Canada: The TCJA And Beyond

KEY POINTS

WHAT IS THE ISSUE?

An update1 on recent tax changes, as well as the non-tax aspects and provincial aspects of US-Canada cross-border planning, which were discussed in the May 2017 edition of the STEP Journal.

WHAT DOES IT MEAN FOR ME?

Practitioners can revise their existing knowledge and advise clients with Canadian and US connections of any recent changes.

WHAT CAN I TAKE AWAY?

Since last year, a number of matters have been the subject of further developments and changes.

OUR 2017 STEP Journal article2 discussed British Columbia’s 15 per cent property transfer tax (the Vancouver tax), applicable to certain foreign buyers of residential property in the Greater Vancouver regional district.

On 21 April 2017, the Ontario government followed suit by implementing a nonresident speculation tax (NRST), applicable to certain transfers of property within the Greater Golden Horseshoe (GGH). The GGH covers a large swathe of Ontario, including Toronto and surrounding regions such as Niagara, Waterloo and Hamilton. Ontario’s 15 per cent NRST applies to transfers of residential real estate located in the GGH to:

  • individuals who are not citizens or permanent residents of Canada (excluding refugees);
  • foreign corporations; and
  • taxable trustees.

Like British Columbia’s 15 per cent foreign buyer transfer tax, the Ontario tax was enacted to cool overheated real estate markets by targeting foreign speculators who purchase property to turn a profit, rather than as a personal residence.

The Vancouver tax appeared to be working, but only temporarily. The market cooled for the first year, but, by mid-2017, year-over-year gains in house prices were returning to double digits. British Columbia’s New Democratic Party government, whose campaign promises included tackling the province’s affordable housing crisis, recently3 announced several expanded real property tax measures, including:

  • Effective immediately, the 15 per cent foreign buyer tax increases to 20 per cent.
  • The foreign buyer tax will be expanded from Vancouver to other major centres, including the Fraser Valley, Greater Victoria, Nanaimo and the Central Okanagan region.
  • The regular property transfer tax (payable by both residents and nonresidents of British Columbia) will increase from 3 per cent to 5 per cent for properties in excess of CAD3 million.
  • A new annual residential property ‘speculation tax’ will be levied, starting at CAD5 per CAD1,000 for 2018, and increasing to CAD20 per CAD1,000 in 2019. Homeowners who pay income tax in British Columbia will be eligible for an offsetting credit, so this tax is aimed directly at non-resident owners and ‘satellite families’, whose main sources of income are taxed outside British Columbia.

PRINCIPAL RESIDENCE EXEMPTION

The Canadian government’s proposed changes to the principal residence exemption, aimed at restricting the ability of certain trusts and non-resident individuals to claim a capital gains exemption on the disposition of Canadian situs real property, have now been passed into law. Individuals and families holding Canadian real estate in trust should review the trust terms, and consider whether it would be beneficial to transfer the property out of the trust, prior to an actual or deemed disposition.

PROPOSED EXPANSION OF CANADIAN TRUST REPORTING RULES

The Canadian government’s 2018 Federal Budget, published on 27 February 2018, included proposals that require all Canadian-resident and non-resident trusts to file an information return every year, whether or not the trust has income in the year. Reporting is to be expanded to include the names and details of the trust settlor, trustees, beneficiaries and any person who has the ability to exert control over trustee decisions (e.g. a trust protector). In addition, the trust return is to include a ‘beneficial ownership schedule’. It is not yet clear how contingent or unascertained beneficiaries would be reported. Additional penalties for failure to file could equal 5 per cent of the value of the trust property. The new reporting requirements and penalties are proposed to begin in 2021.

These are only a few of many recent changes to Canada’s tax regime. We cannot emphasise enough the importance of seeking up-to-date information and advice for any cross-border planning that you may do, as well as periodic updates regarding cross-border structures or plans that may already be in place.

TAX CUTS AND JOBS ACT The most comprehensive reform to the US tax code in over 30 years, the Tax Cuts and Jobs Act (TCJA) became law on 22 December 2017, and generally became effective as of 1 January 2018. Many of the changes brought in by the TCJA are beyond the scope of this article. The following is a summary of certain aspects of the TCJA that affect US-Canada cross-border planning.

It is important to note that, although changes to the corporate and business tax regimes are generally permanent, most of the changes to the individual, estate and gift, and pass-through entity tax schemes are temporary. Unless legislation is enacted to continue these measures, they will expire and revert back to their pre-2018 forms upon the 31 December 2025 sunset date.

ESTATE AND GIFT TAX

The US allows individuals to pass on certain amounts as inter vivos gifts or through their estates, or some combination thereof, free of gift, estate and generationskipping transfer tax. For US citizens and resident non-citizens, the TCJA doubled the exclusion amount to USD10 million (inflation indexed to USD11.18 million). Non-US persons are subject to tax on their US-situs assets in excess of USD60,000. In addition, Canadians are eligible for a prorated exclusion for US-situs assets under the Canada-US Income Tax Convention, equal to the value of US-situs assets, divided by the value of worldwide assets. This means that, at least until 2025, Canadians will not incur US estate and gift tax unless their USsitus assets exceed USD60,000 and their worldwide estate exceeds USD11.18 million.

Given the sunset provisions, non-US persons may wish to consider taking advantage of the additional exemptions through inter vivos gifts prior to 31 December 2025. Advice from a qualified US advisor will be necessary before undertaking any such planning.

CORPORATE TAX

The TCJA lowered corporate tax rates from a top marginal rate of 35 per cent to a flat rate of 21 per cent. However, the TCJA changed how corporate tax is calculated, created and limited, while also eliminating a number of deductions. Of particular interest with regard to cross-border planning is the shift from the worldwide taxation model to a quasi-territorial system. Previously, foreign income earned by a foreign subsidiary of a US corporation was subject to US tax upon distribution as a dividend to the US parent corporation. Under the TCJA, a US corporation that owns 10 per cent or more of a foreign corporation is entitled to a 100 per cent dividends-received deduction (DRD) for the foreign-source portion of dividends paid by such foreign corporation.

DEEMED REPATRIATION AND TRANSITION TAX

Also significant for US-Canada crossborder planning is the deemed repatriation of previously untaxed foreign earnings. Under the TCJA, deemed repatriation applies to US shareholders with at least a 10 per cent voting interest in a controlled foreign corporation and to US shareholders of foreign corporations with at least one US corporate shareholder. The deemed repatriation rule imposes a one-time tax on post-1986 accumulated foreign earnings at rates of 15.5 per cent for cash and 8 per cent for non-cash assets. An election is available to pay this tax over eight years in increasing annual instalments.

The DRD, noted above, is available for corporate shareholders only. As a result, the deemed repatriation rules may lead to double taxation of US individual shareholders residing in Canada. Foreign tax credits may not be available because the one-time transition tax will not match tax on the actual distribution of earnings.

CONCLUSION

The US-Canada cross-border planning landscape continues to evolve. The impact of several new taxes, as well as major changes to the Canadian and US federal tax regimes, is keeping advisors on their toes.

Clients with Canadian or US connections should be advised to review current structures and seek up-to-date advice on any new planning.

Footnotes

1 The authors are grateful to Emily McClintock of Miller Thomson's Edmonton office for her assistance in preparing this article

2 bit.ly/2pOeJ4R 3 Budget 2018: Working For You, bit.ly/2GUyIWK

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
Wendi P. Crowe
Similar Articles
Relevancy Powered by MondaqAI
Collins Barrow National Incorporated
Minden Gross LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Collins Barrow National Incorporated
Minden Gross 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