US Tax Reform 2017: New Pain for US Citizens owning Canadian Businesses – The US “Transition Tax”

The US Tax Reform enacted in December, 2017 made sweeping changes.  In addition to reducing the US corporate rate to a flat 21% in most cases, the law proposed to transition the US to a system of taxing foreign corporate holdings based on the residency of the foreign corporation.  To get there, there is the one-time pain we are calling a “gotcha” tax.

US Persons (citizens, residents, and green-card holders) who are owners of Canadian corporations are now required to report the retained earnings of any Canadian corporation in which they have a 10%+ ownership for 2017.  The amount to be reported is the higher of the balance at November 30, 2017 or December 31, 2017, and must be included as income of the shareholders’ US return for 2017.  Owners will be assessed a tax of 15.5% for any cash-like items making up those retained earnings of their corporations, and 8% for other assets making up those retained earnings.  Adding to the complexity, even indirect owners of foreign corporations are subject to the tax.

Hundreds of multi-national corporations have taken massive tax charges for 2017 – JP Morgan $5 billion, Citigroup $20 billion – but even the smallest foreign corporation is subject to the tax.  There is no uncertainty about this – it amounts to double taxation for US shareholders of foreign corporations.

Alleviating some of the pain is the ability to spread the payment over 8 years.  But to access this option, taxpayers must file and pay the first instalment with the first filing.  Once assessing the liability and beginning payments, any future earnings of the foreign corporation will not be taxed by the U.S..

As with most IRS rules, the penalties for non-compliance are severe.  For willful noncompliance, gross negligence penalties are possible.  For US citizens living in Canada for several years, the tax can amount to a nil filing.  Credits are available to offset the tax, and proper planning in advance can save thousands of dollars.

Like an express train, the system is moving extremely quickly and the IRS is racing to update their forms and publications in order to process the filings.  It’s reasonable to assume a great deal of chaos.  Being very well informed before taking, or not taking, any steps will be crucial.

Shawn Bausch is a tax manager at Sloan Group. Set up a free tax consultation today with Shawn at or 416-665-7735, extension 335.

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