ADCS-ADSC & ADCT Letter to U.S. Congress

 

— In this press release we ask United States Congress to fix a problem in the present House/Senate tax bills that targets certain Canadian citizen/residents who own an incorporated business — and more broadly — to “stop imposing worldwide taxation on any Canadian resident”.

The press release is being sent in part to members of U.S. Congress and also to Canadian politicians who should be in the business of defending Canadian citizens from harm caused by a foreign state.

The focus of the press release is intentionally on “Canadians”. The word “American” is not mentioned. Our use in the text of the now-offensive term “U.S. person” (defined by the U.S. Internal Revenue Service) does not imply that U.S. person law applies to any Canadian resident or that any of these so-designated (by the U.S.) Canadians have ever consented to be U.S. persons.

*******
 

 
 
November 24, 2017
For Immediate Release

U.S. CONGRESS: DO NOT CONFISCATE OUR SMALL CANADIAN BUSINESSES AS PART OF YOUR TAX REFORM

Dear Congressperson,

On November 16, 2017 Rep George Holding, of the House Ways and Means Committee, in an exchange with Chairman Brady, urged that as part of tax reform that: The United States join the rest of the world by adopting “residence-based taxation”. This would END the U.S. current practice of imposing worldwide taxation on certain residents of other countries.
 
As U.S. law currently stands, many Canadian citizen/residents (who are deemed by the U.S. to be “U.S. Persons”) find themselves subject to U.S. taxation (ON THEIR CANADIAN INCOMES and CANADIAN ASSETS), even though they live in Canada and pay taxes to Canada.
The application of U.S. tax law into Canada – a principle enforced by FATCA – has profoundly negative consequences, some of which are intended and some of which are unintended.
 
This is a request that the wording of the United States “Tax Cuts and Job” bill be revised so as not to harm, even more, small Canadian businesses possibly included, we believe inadvertently, by your proposed tax reform legislation.
 
As your tax Senate and House tax reform bills are presently worded, Sec. 14103, for example in the Senate bill, might be interpreted to confiscate a significant percentage of the retained earnings of certain small “Canadian Controlled Private Corporations”. This is evidently part of broader legislation to implement “territorial taxation”, in order to enhance the competitiveness of publicly traded U.S. multinational corporations.
 
We believe that this section is intended to apply ONLY to the foreign subsidiaries of U.S. domestic corporations. However, a strict reading of the language of the bill suggests that this “transition tax” MIGHT also be paid by those who are deemed by your country to be “U.S. persons” living overseas who happen (as is common in Canada) to own an incorporated small business. The “minnows” swept up by your bill will then include small businesses such as a one-person incorporated medical doctor’s clinic, should the owner be designated by U.S. law to be a “U.S. person”.
 
We do not believe that this was your intention and ask that you fix the language of the bills accordingly. Surely you would agree that “territorial taxation” for U.S. multinational corporations does NOT mean that the United States should extend its taxable “territory” to Canadians who happen to own small Canadian Controlled Private Corporations!
 
As part of U.S. tax reform, we conclude by asking that the United States stop imposing worldwide taxation on any Canadian resident AND clarify that the “Tax Cuts and Jobs” Bill does NOT apply to Canadian residents who are shareholders of Canadian Controlled Private Corporations.
 
John Richardson
Carol Tapanila
Patricia Moon
Stephen Kish

 
On behalf of the
Alliance for the Defence of Canadian Sovereignty (www.adcs-adsc.ca ) Information@adcs-adsc.ca;
and
Alliance for the Defeat of Citizenship Taxation (www.citizenshiptaxation.ca)
 
Contact Mr. John Richardson at johnrichardson@citizenshipsolutions.ca
 
 

Parsing Proposed Legislation -Intended Confiscation or Not?

 
cross posted from The Isaac Brock Society
 

Is there a duty to obey a law that was never intended to apply to you,
even if the literal reading of he law suggests that it may/does apply?

 
 
 
 
USCitizenAbroad says
November 22, 2017 at 7:13 am

 
@Karen notes:

At the bottom of page 62 of the section by section summary:

” For the last taxable year beginning before the dividend exemption takes effect, a U.S. corporation that is a 10-percent shareholder of a foreign corporation must include in income its pro rata share of the undistributed, non-previously-taxed post-1986 foreign earnings of the corporation. The subpart F inclusion is taxed at rates of 10 percent for earnings attributable to liquid assets and 5 percent for other earnings. (emphasis added)”

Clearly, the Senate intends for the deferred foreign income to be taxable only to corporate shareholders. I’m not sure how the actual legislative text accomplishes this.

This is what the Senate summary says. This may even be what the Senate actually intends. I have spent considerable time trying to read through this crap to determine whether the “literal reading” of the proposed statute (regardless of legislative or Senate intent) can be interpreted to apply to the shareholders of Canadian Controlled Private Corporations. Although I do NOT believe that the intent is to apply this “transition tax” to Canadian Controlled Private Corporations, I believe that the literal reading of Sec. 14103 would include Canadian Controlled Private Corporations. So, the Senate Bill is no improvement (with respect to Americans abroad than the House bill).

What follows is my reading/parsing of the proposed legislation. I hope that those who are “wiser than I” can demonstrate why I am wrong.

1. What is the purpose of Sec. 14103?

The purpose is to confiscate a percentage of the retained earnings of certain corporations as a way of funding the move to territorial taxation for corporations.

2. Do the U.S. individual shareholders, including Americans abroad get the benefits of territorial taxation?

Absolutely not.

3. To what kind of corporations does Sec. 14103 apply?

The section applies to any “deferred income corporation”.

4. What is a “deferred income corporation”?

“The term ‘deferred foreign income corporation’ means, with respect to any United States shareholder, any specified foreign corporation of such United States shareholder which has accumulated post-1986 deferred foreign income (as of the close of the taxable year referred to in subsection (a)) greater than zero.”

Note that U.S. citizens are United States shareholders. So the question becomes …

5. What is a “specified foreign corporation”?

“For purposes of this section, the term ‘specified foreign corporation’ means— (A) any controlled foreign corporation,”

By “this section” they mean Sec. 14103 – noting that Sec. 14103 is the section that prescribes who is pay the “transition tax”. It does NOT mean Sec. 14101 which is the section that prescribes who gets the benefit of “territorial taxation”.

So, a “specified foreign corporation” appears to include any “controlled foreign corporation” which would include a very large number of Canadian Controlled Private Corporations!

Notice how similar the language in Sec. 14103 “specified foreign corporation” (who is subject to the tax/confiscation) is to the language in Sec. 14101 (who gets the benefit of territorial) “specified 10-percent owned foreign corporations”. The definition of “specified 10-percent owned foreign corporations” in Sec. 14101, is restricted to U.S. corporations that are the owners of a foreign corporation. See:

‘‘(1) IN GENERAL.—The term ‘specified 10-per-cent owned foreign corporation’ means any foreign corporation with respect to which any domestic corporation is a United States shareholder with respect to such corporation.”

Conclusion …

The language in both the House and Senate bills seem to allow for the confiscation of the retirement plans of some Shareholders of some Canadian Controlled Private corporations. (In July of 2017, Mr. Morneau – of Trudeau Government Finance Minister fame) began a discussion of how the Government of Canada could attack this same pool of earnings. It appears that the U.S. Government may be interested in that same earnings pool.)

Actually, I remain convinced that this is not the intent. So, I will conclude with the question that I asked in my last comment on this issue:

Is there a duty to obey a law that was never intended to apply to you, even if the literal reading of he law suggests that it may/does apply?

________________________________________________________________________

Legislative Text of US Senate Tax Reform Bill

________________________________________________________________________

What follows is a very parsed down excerpt from Sec. 14103

1 SEC. 14103. TREATMENT OF DEFERRED FOREIGN INCOME
2 UPON TRANSITION TO PARTICIPATION EX-
3 EMPTION SYSTEM OF TAXATION.
4 (a) IN GENERAL.—Section 965 is amended to read
5 as follows:
6 ‘‘SEC. 965. TREATMENT OF DEFERRED FOREIGN INCOME
7 UPON TRANSITION TO PARTICIPATION EX-
8 EMPTION SYSTEM OF TAXATION.
9 ‘‘(a) TREATMENT OF DEFERRED FOREIGN INCOME
10 AS SUBPART F INCOME.—In the case of the last taxable
11 year of a deferred income corporation which begins before
12 January 1, 2018, the subpart F income of such foreign
13 corporation (as otherwise determined for such taxable year
14 under section 952) shall be increased by the greater of—
15 ‘‘(1) the accumulated post-1986 deferred for-
16 eign income of such corporation determined as of
17 November 9, 2017, or
18 ‘‘(2) the accumulated post-1986 deferred for-
19 eign income of such corporation determined as of
20 December 31, 2017.

1 ‘‘(d) DEFERRED FOREIGN INCOME CORPORATION;
2 ACCUMULATED POST-1986 DEFERRED FOREIGN IN-
3 COME.—For purposes of this section—
4 ‘‘(1) DEFERRED FOREIGN INCOME CORPORA-
5 TION.—The term ‘deferred foreign income corpora-
6 tion’ means, with respect to any United States
7 shareholder, any specified foreign corporation of
8 such United States shareholder which has accumu-
9 lated post-1986 deferred foreign income (as of the
10 close of the taxable year referred to in subsection
11 (a)) greater than zero.
12 ‘‘(2) ACCUMULATED POST-1986 DEFERRED FOR-
13 EIGN INCOME.—The term ‘accumulated post-1986
14 deferred foreign income’ means the post-1986 earn-
15 ings and profits except to the extent such earnings—
16 ‘‘(A) are attributable to income of the
17 specified foreign corporation which is effectively
18 connected with the conduct of a trade or busi-
19 ness within the United States and subject to
20 tax under this chapter, or
21 ‘‘(B) in the case of a controlled foreign
22 corporation, if distributed, would be excluded
23 from the gross income of a United States share-
24 holder under section 959.

1 ‘‘(e) SPECIFIED FOREIGN CORPORATION.—

1 ‘‘(1) IN GENERAL.—For purposes of this sec-
2 tion, the term ‘specified foreign corporation’
3 means—
4 ‘‘(A) any controlled foreign corporation,
5 and
6 ‘‘(B) any section 902 corporation (as de-
7 fined in section 909(d)(5) as in effect before the
8 date of the enactment of the Tax Cuts and Jobs
9 Act).

U.S. CBT is Enforced ONLY by the Compliance Industry

 

 

This post is based upon a comment of USCitizenAbroad at Brock. It makes a very important point that all of us should keep in mind generally but especially if the Tax Reform Bill passes with the insidious clause concerning taxing the retained earnings of small CFCs (which really isn’t INTENDED but………..)
 
USCitizenAbroad says:
November 18, 2017 at 8:55 am
 

@Plaxy quoting @Badger writes:

badger: “What is with the reverence for or tacit acceptance of US
law on Canadian sovereign autonomous soil?”

Exactly. Why accept US law, US/Canadian duals residing in Canada?

Stop filing and renounce.

__________________________________________________________________

After having watched the proceedings at both the House Ways and Means Committee and the Senate Finance Committees, I can say with absolute confidence that:

– the members of the these committees don’t even understand how these provisions affect Homeland Americans

– have no consciousness that the USA has “citizenship-based taxation”
that would apply to people living outside the United States

– do NOT understand the technicalities of how “territorial taxation” for corporations is being implemented

– have no understanding that there is a “transition tax” and/or that it could possibly apply to the owners of Small Business Corporations living outside the United States.

There is no possibility that the “transition tax” could possibly have been intended to apply to the small business corporations owned by Canadian citizens resident in Canada.

BOTH Mr. Reed and Mr. Nightingale state their views that the application of the “transition tax” to CCPCs is NOT intended; but

The plain wording of Sec. 4004 (by making the statute apply to individual U.S. persons as defined in the subpart F rules which reference back to the definitions in Sec. 7701) means that it would apply to any U.S. citizen (regardless of where he has “escaped to”) anywhere in the world.

Please remember that the U.S. legislators:

– equate citizenship with residence (didn’t you know that a citizen is a resident and a resident may or may not be a citizen)

– don’t know there is a world beyond the USA

– are therefore NOT thinking at all about the application of U.S. law outside the USA

Also, again I make the point that the Internal Revenue Code does NOT anywhere explicitly mandate “citizenship-based taxation” – referring only to “individuals” and then allowing the inference that “individuals”
include “citizens”. My point is only that the application of U.S. tax laws outside the USA is not something that is even on the radar in Washington.

Also, to the extent that U.S. laws impact Americans abroad, they are NOT enforced directly by the USA anyway. The USA has downloaded enforcement to the banks and tax compliance professionals. Think about it this way:

FATCA is enforced NOT by the USA directly but by the banks. Yes, your friendly neighborhood bank is a FATCA enforcement agent.

U.S. CBT is enforced ONLY by the compliance industry. If you stay away from the tax professionals you will not be within their “enforcement area” … The ONLY people with U.S. tax problems are those who have attempted U.S. tax compliance. Leaving aside the complicated legal/moral/ethical issues of “to comply or not to comply” (tax compliance people are amoral) the individuals who have been brutalized are those who have attempted compliance. The people who must renounce are those who have complied. Those Americans abroad who want to retain U.S. citizenship do so by NOT attempting compliance.

So, where are we now?

The early commenters from the compliance industry are saying: Bad luck, although NOT intended, this new and exciting instrument of confiscation applies to you. Okay, they should also add to their “news bulletin”
that: Because they are compliance “professionals” that they will NOT sign the returns of anybody who does NOT pay this tax.

This poses an interesting question:

What is a poor compliant person, dependent on his tax professional, doesn’t believe this tax applies to him and needs professional help to do? Completing his return (that form 5471 is not easy for an individual to do). Will you let your friendly neighborhood tax professional force you to turn your retirement fund over to the IRS?

The question it seems to me is this:

Is there a duty to obey a law that clearly was NEVER intended to
apply to you and can be construed to apply to you ONLY because of
the literal wording? That is the question.

This is the question that should have been asked in some other interesting contexts which include:

Were the PFIC rules really intended to apply to the Canadian mutual funds owned by Canadian residents?

Were the S. 877A Exit Rules intended to apply to those who clearly relinquished prior to 2004?

Were OVDP and OVDI appropriate compliance options for Americans abroad who have lived for many years outside the USA?

Were the CFC rules intended to apply to Americans abroad, etc. …

Are you going to allow your assets to be confiscated yet again?

When the “Call Of The Condor” becomes the “Law Of The Land”

Neither the IRS nor Congress really know how these laws apply (or not) outside the USA. What happens is that the compliance industry becomes the single most important vehicle for determining how these laws are to be interpreted. Once enough tax people start behaving in a certain way, the others are sure to follow. Put it another way: In general (and I am not referring to either Mr. Reed or Mr. Nightingale) tax professionals know less about this than you do. So, if you call a tax professional and
ask:

“Does the Sec. 4004 “transition tax” apply to Canadian business
corps” they will just ask their associate”. Yes, it really is that
bad. So, I would NOT rely on “tax professionals” to give you good
advice on how these laws might or might not apply to Americans
abroad.

But, to get back to my original question:

Is there a duty to obey a law that clearly was NEVER intended to
apply to you and can be construed to apply to you ONLY because of
the literal wording? That is the question.

I expect that different people will have different answers to this question. But, I don’t think that the “tax professionals” are worth asking. After all, they can’t sign your returns unless you comply with their interpretation of the law.

I have previously explored this issue in the following comments (which I am including here so that I can find them again later):

http://isaacbrocksociety.ca/2017/11/02/here-is-the-2017-u-s-house-tax-cuts-and-jobs-act-bill-does-it-help-or-harm-us/comment-page-9/#comment-8045126

http://isaacbrocksociety.ca/2017/11/02/here-is-the-2017-u-s-house-tax-cuts-and-jobs-act-bill-does-it-help-or-harm-us/comment-page-9/#comment-8045126

http://isaacbrocksociety.ca/2017/11/02/here-is-the-2017-u-s-house-tax-cuts-and-jobs-act-bill-does-it-help-or-harm-us/comment-page-14/#comment-8049389

isaacbrocksociety.ca/2017/11/02/here-is-the-2017-u-s-house-tax-cuts-and-jobs-act-bill-does-it-help-or-harm-us/comment-page-25/#comment-8053507

And on the compliance choice …

http://isaacbrocksociety.ca/2017/11/02/here-is-the-2017-u-s-house-tax-cuts-and-jobs-act-bill-does-it-help-or-harm-us/comment-page-16/#comment-8049549

The Merry-Go-Round of “Unintended Consequences”

 

This provision is not designed to catch individuals (I think), and certainly not Americans abroad – they are collateral damage. it’s incredibly unfair.

A little more than 10 days ago, an article by a Canadian tax lawyer claimed the proposed House Bill contained two very startling changes that would affect #AmericansAbroad:

BAD NEWS FOR BUSINESS OWNERS
If your cross-border client owns a business, his tax position “may get substantially worse,” Reed says, noting two areas of concern:

a one-time 12% tax will be imposed on all income previously deferred from U.S. tax in Canadian (foreign) corporations; and
new complex rules make it difficult for U.S. citizens who own Canadian (foreign) corporations to defer active business income.
The 12% tax is part of the transition to a territorial corporate tax system.

“Although perhaps unintentional, since U.S. citizens will not benefit from a territorial model, the new rules impose a 12% tax on any cash that has been deferred since 1986,” says Reed.

He offers the example of a U.S. doctor who moved to Canada in 1987 and has since deferred income from personal tax in her medical corporation, and invested it — resulting in a potentially significant tax bill.

Deferring active business income

New punitive rules that apply to US citizens who own a business. Currently, most US citizens who own a Canadian corporation that is an active business don’t pay tax on the company’s profits until they take the money out. The House plan changes this. It imposes a new, very complicated, set of rules on US citizens that own the majority of a foreign corporation. The proposal would tax the US citizen owner personally on 50% of the entire income of the Canadian corporation that is above the amount set by an extremely complex formula. At best, this will make the compliance requirements for US citizens that own a business extremely complicated and expensive. At worst, this will cause double tax exposure for US citizens who own a Canadian business on 50% of the profits of that business.
 

This post was a response to the issues raised.

 

Today, another Canadian compliance professional made similar observations about the proposed Senate bill.

 

Kevyn Nightengale published an article on LinkedIn; excerpts below:

American? Own shares in a foreign corporation? Get ready for a pain in the wallet

Published on November 10, 2017
by Kevyn Nightengale

Accumulated deferred foreign income

One thing they will do is apply an immediate tax (well, sort of immediate – it’s to be paid over 8 years) to the retained earnings of those foreign subsidiaries. And there’s some logic to this as well. Those earnings have been tax-deferred until now. If they fell into the “exempt” system in future years, US multinationals will have effectively gamed the system by keeping them offshore long enough to completely escape tax.

One problem is that if you’re an American individual, and you own shares in a foreign corporation directly, this provision will create an immediate tax in your hands.

You won’t get a foreign tax credit for the corporate tax (like a US domestic corporate parent). You won’t get a special deduction (like a US domestic corporate parent). You just have to pay tax on the retained earnings.

It’s a double whammy if you live abroad

If you live in a country where it’s common to run a small business through a corporation (say, Canada), you already have enough double-tax issues to worry about (Subpart F, filing forms 5471, FINCEN 114, etc.). This new provision will probably lead to double taxation. And even if you can pay out dividends to limit that, it probably will create extra tax in your country. The US tax probably isn’t creditable in your country (in Canada, it isn’t).

Global intangible low-taxed income (“GILTI”)

…… The shareholder (yes, including a US citizen living abroad, in the same country as the company) has to include an amount in his income.

The amount is the company’s total income less a deemed return (10%) on tangible assets. This means that any type of income is caught. Companies that provide services are especially vulnerable, because they typically have only a small amount of tangible assets. Incorporated professionals are going to be hit hard. They’ll be taxed on their companies’ incomes, even if the company doesn’t distribute it to them. And that tax will apply at full tax rates, not qualified dividend rates.

Can this be avoided?

This provision is not designed to catch individuals (I think), and certainly not Americans abroad – they are collateral damage. it’s incredibly unfair.

*******
 
I find it puzzling that both gentlemen indicate these policies are not intended to include #AmericansAbroad, yet act as if they have no choice but to “enforce” this if it becomes U.S. law. Haven’t the “unintended” consequences of #FBAR caused enough grief for #AmericansAbroad? Why does everyone assume there is nothing that can be done to stop this from extending to expats? If the law is not meant to be applied that way, does not specifically indicate they are to be included, how can they claim they must do so because it is “U.S. law?” That is clearly not the correct position to take. And what will the result be if people are mad/scared enough to simply not deal with this U.S. situation any longer?

 

*******

John Richardson comments:

There are many who interpret the proposed changes, to include a provision that would lead to the confiscation of a significant portion of the retained earnings of small business corporations, owned by Americans abroad. I wrote the above referenced post and used the example of a U.S./Canada dual citizen living in Canada who owns a small business corporation. By the way, it is very common for Canadians to utilize small business corporations to carry on their businesses.

This specific provision is found in Sec. 4004 of the Proposed tax bill.
The way it would operate (after identifying those who own small Canadian Controlled Private Corporations in Canada) would be to:

1. Focus on the retained earnings of the corporation since 1986. Note that these earnings were either NOT subject to U.S. taxation at the time or were already included in the income of the shareholder via the subpart F provisions.

2. Impose a tax of either:

House Bill: 14% (cash) or 7% (non-cash)

Senate Bill: 10% (cash) or 5% (non-cash)

on the retained earnings by including those earnings in Subpart F income.

Understand that for many Canadians these small business corporations contain their retirement savings. So, the bottom line is the the United States proposed to literally confiscate these assets.

Understand also that Sec. 4004 is part of the section that creates the system of territorial taxation for U.S. corporations. The idea is that the “transition tax” is a way to repatriate the earnings which have not returned to the USA (obviously because of confiscatory taxation). After paying this “transition tax” those U.S. corporations will get the benefit of territorial taxation.

Understand also that U.S. individual shareholders of Canadian Controlled Private Corporations do NOT get the benefit of “territorial taxation”
but (if this is interpreted correctly) are still required to pay this.

What the USA, in it’s great wisdom is doing, is to:

1. Retroactively go back and deem income that was NOT taxable at the time to be taxable; and

2. Use the mechanism of subpart F inclusion (I am not going to dignify this by calling it a tax) to CONFISCATE the asset.

Understand also that this is one more of a long line of indignities inflicted on Americans abroad that includes:

– the virtual confiscation of Canadian pensions (via the Sec. 877A Exit Tax rules applied to some who renounce U.S. citizenship) that were earned in Canada while the individual was NOT living in the United States; and

– the application of the 3.8% Obamacare surtax to distributions of from Canadian RRSPs (the equivalent of U.S. IRAs) and excluding distributions from IRAs.

I suspect that this will be the “straw that breaks the camel’s back”.

And “The Band Played On ….””

NO Evidence of Intent to apply the “”Transition Tax” to Small Business Corporations of #AmericansAbroad

 

It appears that we are very likely at a breaking point in this intolerable situation faced by expatriates as regards U.S. application of citizenship-based taxation. Tax reform does not happen often. It is critical that relief for expats occur in the current legislation. Many of us simply will not be around in 30 years for the next shift. It will be completely unacceptable if there is no transition (at the very least) to territorial taxation for individuals. Some people may be forced at this point to renounce if only to put a stop on future tax liability. Some will not choose to become compliant simply because it is expensive, they have no ties to the U.S., no intent to go there, etc.

In addition, there is a very dangerous aspect (the “transition tax”) that appears in both the House and Senate bills; it is arguable that it does NOT apply to small corporations owned by US citizens residing outside the United States. The biggest danger here, is that it may remain unclear. We have seen what has happened in a number of situations when this is the case. Some examples are:

1) People who relinquished citizenship decades ago (and who do not have a CLN) have been told they are still U.S citizens. Not by the State Department, not even by the IRS. And not even by the banks per sé. It is the position of many members of the tax compliance community. This is completely unacceptable and no expat should accept such a conclusion without investigating the citizenship aspects of the situation.

2) Accidentals have been told the same thing; they are Americans and must become tax compliant. Again, not directly by the US government (as in “coming after them) but by members of the tax compliance community. This is also unacceptable and no one should become compliant without a complete examination of whether it is in his/her best interests (or not).

3) People who did NOT belong in the OVDP/OVDI programs were put there by tax professionals with hideous and tragic results. The law says one has to file, nowhere does the law say one had to enter one of those programs. If anybody should have known that, it would be the tax compliance community.

4)The IRS has not given a ruling on whether or not 877A is to be applied retroactively. This is another area where tax compliance professionals have decided it is the law. This is definitely NOT in the best interest of anyone renouncing their citizenship and most definitely should not be applied to anyone who renounced/relinquished before it became law.

5)One of the most egregious and limiting situations involves owning foreign mutual funds. There is nothing to support the practice of treating non-US mutual funds as PFICs. Again, guess who insists on this treatment?

All of the above points are as unacceptable as is a lack of change for Americans abroad in tax reform. We have had enough.
 
THIS HAS TO STOP
 
We, as a community, have to make a conscious decision that what they say does not apply to us, is not in our best interests. The application of U.S. law outside of its borders is highly questionable, and should not override the laws of the countries we are residents of. (The IGAs do not represent approval/acceptance of US policy; they are merely proof of what happens when the US threatens to destroy the economies of other nations). “It’s U.S. law.” This is always the argument used to justify application of these ridiculous actions, often with absurd results. Penalties, FATCA “outing” us, application of the Reed Amendment (or worse, the ExPatriot Act if it ever passes)- all can be quite frightening if applied as the tax community claims. Yet there is nothing to suggest that these things are realities. The only people who have been harmed by these things are the ones who are/or tried to comply.

It is time to resist not only the idea that U.S. law should run our lives but also, that the tax community should determine what courses of action we should take. We need to be consistent in our message on this, on FB, in tweets, blogs etc. No more. No more. No more…………

**********

Shortly before the House of Representatives released the Markup for H.R. 1 a Canadian tax lawyer Max Reed authored an article (also here ) claiming that:

New punitive rules that apply to US citizens who own a business. Currently, most US citizens who own a Canadian corporation that is an active business don’t pay tax on the company’s profits until they take the money out. The House plan changes this. It imposes a new, very complicated, set of rules on US citizens that own the majority of a foreign corporation. The proposal would tax the US citizen owner personally on 50% of the entire income of the Canadian corporation that is above the amount set by an extremely complex formula. At best, this will make the compliance requirements for US citizens that own a business extremely complicated and expensive. At worst, this will cause double tax exposure for US citizens who own a Canadian business on 50% of the profits of that business.
Imposition of a 12% one-time tax on deferred profits. Under the new rules, the US corporate tax system is transitioning to a territorial model. As part of this transition, the new rules impose a one-time 12% tax on income that was deferred in a foreign corporation. Although perhaps unintentional, since US citizens will not benefit from a territorial model, the new rules impose a 12% tax on any cash that has been deferred since 1986. Take a simple example to illustrate the enormity of the problem. A US citizen doctor moved to Canada in 1987. She has been deferring income from personal tax in her medical corporation and investing it. Now, 12% of the total deferred income since 1986 would be subject to a one-time tax in the US. That may be a significant US tax bill.
It is unclear what, if anything, will be enacted. However, US citizens in Canada – particularly those that own a business – should pay close attention as their tax situation could get significantly worse. Renouncing US citizenship may become an increasingly attractive option.

There has been much discussion of whether or not this is going to happen (assuming a tax reform bill containing these measures actually is passed).
A very good argument for why this should NOT apply to #AmericansAbroad is
here.

The following comment appeared today on Brock. It reiterates the position that the “transition tax” cannot be viewed as applying to Americans abroad who own small corporations. We can expect that tax professionals are going to claim it does. Start now to learn why it doesn’t make sense and why no one should listen to the notion they owe a tax to the US based upon this new “tax reform.”
 
USCitizenAbroad
November 14, 2017 at 7:16 pm
 
@ Patricia Moon

With respect to the discussion of whether there is a tax on the retained earnings of Canadian Controlled Private Corporations:

First, pick this discussion of the changes to the territorial tax system for corporations at the 35 minute mark here:

https://www.finance.senate.gov/hearings/continuation-of-the-open-executive-session-to-consider-an-original-bill-entitled-the-tax-cuts-and-jobs-act

There is NO evidence of any intention to apply the “transition tax” to anything other than large corporations and certainly not to small business corporations owned by Americans abroad.

Second, an interesting summary was published by the Toronto law firm Oslers which talks about U.S. tax reform and makes NO reference to a possible tax on the retained earnings of CCPCs.

TaxAuthorities/US Tax Reform for Busy Canadians

Note no mention that this could affect CCPCs owned by Canadians:

” Foreign minimum tax – Current taxation of “Foreign high returns”:

Under this provision, a U.S. parent corporation would be subject to
current U.S. taxation (at the new 20% rate) on 50% of its controlled
foreign corporations’ (CFCs’) “high returns.” Tax would be required
to be paid on these imputed income streams regardless of whether the
corresponding earnings were actually distributed to the U.S. parent.
“Foreign high returns” are the excess of the CFC’s net income over a
baseline return (7% plus the federal short-term rate) on the CFC’s
adjusted tax bases in depreciable tangible property, reduced by
interest expense included in the CFC’s net income. “Foreign high
returns” would be defined to exclude certain types of income (including
“effectively connected income,” income from the disposition of
commodities produced or extracted by the taxpayer, and income subject
to tax at an effective rate of at least 18%). This provision, which
cuts against the theory of a “pure” territorial tax system, was
designed to counterbalance incentives that may otherwise linger for
U.S. companies to locate high return generating assets/activities (like
intangible property) in offshore locations.”

My feeling is that regardless of the language that this was not intended to apply to Americans abroad.

What should be done:

The danger is that the compliance community will make the law by interpreting this to apply beyond its obvious intention. The obvious solution is to NOT use the services of any tax firm who interprets the law as applying to CCPCs. After all, it was the compliance firms who created the notion that Canadian mutual funds are PFICs.

US tax reform bill appears to confiscate 12% of retained earnings of certain Canadian Controlled Private Corporations

 

UPDATE November 9, 2017

Today Chairman Brady concluded the “Mark Up” period of his proposed tax legislation. The “Mark Up” period contained NO move to “territorial taxation” for individuals. It did increase increase the “proposed confiscation” of the retained earnings of certain Canadian Controlled Private Corporation, from 12% to 14%.

See the “Manager’s Amendment” here:

summary_of_chairman_amendment_2

Now back to our regular programming …

*******

cross-posted from citizenshipsolutions

by John Richardson, J.D.

US tax reform bill appears to confiscate 12% of retained earnings of certain Canadian Controlled Private Corporations

 
Kudos to Max Reed for his quick analysis of the how the proposed U.S.
tax reform bill might affect Canadians citizen/residents who also have hold U.S. citizenship. You will find the bill here. His analysis, which has been widely discussed at the Isaac Brock Society (beginning here) includes provisions that are very damaging to those who are the owners of Canadian Controlled Private Corporations (noting they are also under assault from Messrs Trudeau and Morneau). The damaging provisions are both prospective and retrospective.

Continue reading “US tax reform bill appears to confiscate 12% of retained earnings of certain Canadian Controlled Private Corporations”

Twelve % Tax on Deferred Earnings Likely to Apply ONLY to Larger/Multi-National Corporations

 
UPDATE November 6 2017 – see below
 


 
Since the new House GOP Tax Bill came out, many are looking beyond the obvious and trying to analyze what this might really mean in peoples’ lives. This post appeared on the Isaac Brock Society on Nov 2 by Stephen Kish. The following sections are excerpts from that post:

Here is the United States House “Tax Cuts and Jobs Act” bill of November 2, 2017.

This is a first pass proposed repeal/amendment etc. of the 1986 Internal Revenue Code of 1986 and is permanently stored here.

November 3 UPDATE:

I was just made aware of an article by Max Reed that apparently indicates that US persons overseas who own small business corporations might be harmed by the new tax legislation. In particular, the imposition of a one-time 12% tax on deferred earnings [THIS INCLUDES LOCAL EARNINGS] would hit not just the intended giant corporations overseas, but also the tiny incorporated businesses (e.g., family or one person farming or medical doctor “corporation”). This would include “U.S. Persons” who have no meaningful relationship with the U.S.

From the Max Reed article:

“… New punitive rules that apply to US citizens who own a business. Currently, most US citizens who own a Canadian corporation that is an active business don’t pay tax on the company’s profits until they take the money out. The House plan changes this. It imposes a new, very complicated, set of rules on US citizens that own the majority of a foreign corporation. The proposal would tax the US citizen owner personally on 50% of the entire income of the Canadian corporation that is above the amount set by an extremely complex formula. At best, this will make the compliance requirements for US citizens that own a business extremely complicated and expensive. At worst, this will cause double tax exposure for US citizens who own a Canadian business on 50% of the profits of that business.

Imposition of a 12% one-time tax on deferred profits. Under the new rules, the US corporate tax system is transitioning to a territorial model. As part of this transition, the new rules impose a one-time 12% tax on income that was deferred in a foreign corporation. Although perhaps unintentional, since US citizens will not benefit from a territorial model, the new rules impose a 12% tax on any cash that has been deferred since 1986. Take a simple example to illustrate the enormity of the problem. A US citizen doctor moved to Canada in 1987. She has been deferring income from personal tax in her medical corporation and investing it. Now, 12% of the total deferred income since 1986 would be subject to a one-time tax in the US. That may be a significant US tax bill…”

November 4 UPDATE:

Republicans Overseas responds to the above concern:

“Stephen Kish, Your comments were forwarded to a House Ways and Means Committee member’s office. His legislative counsel is looking into this. We will report once we receive their reply.

*******

Needless to say, while many hoped there would be improvements in our situation, virtually no one voiced concerns about something appearing that would make things worse. Imagine being an incorporated individual (such as a doctor, accountant, lawyer etc, in Canada) and suddenly being told any retained/deferred earnings left in the corporation since 1986 would be taxed at 12%! While there are no guarantees at the moment, before this idea takes firm hold, particularly in the minds of the tax compliance community, here is an analysis which suggests such a notion could most definitely seen as out-of-context if viewed as a standalone. It really only makes sense when applied to the corporations who moved overseas for whom the U.S. is trying to entice to come back.

*******
 
USCitizenAbroad says
November 5, 2017 at 9:29 pm

@Stephen Kish

You refer to the “frightening prospect” of the 12% tax on the retained earnings of Canadian Controlled Corporations suggested by Max Reed as follows:
 

Imposition of a 12% one-time tax on deferred profits. Under the new rules, the US corporate tax system is transitioning to a territorial model. As part of this transition, the new rules impose a one-time 12% tax on income that was deferred in a foreign corporation. Although perhaps unintentional, since US citizens will not benefit from a territorial model, the new rules impose a 12% tax on any cash that has been deferred since 1986. Take a simple example to illustrate the enormity of the problem. A US citizen doctor moved to Canada in 1987. She has been deferring income from personal tax in her medical corporation and investing it. Now, 12% of the total deferred income since 1986 would be subject to a one-time tax in the US. That may be a significant US tax bill…”

 
@Eric in a later comment confirms that Mr. Reed’s analysis comes from a reference to Sec. 4004 (the transition tax).
 

@Stephen Kish: Yes, he’s referring to Sec 4004 (the transition tax)

 
Although this is unclear and generally difficult to read, I believe that the 12% transition tax (dealing with past retained earnings) does NOT apply to the retained earnings of Canadian Controlled Private Corporations which are owned by INDIVIDUAL shareholders.
 
My reasoning follows …
 
Sections 4001 – 4004 are part of Subtitle A in the proposed bill which appears to deal specifically with the “foreign source” dividends received from certain specific 10-percent owned foreign corporations”. The point is that it deals with domestic corporations that are shareholders of “foreign corporations”.

If you analyze Sections 4001 – 4004, they appear to achieve their objective by amending two different Subchapters of the Internal Revenue Code.
 
Amendments to Sec. 245 which is in the Subchapter of the Internal Revenue Code that describes the computation of taxable income
 
Sec. 4001 is an amendment to the current Sec. 245 which deals very specifically with the deductions available to corporations in the computation of taxable income. Furthermore, by its plain terms Sec. 4001 describes domestic shareholders that are shareholders of foreign corporations. In general the section allows domestic corporations to deduct foreign dividends from the calculation of taxable income. This is the way the USA moves to “territorial taxation” for corporations ONLY.
 
Amendments to the subpart F rules which are found in Subchapter N and used to attribute the income of controlled foreign corporations to U.S. shareholders (Sec. 956, Sec. 961 and Sec. 965)
 
Sec. 4002 is an amendment to the current Sec. 956 which speaks only to the application (or non application) of the section to corporations. In other words, Sec. 4002 applies only to corporations.
 
Sec. 4003 is an amendment to the current Sec. 961 which applies ONLY to corporate shareholders of foreign corporations.
 
Sec. 4004 replaces Sec. 965 which is a section that deals specifically with “the case of a corporation which is a United States shareholder”. I agree that Sec. 4004 (if read outside the context of Subtitle A) could be interpreted to apply to individual shareholders. That said:
 
1. Sec. 4004 replaces a section that deals specifically with corporations; and

2. For Sec. 4004 to apply to individuals would make it the “odd man out” in Subtitle A (in the proposed bill) which is clearly descriptive of how corporations would transition to “territorial taxation”.
 
For these reasons I don’t see how the 12% “transition tax” would apply to individual shareholders.
 
But, Mr. Reed also describes a “prospective tax” (found in Sec. 4301) of the proposed bill on the U.S. citizen shareholders of Canadian Controlled Private Corporations as follows (which I think may be accurate):
 

It imposes a new, very complicated, set of rules on US citizens that own the majority of a foreign corporation. The proposal would tax the US citizen owner personally on 50% of the entire income of the Canadian corporation that is above the amount set by an extremely complex formula. At best, this will make the compliance requirements for US citizens that own a business extremely complicated and expensive. At worst, this will cause double tax exposure for US citizens who own a Canadian business on 50% of the profits of that business.

 
Renounce & Rejoice!

*******

UPDATE November 6 2017

Stephen wrote to Max, asking him to explain his conclusion and why it differed from USCitizenAbroad’s. Unfortunately for us, he is sticking to his initial analysis. Let us hope this gets clarified ASAP.

 

Max Reed has just reviewed USCA’s analysis for me but still feels that, irrespective of intent of the drafters, the proposed tax reform bill, as stated, captures ALL owners of foreign corporations (bad news for us if true).

I am passing this analysis on to Republicans Overseas hoping that it will be passed on to the mark-up folks.

 

Max’s November 6, 2017 response sent to me:

“The purpose of the two sections 4004 and 4301 are to transition the US federal corporate tax regime from a global model to a territorial model. To accomplish this, they create new categories of Subpart F” income that relies in large part on the existing controlled foreign corporation US citizens abroad are already familiar with these rules as they apply to those who own foreign corporations.

As a result, the way the sections are drafted provides for a broader application than the drafters may have intended (I’m not sure).

The technical reasons for this result are briefly summarized as follows. Both sections 4004 and 4301 apply to “United States Shareholders”.

That term is currently defined in Code section 951(b) to mean a US person defined in 957(c) who owns 10% or more of the voting stock of a foreign corporation. Section 957(c) essentially adopts the definitions 7701(a)(30) including US citizen.

There is no change to either Code section 951(b) or Code section 957(c) in the House bill that would alter this. Consequently, 4004 and 4301 apply to “US Shareholders” including all US citizens, US green card holders, US trusts as well as US corporations who own 10% or more of the voting stock of a foreign corporation.

There is no carve out elsewhere in the bill.

The fact that other provisions in the same section only apply to corporate shareholders does not affect the reading of 4004 and 4301. Those sections specifically note the limited application of those provisions whereas 4004 and 4301 do not. Further, the fact that existing section 965 only applied to corporate shareholders also does not matter as it is being replaced in its entirety by new section 965.

In short, the purpose of the provisions may be to assist in the transition to a territorial corporate tax system.

But, as drafted, from a technical perspective the legal effect of them will be so much broader. It will apply this 12% one-time tax to US citizens who own an interest in CFCs [e.g., an incorporated medical doctor’s clinic].

It will further apply an ongoing complex new tax regime to US citizens that own a foreign business that earns active business income. These provisions may not be passed in their current state. I certainly hope not. But if they are the effects on US citizens outside the US will be significant.”

*******

a response from USCitizenAbroad

@Stephen Kish

Re: The Max Reed response to you vis-a-vis my suggestion that that the proposed should NOT be read to include the Canadian Controlled Private Corporations for the “one off 12% tax”.

Mr. Reed’s interpretation is characterized by a the notion that one section of the IRC can/should be divorced from the context in which it appears. Perhaps he is right. Perhaps not. But interestingly the IRS specifically warns that the individual sections of the IRC should be read in the context of the entire code (and therefore obviously the individual subtitles).

Specifically note IRS Official Guidance:

Finally, the IRC is complex and its sections must be read in the context of the entire Code and the court decisions that interpret it. At a minimum, please do not be misled by the false interpretations of the IRC promoted by the purveyors of anti-tax law evasion schemes.

The idea that a a move to territorial taxation for corporations (who have the opportunity to repatriate their earnings at a discount) should be applied to the individual shareholders of Canadian Controlled Private Corporations, is absurd.

*******