Canada: Tax Issues Of Interest To The U.S. Person In Canada And Their Advisors

U.S. persons who are shareholders of Canadian corporations which are deemed controlled foreign corporations under the Internal Revenue Code will be subject to the transition tax    as set out in section 965. The section 965 tax was aimed at forcing large companies such as Apple to repatriate large sums of cash (retained earnings) held outside of the U.S. back to the U.S. In Apple's case, the Company would be remitting retained earnings to a U.S. shareholder corporation. A foreign corporation remittance to a U.S. corporation is subject to a toll tax of 15.5% on cash and 8% on all other assets. Problematic for the Canadian shareholder is that there is no U.S. corporation to repatriate its cash and assets to. As such, an individual would be subject to much higher rates.  According to Amanda Athanasiou, Toll Charge is Taking Individuals by Surprise, Tax Notes International, February 19, 2018,  an individual would  be subject to a toll rate of 27.3% for cash repatriated in 2018 and 14.1% for non-cash.

The favourable tax treatment to a U.S. corporate shareholder as compared to tax treatment of a U.S. individual shareholder has many practitioners considering the section 962 election under the Code which allows an individual US shareholder to be treated as if he or she was a corporate shareholder. This election, which can be made annually, also entitles the individual to claim a deemed paid foreign tax credit under section 960, which would otherwise be unavailable. Section 965 and IRC §951A are both part of subpart F of the Code and an argument can be made that an IRC §962 election is available to a US individual shareholder faced with the transition tax and with GILTI after the transition tax. On September 18, 2018 the U.S. Tax Court released Barry M. Smith and Rochelle Smith v. Commissioner of Internal Revenue, 151 T.C. No. 5 bolstering this thought. In  the Smith case, the Court considered the section 962 election but not in a section 965 but in a regular subpart F context.The decision provides a sound review of the section 962 election.The Court explains that the section 962 election "do[es] not create hypothetical corporations or change real world facts. They simply provide a mechanism that enables an individual U.S. shareholder to elect what he or she may deem more desirable tax treatment".

In the Smith case, the CFCs at issue were based in Hong Kong and in Cyprus. The U.S. does not have a tax treaty with Hong Kong but it does have one with Cyprus. However, the Cyprus Treaty was not applicable as the Cyprus entity did not meet the LOB clause of the treaty.The taxpayers in Smith elected to treat their Hong Kong CFC and Cyprus CFC as corporations pursuant to section 962. The issue was whether the distributions from the CFC now being treated as a domestic corporation could receive qualified dividend treatment pursuant to IRC §1(h)(11)(B)(i)(l) instead of being accorded ordinary dividend income treatment at a higher tax rate. A U.S. shareholder of a Canadian corporation would meet the IRC §1(h)(11)(B)(i)(l) test which accords qualified dividend treatment to dividends from domestic corporations or from "qualified foreign corporations". Section 1(h)(11)(C) defines a "qualified foreign corporation" as a corporation incorporated in the United States or a corporation eligible for benefits of a comprehensive income tax treaty with the United States. Notice 2006-101 provides that Canada meets the requirement of IRC §1(h)(11)(C).

The section 962 election is therefore worth considering for those U.S. persons in Canada deemed to be US Shareholders. For those who have already filed their 2017 tax returns, consideration should be given to filing an amended return with a section 962 election.

Treasury, IRS Announcement – Making large gifts now won't harm estates after 2025

The 2017 Tax  Cuts and Jobs Act temporarily increased the base amount of the lifetime gift and estate tax  from US$5 million to US$10 million to 2025. After 2025 the base amount of the life time gift and estate tax exemption will drop back to US$5 million. There was concern amongst advisors that the estate tax after 2025 could apply to gifts exempt from gift tax prior to 2025. On November 20, 2018, the Treasury and the IRS announced that individuals taking advantage of the increased gift and estate tax exclusion amount would    not be adversely affected after 2025 when the exclusion amounts drops to pre-2018 levels. The Treasury and the IRS also announced the proposed regulations implementing the increased exemptions. The proposed regulations also amend the existing regulations to provide that in the case of decedents dying or gifts made after December 31, 2017 and before January 1, 2026, the increased base amount to US $10 million is adjusted for inflation.

US spouses share an unlimited marital deduction for federal estate tax purposes and do not have to rely on the increased life time estate tax exemption between each other. However, the estate of the last to die will bear the burden of the tax levied on the entire estate. Advisors have to remember that upon the first to die, one must elect on the estate tax return of the first spouse to die that the surviving spouse will be using the unused estate tax exemption upon his or her death. IRS Form 706, United States Estate and Generation-Skipping Transfer Tax Return will have to be filed by the surviving spouse declaring that the deceased spouse's available exemption be added to the surviving spouse' exemption. Given that for 2018 the base amount adjusted for inflation of the estate tax exemption is $11.2 million, care should be taken that the increased estate tax exemption is ported correctly upon the death of one U.S. spouse prior to 2026 to the surviving spouse.

The annual gift exclusion amount for 2019 remains at $15,000. A U.S. person may gift $15,000 to as many persons he or she wishes to.

Excise Tax on premiums on policies issued by non-U.S. insurance companies

Recently, there have been many queries about the1% excise tax levied by the U.S. under section 4371(2) of the Code on premiums, paid to non-U.S. insurance company, on a policy of life, sickness or accident insurance of  a U.S. citizen or a U.S. resident.

This is not a new tax and goes back to the 1970s when it was known as a stamp tax.The section 4371 excise tax is an area often overlooked by advisors who are conditioned to rely on the Treaty which provides an exemption from income taxation where a Canadian corporation carries on business without a permanent establishment in the U.S.

The Canadian Tax Treaty however does not provide relief to a Canadian insurer or its agents or the beneficiaries of the policy where the life insured is a U.S. person and where the Canadian insurer does not carry on business in the U.S. or does not attribute the premiums in Canada to a U.S. office. Section 4371 to 4374, the relevant provisions of the Code, are the successor to the original stamp tax levied on foreign insurance companies.The retention of this stamp tax which is now called an excise tax was necessary in the eyes of Congress in order to reduce the competitive advantage of a foreign insurer's otherwise tax-free operation. See H.R. Rep. No. 2333, 77th Cong., 2d Sess., at 61 (1942); 61 Cong. Rec. 7180-81 (1921).

The Canadian Tax Treaty does not provide relief. Article 2 which addresses what taxes are covered under the Treaty does not exempt the section 4371 excise tax. As such an argument cannot be made pursuant to Article VII of the treaty that a premium paid in Canada to a Canadian or other non-US insurer would be exempt from U.S. taxation as such insurer was not carrying on a business through a U.S. permanent establishment. Section 4374 holds that the excise tax has to be paid by any person who makes, signs, issues or sells any of the documents and instruments subject to the tax, or for whose use or benefit the same are made, signed, issued or sold.This is a very broad scope of liability.

The IRS has stated in its ExciseTax – Foreign Insurance Audit Techniques Guide  that

"while the Service will generally seek payment of the excise tax from the U.S. person making the premium payment, the Service may, in its discretion, seek payment from .... any of the following persons:

  • The insured, sometimes referred to as the beneficiary,
  • The policyholder, if that person is someone other than the insured,
  • The insurance company, and
  • The broker obtaining the insurance.

Regulation 46.4374-1(d) warns that any person who fails to comply with the requirements of this section with intent to evade the tax shall, in addition to other penalties provided therefor, pay a fine of double the amount of tax.

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

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

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

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Sign Up
Gain free access to lawyers expertise from more than 250 countries.
Email Address
Company Name
Confirm Password
Mondaq Newsalert
Select Topics
Select Regions
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 (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

To Use 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.


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.


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