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GILTI Rules for Americans in Canada: The Basics
The recently passed U.S Tax Cuts and Jobs Act (TJCA) makes it more complicated for American citizens living in Canada to run businesses. One of the new complex tax regimes to consider is the GILTI rules.
What Is GILTI?
GILTI is the acronym for Global Intangible Low-Taxed Income. GILTI rules were put into place so that American citizens do not try to shift profits to foreign subsidiaries in low-tax countries since those foreign profits can be repatriated tax-free. While these rules were primarily put in place with Apple and Google in mind, they make it harder for U.S. citizens in Canada to use Canadian corporations to defer income from personal tax.
Under the GILTI rules, profit earned through a Controlled Foreign Corporation (CFC) owned by a U.S. citizen must be classified as GILTI or not. Profits are considered GILTI if they exceed a 10% return on depreciable tangible assets (e.g. equipment, hardware) owned by the corporation.
The issue is that professional corporations generally do not need a lot of tangible property to run their business. For instance, an incorporated doctor who is a Canadian-resident U.S. citizen may only own computers and basic medical equipment. However, the profits of the doctor’s corporation will be deemed GILTI income to the extent they exceed 10% of the corporation’s investment in those tangible assets.
If income is considered GILTI, it will be taxed to the U.S. citizen personally, even if the profits remain inside the corporation and are not distributed to the U.S. Also, the ability to offset the GILTI inclusion with Canadian tax paid is limited. As a result, U.S. citizens who perform services through Canadian corporations may lose the ability to defer income from personal tax.
Section 962 Election
If you are impacted by the GILTI regime, there may be some relief by virtue of filing a Section 962 Election in the US. A 962 election is designed to ensure an individual taxpayer is not subject to a higher rate of tax on the earnings of a directly-owned foreign corporation than if he or she had owned it through a United States corporation. The election may be made on an annual basis with respect to all controlled foreign corporations in which an individual is a United States shareholder, including those owned through a pass-through entity. Individuals who make a section 962 election are taxed as if there was an imaginary domestic corporation interposed between them and a foreign corporation that creates GILTI. The section 962 election may be a valuable tool in softening or deferring the double-tax blow of being a U.S. shareholder of Canadian business – but careful consideration should be used before making the election. Depending on the specific circumstances, using section 962 could result in an individual paying a greater effective rate of tax on their foreign earnings once they have been repatriated to the US.
At UHY Victor, we have expertise helping Americans living in Canada navigate the complex GILTI regulations to optimize their cross-border tax situation. Contact us cross-border tax experts for a free consultation:
UHY Victor LLP Canada U.S. Tax Team