On April 2, 2013, Roy Berg and James Gifford were in Washington
DC to present the Canadian perspective on the proposed regulations
under IRC 1411, the provision that implements the 3.8% tax on net
investment income that was enacted as part of the US health care
overhaul in 2010. The IRS had requested public comments on the
proposed regulations issued on December 5, 2012. Moodys submitted a
comment articulating a number of our concerns.
Practitioners from a variety of firms and interest groups spoke.
(A very good article on the hearing will be publicly available next
week, but Tax Notes subscribers can already access it here.) Roy and James spoke on issues of
interest to Moodys' Canadian clients.
Two areas of greatest concern are the treatment of Canadian
RRSPs and pensions and whether foreign tax credits may be used to
offset the NII. Unless the proposed regulations are modified a new
3.8% tax will likely apply to US citizens resident in Canada or
Canadians who are resident in the US on the following types of
Income generated in Canadian retirement plans (including RRSPs,
DPSPs, LIRAs, TFSAs, etc.), even though this income is not taxable
under the Canada-US Treaty;
Even if #1 does not apply, distributions from Canadian
retirement plans will likely be subject to the tax;
Payments made to retirees under the Canada Pension Plan
Recipients of government pensions.
Further, unless there are changes to the proposed regulations,
Canadian snow birds that rely on the Treaty to
"tie-break" back to Canada may have their net investment
income subject to this tax.
Although the hearing was an opportunity for practitioners to
speak to the IRS, rather than the other way around, it was possible
to get a sense of where things might be heading based on their
follow-up questions and informal discussions before and after the
hearing. It appears that the finalization of the regulations is
likely to move quickly.
Treasury appeared to be considering a few possible avenues, such
as allowing a deduction of foreign taxes against the NII. (It
appears that there are two camps of opinion within the IRS as to
whether the NII is foreign tax creditable.) The IRS also appears
sympathetic to the double-tax concerns that may arise under the
interaction of the NII with US tax treaties, but seems uncertain as
to how to technically resolve the dilemma.
Moodys will be providing the US Treasury with further analysis
on the foregoing and will post that analysis when it is formally
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.
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