by John Richardson
RT: The USA Must stop imposing "worldwide taxation" on any individual who has @taxresidency in another country and does not live in the USA. This is NOT a partisan issue. ALL individuals and groups MUST UNITE in achieving this goal! See explanation here – https://t.co/uRbK2IGFX3
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) April 10, 2018
This is the eighth in my series of posts about the Sec. 965 Transition Tax and whether/how it applies to the small business corporations owned by taxpaying residents of other countries (who may also have U.S. citizenship). These small business corporations are in no way “foreign”. They are certainly “local” to the resident of another country who just happens to have the misfortune of being a U.S. citizen.
The first seven posts in my “transition tax” series were:
Part 1: Responding to The Section 965 “transition tax”: “Resistance is futile” but “Compliance is impossible”
Part 2: Responding to The Section 965 “transition tax”: Is “resistance futile”? The possible use of the Canada U.S. tax treaty to defeat the “transition tax”
Part 3: Responding to the Sec. 965 “transition tax”: They hate you for (and want) your pensions!
Part 4: Responding to the Sec. 965 “transition tax”: Comparing the treatment of “Homeland Americans” to the treatment of “nonresidents”
Part 5: Responding to the Sec. 965 “transition tax”: Shades of #OVDP! April 15/18 is your last, best chance to comply!
Part 6: Responding to the Sec. 965 “transition tax”: A “reprieve” until June 15, 2018
Part 7: Responding to the Sec. 965 “transition tax”: Why the transition tax creates a fictional tax event that allows the U.S. to collect tax where it never could have before
Considering the impact of the “transition tax” on the corporation itself
The Sec. 965 “transition tax” is a provision that the United States is using to impose taxation on the UNDISTRIBUTED earnings of Canadian corporations. (Section 5 of Article X of the Canada U.S. Tax Treaty prohibits the United States from imposing taxation on the “undistributed earnings” of Canadian corporations.)
The mechanism to impose the “transition tax” is the Subpart F income inclusion (a way of attributing the earnings of the corporation to the shareholder). Because the corporate income is attributed to the individual shareholder, my first posts have focussed on the impact on the individual. These posts have focussed on the impact of the “transition tax” at the individual shareholder level.
This post will focus on the impact of the “transition tax” on the corporation and the Canadian economy as a whole.
The Transition /Repatriation Tax is a grab by the US at the tax base of every country with American emigrants. https://t.co/g9vXnTTeW1 via @ExpatriationLaw
— Fix the Tax Treaty! (@FixTheTaxTreaty) April 5, 2018
The purpose of this post is to focus on how the “transition tax” will impact the business, expansion and growth of the corporation. It will focus on how the “transition tax” impacts the local Canadian economy on a macroeconomic level.
Here we go …
I recently received a call from a small business person who had learned very late about the “transition tax”. Because he learned about the “transition tax” so late, he had no time to take corrective action (with the few available options to generate “foreign tax credits”). This resulted in a “transition tax discussion“, with the owner of the shares of a small “Canadian Controlled Private Corporation“. What follows is the story, of what is happening to Canadian Controlled Private Corporations, that have “U.S. Person shareholders”. It explains, why some of those people organizing the structure of corporations in Canada, are restricting ownership opportunities to those who are NOT “U.S. persons”.
“Once upon a time in the real world”, there was a …
– small family business in the hospitality industry
– where the owner had taken very few distributions (no dividends or salary payments), meaning he had allowed the corporation to retain the earnings
– his specific reason for NOT taking distributions and leaving the money in the company, was to accumulate capital inside the company for the purpose of expanding, renovating and generally upgrading the business
– because the owner had taken few distributions his personal assets were primarily the shares of the business
– after scrimping and saving he had accumulated about 2 million in cash which was earmarked specifically to renovate and expand the business
– his renovation and business expansion plans included hiring new employees for the business once expanded and of course hiring local contractors (good for the local economy)
Get it! This is money that to be used to invest in the business and in the local economy for years to come. Or so this, “poor” (soon to be) guy thought.
Let’s see how the “transition tax” would impact his plans. We assume the 2 million dollars of retained earnings. Here we go.
Watch how this confiscation and damage to the local Canadian economy will unfold:
1. The individual shareholder is required to pay 17.54% of the 2 million to the USA. That’s a total of $350,800.
2. Where would he get the money to pay this? Well he has no personal assets. So, he needs to get the $350,800 out of the company in the form of a distribution (dividends or salary).
3. But, if he takes a distribution, that distribution will be subject to taxation in Canada (remember??). Unless the timing of the U.S. “transition tax” is matched to the timing of the “distribution” in Canada, he will be subject to double taxation on the same income! (The only way for the timing of the “transition tax” to match the timing of the “distribution” would be if the “distribution is made in 2017 – or possibly 2018.) Again, with a timing mismatch the “transition tax” WILL result in double taxation! (A purpose of the Canada U.S. tax treaty is to prevent “double taxation“).
4. How much of a distribution would be needed (recognizing that the distribution is subject to Canadian tax), to be left with $350,800. Let’s assume a Canadian tax rate of 50%. (This is an estimate only and there are other factors. My point is only to demonstrate that more than $350,800 must be distributed from the company.) If it were a 50% tax rate in Canada then he would have to distribute $350,800 times 2 = $701,600.
5. But wait just a minute!! What were you thinking? If the distribution is in the form of a dividend, the poor guy also has to pay a 3.8% Obamacare (remember this guy?) surtax on the $701,600 dividend. This means an additional $701,600 times 3.8% = $26,660 to go to the USA (but hey, who’s really counting at this point?). Shouldn’t Canadian residents be required to contribute to health care for Homelanders? (Note that under the U.S. Internal Revenue Code the 3.8% Obamacare surtax cannot be offset by foreign tax credits. There are various arguments for why tax treaties might require the U.S. recognize foreign tax credits to offset the Obamacare tax.)
6. So how much is left in the Company (to use for the renovations and business expansion) after this $701,600 distribution? Well, the calculation works like this:
$2,000,000 less $701,600 = $1,298,400!! (And I haven’t added the 3.8% Obamacare surtax! Maybe he can get his Canadian wife to pay that $26,600.)
This is capital reduction of about 35%!!
To put it very simply: This is the United States simply stealing from Canada’s tax base. You may not care about the poor individual shareholder. You may think that this guy is rich and deserves to be taxed. You may not care if he has to pay this.
But, you might care about the fact that your son or daughter is no longer going to be able to apply for that job at his restaurant. You surely would care about the fact that this money is no longer available to expand this business and provide work for the local contractors. You surely would care about the fact that this means fewer jobs in the Canadian economy (both long term and short term)!
Mitigating the U.S. Transition Tax: The use of “Canadian tax paid” as a credit against the U.S. transition tax owing
It is important to emphasize that the $350,800 is (according to U.S. law) a tax that is due! The “transition tax” can be offset (in some cases) by Canadian taxes paid. This does NOT change the fact that the $350,800 “transition tax” is payable. The tax credits generated in Canada are the WAY that the “transition tax” is to be paid. Tax credits are a method to pay taxes. They do NOT change the fact that a tax is payable.
The (non) response of the Government of Canada
What would the Government of Canada say about this outright confiscation of Canadian assets?
Well, so far they have said:
“It’s U.S. law. Take it up with the United States”.
What the Government of Canada doesn’t acknowledge is:
The fact that “It’s U.S. law is why the Government of Canada should be concerned. In fact it’s even more reason why the Government of Canada should be concerned!
But, back at the ranch (or rather the restaurant) …
Looks like that renovation is not going to be happening. Too bad. So sad. Maybe the U.S. Government can invest that $350,800 in the U.S. economy. Maybe it could be used to invest in a restaurant across the border in the United States. Canadians can then go and have lunch in the United States!
This particular U.S. law MUST BE CHANGED and here is how you can contribute to changing it:
RT It's vitally important that those opposing the @USTransitionTax donate to this effort RIGHT NOW! "Expats against Repatriation Tax: Campaign to fund Lobbyist" https://t.co/V7q2lDw5X4 via @youcaring
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) April 13, 2018
An artist’s impression isn’t needed to see what bald eagles do.
“For my own part I wish the Bald Eagle had not been chosen the Representative of our Country. He is a Bird of bad moral Character. He does not get his Living honestly. You may have seen him perched on some dead Tree near the River, where, too lazy to fish for himself, he watches the Labour of the Fishing Hawk; and when that diligent Bird has at length taken a Fish, and is bearing it to his Nest for the Support of his Mate and young Ones, the Bald Eagle pursues him and takes it from him.” — Ben Franklin
Here’s an idea:
All Western countries should levy a mandatory interest-free bond purchase on all their expats living in the U.S. You get the value of the bond back after 10 years or when you move back to your home country.
So for example, a Canadian living in the U.S. should have to buy a Canadian government bond every year as long as he lives in the U.S. He receives the money back after 10 years or immediately if he moves back to Canada. This interest-free fund will help offset the losses to the Canadian economy caused by US citizen-based taxation and will minimize the amount of pain to Canadians in the U.S. (i.e. they lose potential interest, but they also contribute to their home country while away)
We’ve seen suggestions like that before. But two wrongs do not make a right. It is not fair to abuse your own innocent victims to make up for someone else abusing their innocent victims. We have to find something that would make the US Government care, and since there doesn’t seem to be anything, we have to find ways to stop our own governments from cooperating.
Very clear demonstration of damage from the new law.
“Funding a lobbyist” effort is intriguing. Much tempted to give.
“we have to find ways to stop our own governments from cooperating.”
I do wonder just what it’s going to take before governments around the world stand up for their residents here. In many ways it’s this aspect of the issue that angers me more than anything else.
Quite frankly I expect this sort of predatory behaviour from a government that thinks it owns people, but I do NOT expect my own government to go along with this!
Something is deeply rotten to the core when a British politician tells a British citizen that he needs to reach out to the US government for help when it’s the US government that is his tormentor on UK soil!
The failure of so many people, governments included to realise the enormity of what is going on here is deeply troubling.
I have another idea: Ban any U.S. politician that has openly supported CBT/FATCA/etc. from entering your country.
John, Keith, et al: The only reason I can face each day is knowing that you folks are in the vanguard of our movement to get these appalling extraterritorial US tax laws off the books forever. Thank you for being people of action and leadership.
As for that marvelous bald eagle quote of Benjamin Franklin (thanks for posting it, Norman!): The man was a prophet! History has proven that no more fitting “mascot” could have been chosen.
Indeed, my greatest disappointment in all this has been in what I consider to be the rather disinterested betrayal of my Canadian government. Makes me feel like chopped liver to them.
Benjamin Franklin may have been disappointed in the choice of the bald eagle but as it turns out it is a perfect metaphor for how the USA steals from those who live and make their income in countries outside its borders … and from countries who possess coveted resources. (Actually just yesterday there was a bald eagle soaring above our town.)
The FairTax would solve all your and our problems. Shut up and support the FairTax with the same skill and effort you had expended advocating for things that are not a solution to yor problem. The FairTax gives the poor a raise in pay for as long as he lives and follows iot
Telling the members of this blog to “shut up” is unacceptable.
Your comments concerning the Fair Tax have nothing to do with the subject of this post.
Please abide by the few things we ask of those who comment at this blog.
Shut up and support the Fair Tax yourself. I don’t know what it is and I couldn’t care less whether the US switches to it or not. I’m a Canadian who lives in Canada and the only thing I want is for the US and its tax system to stay the hell out of my country. That’s what Homelanders can’t seem to understand; although we may have a US birthplace, we are not Americans anymore.
Its up to you to fix your US tax system. Its not reasonable or proper to expect Canadians to get involved.
Franklin’s remarks about the bald eagle (and praise of the turkey as superior to it) seem to have been motivated by his opposition to the Society of the Cincinnati, an attempt by former American Revolutionaries to establish themselves and their eldest sons as a sort of nobility. The eagle was their symbol.
The Repatriation Tax highlights the absurdity of CBT. The lobbying effort needs everyone’s support. Unlike many people here, I have not given up on the belief that the US is capable of sensible behaviour once they are aware of the problem. Those who are willing to do something deserve encouragent, not the self-fulfilling prophesies of failure by those unwilling to do more than repeat the same message day after day. Do something even if it means contributing just a few bucks to the lobbyists. Or contact a journalist, MP, or anyone who can potentially affect change.
Do what you need to do to protect yourself, but never give up on what you know is right. Giving up or engaging is ‘slacktivism’ accomplishes nothing – guaranteed.
BB. Renouncing is not giving up or slacking. It’s the only reasonable thing to do. You can pay a lobbyist if you like but you will be outlobbied by Google , Apple, Amazon , the Mercers and so on . They accompany there efforts with huge campaign contributions.
I didn’t say renouncing is giving up or slacking. I said do what you need to do to protect yourself.
To say that I will be outlobbied by major corporations is to suggest I just give up. Why would major corporations care whether non-resident Americans are given an exception to the Repatriation Tax or benefit from TTFI? We’re no threat to them.
Money counts, but there’s also strength in numbers. The sheer number of TT petitions coming into the Treasury Department got their attention. That’s not to say that there aren’t a few deep pocketed individuals with corporations outside the US who might have called their Congressman when they got wind of the tax. This is going to take a huge effort from every angle, no doubt, and the US government may invariably do what it’s always done – nothing. Fortunately there are many of us who won’t accept nothing as an answer.
Hear, hear, BB!!
SECTION 965 IS NOT A BIG ISSUES IF THE LAW IS UNDERSTOOD CORRECTLY.
NO US TAX SHOULD BE PAYABLE ON THE SECTION 965 AMOUNT IF THE TAXPAYER HAS FOREIGN TAX CREDIT CARRYOVERS. THAT IS THE SIMPLEST SOLUTION AS A STARTING POINT
“IF THE TAXPAYER HAS FOREIGN TAX CREDIT CARRYOVERS.”
Exactly. There is no Foreign Tax Credit carryover because the country of residence will tax the money when the person will withdraw the money, years in the future.
Obviously he means existing FTC credits from other sources. Some may have those, others may not.