Canada: 2013 - The Fiscal Cliff, Obamacare, And Maybe Even US Tax Reform

The fiscal cliff has mostly come and gone. Last minute legislation has prevented the worst-case scenario of sharply higher US taxes on wages, interest, dividends, capital gains, and on estates.

We're gratified that the predictions we made in an August blog post (and hence republished elsewhere) were largely correct. We said that "we are confident that the legislation avoiding the worst case scenario, 'Taxmaggedon,' will be enacted, whether in 2012 or 2013." We called as the most likely scenario that "the lame-duck Congress takes action in November or December, to delay the effect of the new rules for a year or two...or to pass a compromise between the current rules and the ones scheduled to take effect in 2013." Congress actually waited until January 1, 2013 to pass the "American Taxpayer Relief Act of 2012" which did a little of both. Most of the cliff bill is a permanent compromise between 2012 rules and what was to take place in 2013, although there are a number of credits and other items that were merely extended for a year or two.

We also said that there was reason for hope that the estate tax wouldn't kick in at a US $1,000,000, as scheduled for 2013, instead of the 2012 exemption of US $5,120,000. That in fact happened. The new rate is the same as the 2012 rate, but indexed for inflation. The only bad news is that the top tax rate on estates exceeding the exemption amount has been bumped from 35% to 40%.

Here's what the most prominent features of the new landscape look like:

The top tax bracket of 39.6% kicks in at US $450,000 for married US couples, for US $400,000 for single US persons, and at US $225,000 for a married US person filing separately (typically the case when a US person is married to a non-US person (a "mixed" marriage)). These numbers are indexed for inflation. To the extent that a person is in this new highest bracket, capital gains and dividends, to the extent overall income is above the bracket floor, are now taxed at 20%, rather than 15%. An additional 3.8% tax on net investment income is applied under Obamacare. This tax kicks in at much lower thresholds (US $250K for marrieds, US $200K for singles, and US $125K for marrieds filing separately). The threshold is also calculated differently. It is based on adjusted gross income plus the amount of any foreign earned income exclusion. (The "foreign earned income exclusion" allows US persons working abroad to exclude some of their foreign earnings. The figure for 2012 was US $95,100 and is adjusted for inflation annually.) Moreover, unique rules apply for determining what constitutes investment income. Income from a passive business counts for purposes of this tax. So do some annuity payments as well as gain from the sale of certain interests, such as some partnership interests.

So where does that leave the typical American living in Canada? Well, although tax rates are now higher than they were in the US, overall the burden is generally still higher in Canada—even in low-tax Alberta. Given that reciprocal foreign tax credits are available, the rule of thumb is that a person subject to both taxing systems generally ends up paying the higher of the two. So if Canadian federal and provincial taxes are more than what is owed in the US, a change in the US rate doesn't affect how much you owe—just who is getting handed the check.

Except that is it unfortunately not so simple. Foreign taxes most likely will not be creditable against the 3.8% Obamacare tax on net investment income. The US provision governing foreign tax credits, section 901 of the Internal Revenue Code, doesn't apply to this tax. At this time it is unclear whether the Income Tax Treaty between the US and Canada, which strives to eliminate the double taxation of income, will apply. If it doesn't, many Americans living in Canada will owe US tax for the first time. Moreover, because investment income tax isn't typically withheld at source, estimated quarterly tax payments will be required in many cases.

Some other changes of which to be aware:

  1. The exemption from tax for interest-related and short-term capital gains dividends received from regulated investment companies ("RICs") was extended to the 2012 and 2013 tax years. This extension applies mainly to non-US persons who invest in US mutual funds.
  2. The "look-through" rule for controlled foreign corporations (CFCs) is extended through the end of 2013.
  3. The 3.8% net investment tax has some funky applications in the context of CFCs and PFICs (passive foreign investment companies). The details are technical (a code word for "will put non-tax people to sleep"), so we'll spare you. But something to watch out for.

Continuity of leadership in the US Congress bodes well for the prospects of tax reform. John Boehner was re-elected as Speaker of the House last week, and the Republican caucus has already determined that Representative David Camp will continue to serve as chairman of the powerful House Ways & Means Committee. For the past two years Camp has championed a reform effort with respect to the US corporate tax rules, even producing his own discussion draft to spark debate on how to switch to a territorial tax system. He may very well spearhead a reform proposal this year. Support for a reform effort may also be forthcoming from his counterpart in the Senate, Max Baucus, Chair of the Senate Finance Committee, who is similarly interested in pursuing comprehensive corporate tax reform. With the caveat that reform is more often predicted than accomplished, we think the odds are at least fair that some sort of reform package will make its way onto the 2013 agenda.

If there is any overarching theme that seems to define what we expect in 2013, it is that the dramatic changes in the US tax landscape that have occurred since 2008 are finally crystalizing into final form. The crackdown on international tax evasion through the banking system has solidified into a permanent policy framework under the FATCA rules. What began as an inquiry into the practices of Swiss banks morphed into a hunt for sophisticated tax evaders and now is reaching a policy framework for ordinary Americans living abroad to get and stay compliant, with the FATCA rules making  foreign governments and banks assist the IRS.

The new tax on net investment income under Obamacare is now in effect. Doubts as to its implementation persisted while litigation challenged the law and were only partially resolved by the Supreme Court's ruling that most of the law (including the tax) would stand. Mitt Romney campaigned on repeal and replacement of Obamacare and even with his defeat, some on the right hoped that the fiscal cliff standoff would be resolved in part by an undoing of the new health care tax.

And last, the drama of the fiscal cliff was resolved with an end to years of patchwork extensions of the Bush-era tax cuts and temporary fixes to the problem of the AMT (alternative minimum tax) reaching new taxpayers each year because of its lack of inflation indexing. We now have a relatively permanent regime that should stand at least through the end of the Obama presidency, if not beyond. Although the tax world looks quite a bit different than it did in 2007, the earthquakes of the past few years have largely dissipated. Of course, one big one is still threatening—corporate tax reform. We'll see what happens.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Events from this Firm
18 Oct 2018, Webinar, Calgary, Canada

On Dec. 22, 2017, President Trump signed into law the biggest US tax reform bill in 31 years, changing the lives of Americans at home and abroad. Many US residents will see an immediate benefit on their 2018 tax return, but for US expats and green card holders living abroad, things may have changed for the worse.

20 Oct 2018, Seminar, Vancouver, Canada

On Dec. 22, 2017, President Trump signed into law the biggest US tax reform bill in 31 years, changing the lives of Americans at home and abroad.

27 Oct 2018, Seminar, London, UK

On Dec. 22, 2017, President Trump signed into law the biggest US tax reform bill in 31 years, changing the lives of Americans at home and abroad.

Similar Articles
Relevancy Powered by MondaqAI
Grant Thornton
Moodys Gartner Tax Law LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Grant Thornton
Moodys Gartner Tax Law LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions