. It is very difficult to read and understand this proposed legislation. They read legislation literally. They don’t read contextually. They in effect “make up the law”. We have seen this happen time after time.
Now, what are individuals to do? It’s obvious that this tax was NEVER intended to apply to them. But, (I expect) the tax compliance industry will work hard to force people to pay up. What is clear is the tax compliance community will NOT (if they adopt the “party line”) tell people that the tax does not apply to them. They won’t be willing (and understandably so) take the risk. But, they don’t know any more about this than you or I.
So, what should be done? What should the response be?
At the present time there are still many unknowns. But, I really don’t see how people can pay a tax that (1) was never intended for them (2) will confiscate their retirement plans (3) is in effect a retrospective tax – they are (possibly) going back in time and deeming income that was not taxable at the time to be taxable now. (4) is not based on any “event” whatsoever – this is why it is pure confiscation. Even if it were 1 cent it would be pure confiscation because there is no event triggering a tax. (5) reaches directly into the tax base of Canada. Since July the Government of Canada has been discussing this same pool of Canadian capital. This whole discussion is confusing theory, reality and practicality. This cannot and should not be paid.
My suggestion I guess is:
Get your tax preparer to reveal his/her position on this before work on the returns commences. If the preparer will not sign the returns without paying this tax – then find another preparer or do them yourself or don’t file at all. Obviously the pressure to renounce has become even more intense.
What you cannot due is let the tax compliance community turn your retirement savings over to the IRS based on a law that was never intended to apply to you.
Furthermore, I think that tax preparers have a moral obligation to make their position on this known in advance.
USCA – I largely agree with your comment but:
In my view, what matters is not what the tax industry says but what the taxmakers intend – as the IRS thinks that might be perceived by a future US Court.
If the wording of any law that eventually gets passed allows scope for imposing the tax on USC shareholders of non-USC corporations, but doesn’t explicitly state that such USCs are covered by the provision, then the IRS will have to draw up guidance, regulations and forms that allow for such an individual to assume the law applies to them and pay up, but also allow for such an individual to assume that the law does not apply to them.
As happened with Form 8854, where for years and years the IRS offered no guidance whatever on the most controversial aspects of the “covered expatriate” law, including calculation of net worth.
@Plaxy
People will follow the advice of the tax preparer. The tax preparers are the danger here. I agree that that the forms will play a significant role, but we are a few years away from the form(s).
Also, when the forms are created it will be a reflection of now Treasury/IRS thinks this should be applied.
It’s “all of the above”, but the tax preparers will create an expectation of how this is to be applied.
Breaking news!: With the upcoming marriage of Prince Harry with an american, the British Royal Family will now have to pay american taxes.. Maybe somebody in the government will wake up at that point. Meghan Markle is too rich to renounce without getting an unaffordable exit tax.
The specific problem in the U.S. tax reform bills related to U.S. person-owned incorporated businesses in Canada, Australia, France, UK, etc. appears to have been identified.
However, apart from the general solution of changing the bills’language to end U.S.-imposed worldwide taxation, WHAT IS THE ONE SENTENCE CHANGE IN WORDING OF THE TAX BILLS LANGUAGE THAT WOULD FIX THE PROBLEM IDENTIFIED IN THIS POST?
What would be the one sentence simple fix?
This one sentence change could be sent to the drafters and supporters (and others) of the bills.
Plaxy and USCA
I agree that the transition tax is clearly double taxation – there is a timing difference between when the US plans on taxing the income (now), and when our home countries will tax the same income (when there’s an actual distribution/dividend). But, eventually both will claim the right to tax the same income; and due to the timing difference, foreign tax credits will not be available.
Our home governments should be put on notice that they need to fight to keep the US from stealing their tax base. They can fight within the treaty by using the Mutual Agreement Provision to request that the US clarify that the transition tax does not apply to individual shareholders of local (to us) corporations. They should also make it clear that allowing the US to impose the transition tax on individual shareholders of local corporations is contrary to the spirit of the tax treaty.
Stephen,
See my comment here: http://isaacbrocksociety.ca/2017/11/21/here-is-the-full-legislative-text-of-the-u-s-senate-tax-reform-bill-that-passed-the-sfc/comment-page-1/#comment-8062148
I believe that if they removed section 965(e)(1)(A) and just defined a “specified foreign corporation” as a “section 902 corporation” that would eliminate the problem.
Alternatively, they could re-write section 965(e)(1) to define a “specified foreign corporation” as a “specified 10-percent owned corporation” as defined in section 245A(a)(1).
The latter solution is appropriate because section 245A is the section that allows the dividend received deduction that implements territorial tax for corporations.
“Breaking news!: With the upcoming marriage of Prince Harry with an american, the British Royal Family will now have to pay american taxes.. Maybe somebody in the government will wake up at that point. Meghan Markle is too rich to renounce without getting an unaffordable exit tax.”
And I bet they both have no idea.
” With the upcoming marriage of Prince Harry with an american, the British Royal Family will now have to pay american taxes..”
Did you forget where this blog is located? Even though Brock was a British citizen, this is the Canadian Royal Family we’re talking about.
“Maybe somebody in the government will wake up at that point.”
No they won’t. Not only does the Canadian Royal Family have to stay out of politics, they’re not even allowed into the country during elections.
(One time I asked a British government official where their Royal Family goes during elections. Oddly their Royal Family isn’t prohibited from entering their country during elections.)
Perhaps the CMA would be interested in this newest US extraterritorial tax if it affects Canadian doctors who incorporate and are UStaxablepersons.
This was their correspondence re FATCA;
https://www.cma.ca/Assets/assets-library/document/en/advocacy/CMA-letter-Flaherty-Nov21.pdf
https://www.cma.ca/Assets/assets-library/document/en/advocacy/FinanceMinister-reply-Jan2012.pdf
Perhaps other professional bodies who represent professionals who commonly incorporate (ex. https://www.lsuc.on.ca/For-Paralegals/Manage-Your-Practice/Practice-Arrangements/Professional-Corporations/ ?) and who might be affected would be interested.
Badger,
CMA — that does make sense. I will contact them too. Thanks.
Seems we really aren’t the only ones worried about possible harm from this bill. https://www.youtube.com/watch?v=kTzi9Vhy8JY
FixTheTaxTreaty.org swings into action with call to action in Australia.
http://fixthetaxtreaty.org/2017/12/04/call-to-action/