189 thoughts on “Be on the Lookout! Bubblebustin to be on CBC The National- on the #TransitionTax”

1. Another source not official. Worth checking? Don’t want to raise false hopes. https://www.fool.com/retirement/2016/12/11/long-term-capital-gains-tax-rates-in-2017.aspx

2. More coverage outside the CBC in Canada. Better emphasis on the fact that these are Canadians being affected:

   http://thechronicleherald.ca/editorials/1567440-editorial-drawing-the-line-in-the-u.s.-tax-raid-on-canada

3. I don’t want to prolong the discussion of capital gains tax on this thread. But I can report, having now done the research, that indeed no capital gains tax is owed if one’s income is in the 15% or below tax bracket (US$75,000 a year for a couple filing jointly), without the Form 2555 exclusion. This is made quite clear in the IRS instructions for Form D. Since my friends’ joint income under such calculation is around $90,000, they indeed “owe” the USA for their non-US earned property sale. Their question remains: report or don’t report? We’re skirting clearly into the zone of choice between “tax evasion” and sacrificing an entire year’s gross income to the beast, so there is no happy answer.

4. Stop filing? Safe as long as they’re able to ignore any IRS letters.

5. That Chronicle Herald article is very good. Just the right tone, IMO.

6. Excellent article from the Chronicle Herald; I just hope that “drawing the line” on this Transition Tax will translate into “drawing the line” on the whole damn CBT mess, which is, after all, the root cause of this entire evil.

7. Excellent article from the Herald.

8. @Barbara

   I think Uncle Tell is on to something. Unless your friends have already told the IRS what the original purchase price was via prior reporting, the IRS will have no idea there was a gain, let alone how much. The original cost basis would have gradually increased over the years due to maintenance, improvements, local property taxes, etc, so its likely the gain is far less than a simple proceeds minus the original purchase price calculation.

   If it were me, I’d just let sleeping dogs lie, ignore the property sale, file for 2017 as usual, and see if the IRS has any questions. They won’t because they have absolutely no knowledge a taxable event occurred other than a minor one week spike in the balance of an obscure account in a far away country. The chances of the IRS noticing that small blip in the world wide flood of FATCA data continually coming at them is virtually zero, therefore the chances of them asking about it is near zero. Their ability to collect anything if there ever was a dispute is also practically zero.

   Reporting the sale, on the other hand, would violate the first principal of IRS reporting: Never tell the IRS anything they don’t already know. People who try to comply are always the ones that get hurt the most.

9. From the article, “Some Opposition MPs have been calling on the Trudeau government to ensure Canadians in this situation are not double-taxed. They want Ottawa to have the Americans agree to credit any Canadian taxes paid against the U.S. repatriation tax liability. That would be the usual arrangement under the Canada-U.S. tax treaty.”

   Is this even feasible? I hope the more tax treaty savvy here will comment on this .

10. BB – are they perhaps referring to the Canadian tax that would be payable if money was taken out of the company in order to pay the Repatriation Tax?

    The US would have to give credit for the tax on the real distribution but that wouldn’t help with the tax on the imaginary distribution.

    But I may be misunderstanding.

11. But if Ottawa could get the Americans to accept that if they’re deeming the money has been distributed, they must also deem that the distributed income has been duly taxed by Canada, that could work, it seems to me. The US would allow credit for deemed Canadian tax deemed paid on the deemed distribution.

12. @BB

    I don’t see how it would be feasible because the Transition tax creates a fictitious taxable event instead of a real event.

    In order to have Canadian tax to use as a credit against the Transition Tax there would have to be an actual distribution and Canadian tax paid which would defeat the whole purpose of using the corporation to defer tax in order to save for retirement.

    Additionally, the distribution would have had to have been made before the end of 2017, before anyone even knew the Transition Tax would be legislated into existence. No amount of tax planning could have foreseen this disaster. Its a US government ambush, pure and simple.

    Morneau has stated that they are “studying” the situation. That’s not good enough with the deadline looming in less than 2 months. The Canadian government must immediately tell the US in no uncertain terms that they will not allow the US to tax these Canadian corporations.

13. maz57 – “In order to have Canadian tax to use as a credit against the Transition Tax there would have to be an actual distribution and Canadian tax paid”

    They’re pretending the money has been distributed. They should also have to pretend it’s been taxed by Canada, because that’s what would have happened if the money had been distributed year-on-year. And as a result of the money being distributed every year, each year’s E&P would presumably have been significantly lower.

14. @BB & MNM

    I have added it but will leave the first one as it is the standard form for MPs.

    I am not reading much now, sorry for delay. Now stormy, have lost power. Need to save phone.

    CDNs are now to report sale of residence on annual tax form. So worst-case scenario there is a vague notion that the info could be available. After all, some sources claim the CDN govt could have proceeded without the IGA based upon the treaty. ( try not to scream or strangle anyone close by…) And some condors claim a USC must claim entire value of home if spouse is non USP. Recall trying to find any basis for that claim by looking at number of IRS docs. It seems when establishing value of an asset one is to use the gift tax rules. And in determining the Exit tax, the estate tax rules. I don’t recall any clear indication in gift tax rules about US spouse having to claim entire value. Cannot swear to it…..

15. Plaxy – I think it would be poetic justice if Canada were to convince the US to allow FTC for deemed Canadian tax (not yet paid) to offset the US tax on a deemed distribution.

    Or, Canada could get the US to honour the treaty prohibition on taxing undistributed earnings of Canadian corporations.

    Yes, I know that the US is using the fiction of a deemed distribution to tax the shareholder so that the saving clause applies – but Canada doesn’t have to agree. The truth is that the transition tax is a tax on the undistributed earnings of a Canadian corporation – and a Canadian corporation is not a US taxpayer.

16. Karen – I don’t think a US taxpayer could claim exemption using the treaty article that prohibits taxation of undistributed actions because the taxpayer would have to file 8833, thus providing the IRS with the information needed to calculate the tax. The taxpayer would be relying entirely on the hope of being able to succeed in a MAP double-taxation complaint. In other words it would be very risky.

    If the Canadian government intervenes, then presumably they’ll use whatever arguments they see fit, in raising the issue with the US. The government, unlike the taxpayer, would not have to play the treaty game where the taxpayer argues that double taxation has occurred, and the Competent Authorities decide that *under the terms of the treaty* double taxation has not occurred. The government can take a stand on the undeniable fact that the US doesn’t have primary taxing rights on the earnings of the corporation, regardless of whether the earnings have or have not been distributed. And the taxpayer thus does not have to expose himself/herself to the risks of trying to win in using the MAP procedures.

    IMO.

    My suggestion about deeming that the deemed distribution has been deemed taxed and therefore the taxpayer can claim credit, doesn’t involve a treaty claim; it’s just an idea of how the exemption could work right now (if the Canadian government negotiates with the US), rather than the taxpayer having to pay the first instalment in a few weeks time and then trust the USG (!) to legislate to grant exemption.

    Presumably the Canadian government will approach the matter in the way it sees fit, if it does raise the question with the US.

17. I don’t see how the Canadian government can raise the issue and resolve it in a timely manner without using the existing tax treaty and MAP. In doing that, even the Canadian government will have to raise an argument as to why the tax is contrary to the treaty (plus an argument that Congress did not intend to override the treaty using the last in time rule). There are two possible treaty positions – the argument that the transition tax is double taxation and the argument that the transition tax is actually a tax on the undistributed profits of a Canadian corporation.

    If the tax is double taxation – the argument is that Canada has first right to tax corporate distributions so the Canadian tax on the amount that the US is deeming distributed should be allowed as a credit, and even though Canadian tax has not actually been paid, shareholders should be able to treat it as accrued in this instance in order to best match the Canadian and US tax liability for purposes of FTC.

    And, while they’re at it, they should inform the US Treasury that exactly the same arguments apply for GILTI.

    If the Canadian government is not forthcoming, it is possible for the taxpayer to request a MAP ruling in advance.

    Failing that, they could take the return position and see what the IRS does. If they follow this route, failure to file a form 8833 does not preclude the taxpayer from arguing that the treaty applies – and the fine for failure to file form 8833 is $1000. It may be a valid strategy to omit the 8833 and wear the penalty should the IRS challenge. For taxpayers with no US assets who are Canadian citizens, it may not be worth the cost for the IRS to challenge in the first place.

18. Karen:

    “If the Canadian government is not forthcoming, it is possible for the taxpayer to request a MAP ruling in advance.”

    Is the MAP ruling not binding?

    I don’t have any faith in the MAP procedures producing a fair decision.

    “It may be a valid strategy to omit the 8833 and wear the penalty should the IRS challenge. For taxpayers with no US assets who are Canadian citizens, it may not be worth the cost for the IRS to challenge in the first place.”

    Yes I agree, if the taxpayer is willing to deal with IRS letters. (Which may not occur but can’t be ruled out.)

19. Would it be possible for a taxpayer to ask the CRA for an immediate ruling, in writing, as to whether the CRA will allow credit for the tax paid on the deemed distribution, when a real distribution eventually takes place?

    Presumably the answer would be no. This could then be submitted with any MAP complaint, to show that double taxation would result.

    If the taxpayer is allowed to submit evidence.

20. The Canadian government could declare that an overridden treaty is overridden. There is no longer a savings clause. There is no longer a collection assistance clause. The last-in-time rule overrode the treaty and no Canadian law lets the US tax Canadian residents on anything other than US-sourced income.

    But to do that, one would have to persuade the Canadian government to care.

21. I usually interpret government promises to ‘study’ some pressing issue to mean that they feel they need to publicly pretend that they care, and in reality don’t intend to do anything meaningful to address the problem, hoping that it will blow over, people will forget, or that those protesting will just give up and go away (hence on the provincial side here in Ontario, we’re still waiting for the provincial Liberals to amend the core funding formula for the education system in Ontario that was cut by the Cons).

    My comment isn’t at all meant to discourage people here from contacting their MPs and others. The more they feel the heat, and the more publicity the problem gets, the better.

    Just saying that I put no faith in that statement made on Morneau’s behalf (“Dan Lauzon, spokesman for Finance Minister Bill Morneau, said the federal government is studying the Trump administration’s tax reform.

    “The Department of Finance is conducting detailed analytical work to consider the impact of U.S. tax reform,” said Lauzon. “This work is expected to take several months.”” http://www.cbc.ca/news/politics/transition-tax-trump-corporations-1.4639020 ) meaning they intend anything tangible as a result. After all, they’ve known about the problem with US extraterritorial taxation of Canadians for years, and have not lifted a finger to renegotiate the tax treaty to fix any of the many gaping treaty gaps that advantage the US extraterritorial claims over Canadians. They’ve done nothing about the Obamacare tax for ex. or the problem with RDSPs and RESPs being subjected to the punitive 3520/A reporting and penalty regime as ‘foreign trusts’.

    A plague on both the Glib and the Con houses.

22. I meant to say that I doubt that Morneau’s statement was meant to produce anything tangibly helpful.
    If we were Canadian softwood shingles and shakes, that would be a different story.

23. Or if we were Canadian banksters.

24. The treaty doesn’t enforce CBT on USCs. The treaty might (or might not) provide an avenue which would allow the USC to comply with US law without being forced into bankruptcy.

25. It’s the saving clause, which excludes USCs from most treaty benefits, which is the problem.

    It’s to be hoped that countries with US treaties will raise the international aspects (including the transition tax as well as GILTI, BEAT, and all the other cutesy-sickmaking acronyms of the US tax reform), with the US.