Appendices
Appendix A – A Step By Step Description of how the 965 Transition Tax impacted by Canadian residents:
Appendix B – Additional Commentary On The “Faces Of The Transition Tax”
Appendix A – A Step By Step Description of how the 965 Transition Tax impacted by Canadian residents:
This is a complex problem – in the spirit of helping people understand the context and unfairness of this, here is a summary of what is going on:
1. A Canadian resident individual creates a Canadian Controlled Private Corp.
2. That CDN corp may make some profits.
3. If those profits are paid out to the individual, the individual pays taxes on his personal tax return (wherever he is required to file a return).
4. If the profits earned by the Corp are not paid out to the individual they are (1) taxed to the corp in Canada. The “after tax money” remains in the corp for future investment, or to be distributed to the individual later. Note that in Canada the money is not taxed to the individual until the money is distributed to the individual.
5. Canadians with U.S. citizenship also have to file U.S. tax returns. Those returns disclose existence of the CCPC and the amount of earnings that have not been paid out by the corp.
6. Money left in the corp (to be distributed later) was fully disclosed to the USA, but was NOT subject to US tax when earned. I repeat it was NOT (under US law subject to taxation when it was earned).
7. USA is claiming the right to (1) impose tax on money earned by the corp by (2) pretending that the money was actually earned by the individual (who never received it) – creating fake income!
8. Therefore, this is about (1) the USA imposing retroactive tax on (2) money that was not subject to U.S. tax when earned (3) by pretending that the money was distributed to the CDN shareholder (4) when the money was not distributed.
9. It will expose the individual to double tax in the USA and Canada.
USA is (1) creating fake income (2) imposing real taxation on fake income (3) imposing taxes before Canada can tax it and (4) stealing from Canada.
Appendix B – Additional Commentary On The “Faces Of The Transition Tax”
Face 1 – C corps
IRS: General Section 965 Questions and Answers (Including Transfer and Consent Agreements)
Face 2 – Individual shareholders of S Corps 965 (i)
(i) Special rules for S corporation shareholders
(1) In general
In the case of any S corporation which is a United States shareholder of a deferred foreign income corporation, each shareholder of such S corporation may elect to defer payment of such shareholder’s net tax liability under this section with respect to such S corporation until the shareholder’s taxable year which includes the triggering event with respect to such liability. Any net tax liability payment of which is deferred under the preceding sentence shall be assessed on the return of tax as an addition to tax in the shareholder’s taxable year which includes such triggering event.
(2) Triggering event
(A) In general
In the case of any shareholder’s net tax liability under this section with respect to any S corporation, the triggering event with respect to such liability is whichever of the following occurs first:
(i) Such corporation ceases to be an S corporation (determined as of the first day of the first taxable year that such corporation is not an S corporation).
(ii) A liquidation or sale of substantially all the assets of such S corporation (including in a title 11 or similar case), a cessation of business by such S corporation, such S corporation ceases to exist, or any similar circumstance.
(iii) A transfer of any share of stock in such S corporation by the taxpayer (including by reason of death, or otherwise).
Face 3 – Green Card holder using the tax treaty to become a treaty nonresident and therefore not subject to U.S. taxation on foreign source income
By way of example, Paragraph 3 of Article 4 of the 2016 Model U.S. Tax Treaty states:
3. Where, by reason of the provisions of paragraph 1 of this Article, an individual is a resident of both Contracting States, then his status shall be determined as follows:
a) he shall be deemed to be a resident only of the Contracting State in which he has a permanent home available to him; if he has a permanent home available to him in both Contracting States, he shall be deemed to be a resident only of the Contracting State with which his personal and economic relations are closer (center of vital interests);
b) if the Contracting State in which he has his center of vital interests cannot be determined, or if he does not have a permanent home available to him in either Contracting State, he shall be deemed to be a resident only of the Contracting State in which he has a habitual abode;
c) if he has a habitual abode in both Contracting States or in neither of them, he shall be deemed to be a resident only of the Contracting State of which he is a national;
d) if he is a national of both Contracting States or of neither of them, the competent authorities of the Contracting States shall endeavor to settle the question by mutual agreement.
Significantly, the circumstance of U.S. citizenship prohibits an individual from using the residence tie break provision to be taxed by ONLY their country of residence. This prohibition is the result of typical treaty “saving clause” which allows U.S. residents (but NOT U.S. citizens) to be treated as residents of ONLY the country where they reside. U.S. citizens, who are tax residents of countries outside the U.S. are ALWAYS residents of BOTH the United States and their country of actual residence for income tax purposes. This principle is found in Paragraph 4 of Article 1 of the 2016 U.S. Model Tax Treaty:
4. Except to the extent provided in paragraph 5 of this Article, this Convention shall not affect the taxation by a Contracting State of its residents (as determined under Article 4 (Resident)) and its citizens. Notwithstanding the other provisions of this Convention, a former citizen or former long-term resident of a Contracting State may be taxed in accordance with the laws of that Contracting State.
Notably Paragraph 5 does NOT allow U.S. citizens to be treated as nonresidents of the United States income tax purposes.
5. The provisions of paragraph 4 of this Article shall not affect:
a) the benefits conferred by a Contracting State under paragraph 3 of Article 7 (Business Profits), paragraph 2 of Article 9 (Associated Enterprises), paragraph 7 of Article 13 (Gains), subparagraph (b) of paragraph 1, paragraphs 2, 3 and 6 of Article 17 (Pensions, Social Security, Annuities, Alimony and Child Support), paragraph 3 of Article 18 (Pension Funds), and Articles 23 (Relief From Double Taxation), 24
(Non-Discrimination) and 25 (Mutual Agreement Procedure); andb) the benefits conferred by a Contracting State under paragraph 1 of Article 18 (Pension Funds), and Articles 19 (Government Service), 20 (Students and Trainees) and 27 (Members of Diplomatic Missions and Consular Posts), upon individuals who are neither citizens of, nor have been admitted for permanent residence in, that Contracting State.
