U.S. tax reform could have Consequences for business owners in Canada

The proposed overhaul of the U.S. tax system is expected to benefit Canadian companies doing business south of the border. The U.S. Senate is set to begin its consideration of the Tax Cuts and Jobs Act this week, after House Republicans passed it earlier this month. However, the legislation could also bring bad news for some business owners — Americans residing in Canada who have Canadian corporations are concerned they might be subject to enormous tax bills.

“Things will get simpler and more appealing for Canadian companies doing business in the U.S. and more complex and costly for U.S. citizens who have Canadian companies,” if the law passes, says Max Reed, a cross-border tax attorney with SKL Tax.

The proposal to decrease the corporate-tax speed to 20 per cent from 35 per cent will provide businesses more money to invest and is expected to spur economic activity. The proposal also allows American companies investing in the United States to write off equipment purchases more quickly, which might boost capital spending. Both measures are thought to be good news for Canadian companies selling goods and services to American businesses.

Barrie, Ont.-based Linear Transfer Automation, making technical automation equipment for the automobile industry, is positioning itself for greater expansion in america if the taxation proposals are passed. About 70 percent of its business is in the U.S.

“It is a very positive thing for us if it goes through,” says Paul Stirrett, Linear’s vice-president of earnings. “It is simple economics 101 — reduced corporate taxes means more spending for capital investment.”

While Canadian companies selling in the USA will probably benefit, it might also incentivize some to relocate south of the border to pay less corporate taxation, says Dan Kelly, president of the Canadian Federation of Independent Business.

Mr. Kelly says more members are telling him that movement is tempting given increasing costs of doing business in Canada.

“They’re taking a look at the trend line in Canada versus the U.S. and saying, ‘Maybe I am crazy to stay here.’ That is the piece we must worry about the most,” Mr. Kelly says. “If the pasture is far greener from the U.S., there’ll be some companies that will take up the supplies they are getting [to relocate south of the border]. There’s big money on the table.”

American business owners in Canada

The proposed bill creates a one-time tax hit of around 14 percent to U.S. citizens who have businesses overseas. Mr. Reed says the tax will be on corporate assets not taxed in the USA since 1986, the last time that the U.S. tax code has been overhauled, such as physical assets like machines as well money, bonds and stocks. The outcome might be a one-time tax bill of hundreds of thousands of dollars for American small business owners that reside and work in Canada and pay taxes in both countries. U.S. citizens, regardless of where on earth they reside, need to file with the Internal Revenue Service.

Mr. Reed says the proposal aims large multinational corporations but, as suggested, would also have various sized companies operating outside america.

Moving forward, the proposals also involve American citizens who have Canadian companies to include in their private income some of their active business income every year. At present, Mr. Reed says, these citizens with active companies do not pay tax on the provider’s profits until they take the cash out.

“The proposal imposes a brand new, very complicated set of principles on U.S. citizens that own most a foreign corporation,” he says. Those affected will be taxed personally on 50 percent of the whole earnings of the Canadian corporation that’s over the amount set by a complicated formula, Mr. Reed says, adding that it would make compliance for those companies “extremely complicated and costly.”

Mr. Reed has quite a few American clients residing in Canada caught up in these suggested changes, a few of which are considering renouncing their U.S. citizenship to prevent the hefty tax strike.

1 dual Canadian-American citizen who resides in British Columbia and has owned a business in the state since the late 1990s says his tax invoice under the proposed legislation may be as much as $400,000.

“That’s lots of money, and it is from nowhere,” says the company owner, who did not want his termed used for fear of repercussion from U.S. taxation authorities.

He believes Americans such as him, living out the nation, are easy targets because they do not have a constituency south of the border.

“I do not know if it is inadvertent, or they simply have not thought it through,” says the company owner, who pays taxes in the USA and Canada. “They’re impacting our lives profoundly if we have not done anything wrong. They’re unfairly taxing those who’ve done the right thing.”

Though some have suggested he renounce his citizenship, the procedure can be complex and costly. Additionally it is irrevocable. Instead, he is hoping the Canadian government will step in and defend dual citizens such as him that are following the rules.

When asked to respond about if Ottawa was looking into the problem, a spokesperson from Canada Revenue Agency said the section is “responsible for administering tax and benefits from Canada. It’s not the CRA’s practice to comment on the taxation laws of another nation.”

Steven Flynn, a partner at cross-border tax company W.L. Dueck amp; Co.. LLP, says the one-time tax strike could be offset by a foreign tax-credit proceed, which is surplus Canadian taxes paid over U.S. taxes. (The overseas tax-credit system helps to ensure that taxpayers are not taxed twice on the same income. I?n general, I? two countries are attempting to tax the identical quantity of income, the country where the income was earned taxes the earnings) As an example, if an American company owner in Canada pays $30,000 in tax in Canada, and owes $20,000 in tax in the U.S., the operator could use $20,000 of the $30,000 to decrease the U.S. tax to nothing and the remaining $10,000 is carried over to future years.

“For many U.S. citizens in Canada, they likely have a balance of overseas tax-credit carry forward which will help cut the bill,” he says.

Mr. Flynn also said the tax owed under the new proposal may also be distributed over eight decades, instead of paid the same time, which might provide some relief to those affected.

Courtesy: The Globe And Mail

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