Changing Canadian and U.S. Tax Law

March 13, 2016

Feedback is a valuable tool for improvement. Whether you are a student seeking advice from a teacher, a professional listening to clients to upgrade service or a young point guard looking to beat a press (pass the basketball instead of dribbling it), we can all evaluate suggestions to help us improve. Governments and tax authorities are no exception and often seek out comments and feedback on existing or proposed tax changes. Recently a number of groups and organizations have offered their comments.

US Tax Treatment of Canadian Plans

We have written in the past about the different U.S. and Canadian tax treatments for certain Canadian accounts. You can review our past comments on certain items by clicking on the links at the end of this blog.

Earlier this month, the American Institute of CPAs (AICPA) released a letter sent to the U.S. Department of the Treasury requesting tax relief for U.S. and Canadian citizens who own certain types of deferred and tax exempt savings accounts which can cause significant reporting burdens and potential double taxation. Working with the Chartered Professional Accountants of Canada and the American Chamber of Commerce in Canada, the groups have made three major recommendations:

  • Provide U.S. citizens and residents similar tax-deferred or tax-exempt treatment that Canadians currently have for Canadian Registered Education Savings Plans, Registered Disability Savings Plans and Tax Free Savings Accounts;
  • To reduce the onerous filing and reporting requirements, exempt these plans from classification as grantor trusts and from the passive foreign investment company rules under US tax law;
  • Provide relief from taxation and reporting requirements for Canadians who own US college savings plans and Roth IRA accounts.

Anything that results in fair taxation and simplified reporting for individuals in a cross border situation is welcome and we support all of these initiatives and recommendations. This past week the U.S. hosted Canada in the first State dinner at the White House in 19 years. Perhaps when President Obama and Prime Minister Trudeau weren’t teasing each other about hockey, they found time to discuss tax!

Further details on the AICPA’s announcement can be found here:

US Offshore Voluntary Disclosure Program and Streamlined Procedures

This past week, the AICPA made public its recommendations to improve these tax amnesty programs. We have also written about these programs in the past, see the links below.

The AICPA commended the IRS on its’ success in these programs. It recommended that for the Offshore Voluntary Disclosure Program, the Internal Revenue Service go back to its policy of not requiring upfront payment of certain penalties. It also recommended that the IRS expand the Streamlined Procedures program to include certain classes of non-willful and ineligible individuals and requested the IRS provide additional guidance on how the IRS will consider and conclude on what situations are considered non-willful.

We agree with the recommendations but are somewhat doubtful that they will be considered. Senior IRS officials have previously commented that they don’t intend to define willfulness and that the exclusion from the Streamlined Procedures program of frequent travelers to the US such as snowbirds is intentional.

Canadian Small Business Tax Rate – Professionals

Under Canadian tax law, the first C$500,000 of annual profits from a small privately held business is subject to a lower Canadian corporate income tax rate ranging in most provinces from 13 to 15%. Members of professions such as medicine, engineering & architecture, law and accounting often incorporate their practice not only to access this lower corporate tax rate but to utilize other tax strategies such as splitting income with other family members and taking advantage of the lifetime capital gains exemption on the sale of their business.

Last fall, the Liberals stated in their election material that the tax strategies for small businesses were not intended for high income individuals to lower their own tax liabilities and those steps would be taken to modify the rules. Many expect the Liberals to announce their plans in this area in their March 2016 budget.

These comments prompted many organizations including the Canadian Medical Association, the Canadian Federation of Independent Businesses and the Certified Professional Accountants of Canada to urge the Liberal government not to alter or change these laws. Their arguments are that these highly skilled professionals, while providing significant contributions to the knowledge economy, are required to provide for their own pension plan funding as self-employed businesses. Furthermore, an increase in tax liabilities would result in fewer funds available to pay salaries and grow their business thus hurting the Canadian economy.

These comments appear to have been heard and acted on. On Friday the Canadian House of Commons Finance Committee issued its report in advance of the March budget recommending the Liberals make no changes to the small business tax rules. The Globe and Mail summarized the report:

The Liberals present their first budget on March 22nd. Stay tuned.

Past WLD Blog Entries on U.S. Tax Treatment of Canadian Plans: