Russell W. Crawford is the national service line leader of KPMG’s U.S. corporate tax services practice.
With U.S. tax reform appearing increasingly likely to be enacted, Canadian companies owners are wondering exactly what the impacts are going to be in their U.S. operations. Here’s a glance at where we’re headed.
What will happen in respect to U.S. tax reform in the upcoming few weeks?
The U.S. Congress has formed a joint committee with representatives from the Senate Finance Committee and the House Ways and Means Committee to reconcile the two tax bills. Reports suggest that the committee has reached an agreement on a reconciled bill. We expect details to be published Dec. 15. There’s a push to have the identical bills passed through both chambers next week to be able to present 1 bill to the President by Christmas. In that case, we could expect it to be signed by the President before Dec. 31.
When will changes come into effect?
Any bill comes into effect once signed by a president. If signed by Dec. 31, many provisions within this bill will be effective as of Jan. 1, 2018, while some might be pushed out as well as subject to sunset clauses. Furthermore, there are particular provisions that would be retroactive to 2017. This includes the immediate expensing for certain business assets set in-service after Sept. 27, 2017, in the Senate bill. There are varying effective dates for various provisions in both bills. These effective dates are a few of the numerous problems being ironed out in the committee.
What are the largest effects for Canadian companies doing business in the U.S.?
The decrease in the corporate rate is among the most crucial changes which will affect companies of all sizes. And for many companies the restrictions related to the deductibility of interest costs will require preparation. For the first time ever there’s a possible limit on any interest cost, including that associated with third party debt. The fantastic thing is that some small businesses could be excluded from these limits. By way of instance, while particular interest may be limited to 30 percent of earnings, both bills exempt certain small businesses. The Senate version provides exemptions where gross receipts are no more than $15-million (U.S.). Under the Senate bill the interest limit would begin in 2018.
Does the minimal small-business tax rate in Canada mean it is still cheaper for companies to operate here?
It’s hard to generalize. While in most cases the U.S. and Canadian prices may now approximate each other (when one factors in provincial/state income taxation) certain companies operate in nations with no tax or in Canada they profit in the small-business tax rate. Furthermore, Canada provides research and scientific development credits which could affect this analysis. Recent proposed Canadian legislation taxes passive income reinvested through a personal corporations at substantially higher prices. If these principles are enacted it would put Canada at a substantial disadvantage for this sort of income.
Finally, lower corporate rates probably lead to greater economic activity. Thus, once the U.S. tax rate reductions become effective and the ability to immediately expense certain company assets is set up, Canadian companies could be at a disadvantage. Canadian taxation policy makers really have to monitor what is happening south of the boundary and consider whether their particular policies should be geared towards encouraging business growth though aggressive tax measures.
What are the largest impacts on U.S./dual citizens who have businesses in Canada?
The U.S. Controlled Foreign Corporation principles will still exist, despite a change to a partial exemption system (from complete U.S. worldwide taxation). Because of that conversion, there’s a deemed repatriation of accumulated earnings to U.S. shareholders who own at least 10 percent of these Controlled Foreign Corporations. This applies to U.S. people in addition to Canadian corporate shareholders. Thus, many small business owners with such status may have an extra tax burden they weren’t expecting.