Russell W. Crawford is the national service line leader of KPMG's U.S. corporate tax services practice.
With U.S. tax reform looking increasingly likely to be enacted, Canadian businesses owners are wondering what the impacts will be on their U.S. operations. Here's a quick look at where we are headed.
What will likely happen in regard to U.S. tax reform in the next 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 indicate that the committee has reached an agreement on a reconciled bill. We expect details to be released Dec. 15. There is a push to have the identical bills passed through both chambers next week in order to present one bill to the President by Christmas. If so, we can 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 in this bill will be effective as of Jan. 1, 2018, while others may be pushed out and even subject to sunset clauses. Furthermore, there are certain provisions that would be retroactive to 2017. This includes the immediate expensing for certain business assets placed in-service after Sept. 27, 2017, in the Senate bill. There are varying effective dates for different provisions in both bills. These effective dates are some of the many issues being ironed out in the committee.
What are the biggest effects for Canadian companies doing business in the U.S.?
The reduction in the corporate rate is one of the most significant changes that will affect businesses of all sizes. And for many businesses the restrictions associated with the deductibility of interest expenses will require planning. For the first time ever there is a potential limitation on any interest expense, including that associated with third-party debt. The good news is that some small businesses may be excluded from these limits. For example, while certain interest may be limited to 30 per cent 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 limitation would start in 2018.
Does the low small-business tax rate in Canada mean it's still cheaper for businesses to operate here?
It's difficult to generalize. While in many circumstances the U.S. and Canadian rates may now approximate each other (when one factors in provincial/state income taxes) certain businesses operate in states with no tax or in Canada they benefit from the small-business tax rate. Additionally, Canada provides scientific and research development credits which can affect this analysis. Recent proposed Canadian legislation taxes passive income reinvested through a private corporations at substantially higher rates. If these rules are enacted it would put Canada at a significant disadvantage for this type of income.
Ultimately, lower corporate rates likely lead to higher economic activity. Thus, once the U.S. tax rate reductions become effective and the ability to immediately expense certain business assets is in place, Canadian businesses may be at a disadvantage. Canadian tax policy makers really need to monitor what is going on south of the border and consider whether their own policies should be geared towards encouraging business growth though competitive tax measures.
What are the biggest impacts on U.S./dual citizens who own businesses in Canada?
The U.S. Controlled Foreign Corporation rules will still exist, even with a switch to a partial exemption system (from full U.S. worldwide taxation). As a result of that conversion, there is a deemed repatriation of accumulated earnings to U.S. shareholders that own at least 10 per cent of such Controlled Foreign Corporations. This applies to U.S. individuals as well as Canadian corporate shareholders. Thus, many small business owners with such status may have an added tax burden they were not expecting.