The sweeping tax reform that US President Donald Trump signed into law in December is impacting thousands of long-time Canadian residents, who now face tax obligations that go as far back as 1986.
The problem is centred on the so-called repatriation or ‘transition’ tax, which was aimed at making big American multinational corporations stop parking billions of dollars in foreign subsidiaries. But the one-time, retroactive tax has also hit US or dual citizens in Canada who own corporations.
“Many of those people are facing tax bills amounting to hundreds of thousands of dollars on all of the retained earnings in their corporations going back to 1986,” reported CBC News. “Some are facing bills in the millions of dollars.”
The tax is being levied on money sitting in corporations, but the corporation owners have to declare that money on their 2017 personal tax return; those who have been putting retirement funds in their corporate structures are particularly hard hit. Even worse is if the owners have to take money out of their corporations to pay the US Internal Revenue Service (IRS), in which case they’ll also end up owing tax to the Canadian government.
Recognizing the unintended consequences of the repatriation tax, the IRS has extended the window for the first payment on the tax up to April 15, 2019. However, that reprieve applies only to those who owe a maximum of $1 million; those who owe more than that will have to make their first installments by June 15 or be slapped with late-payment penalties.
The repatriation tax isn’t the only measure in the reform that threatens Canadian business owners with US citizenship. Dual Canadian-US citizens Suzanne and Ted Herman, who own a small Vancouver-based film company that they’re using to save for retirement, are also concerned about the Global Intangible Low Taxed Income (GILTI) tax, which was designed to keep American companies from shuffling profits into foreign subsidiaries residing in low-tax countries.
“The GILTI tax essentially would not make it beneficial to be in business any more in Canada,” Ted Herman told CBC News. Noting that their company employs 100 Canadians on and off, he said that they would have to shut the business down because they would only be able to keep “essentially 25 cents on the dollar.” With a six-figure tax bill hanging over their heads, the Hermans are planning to ask for an extension until October 15 to file their 2017 tax return, which many experts are advising.
US lawmakers appear to be moving toward a more permanent solution to the collateral damage suffered by Canadians. According to Brian Masse, an NDP MP who is part of the Canada-United States Interparliamentary Group, US lawmakers were very cognizant of the tax reform’s side effects when MPs and senators met with them in Washington last month.
“There seemed to be a genuine understanding and appreciation that these [Canadian businessmen] are victims,” Masse told CBC News, adding that legislation to fix the problem could be tabled in the coming weeks.
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