GILTI Rules for Americans in Canada: The Basics

This post is also available in: Français (French)

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.

Need Help?

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
(514) 282-0067


UHY Victor Response to the Spread of COVID-19

UHY Victor is taking action to maintain the health and welfare of our team, our clients and support communal efforts to respond to the coronavirus pandemic.

UHY Victor will remain open during this difficult period and client services will continue. We have implemented contingency plans which allow us to continue to operate as we all deal with the spreading pandemic.

In light of the present situation we have introduced the following measures:

  • Our staff and procedures have been structured so that our team can work remotely.
  • Our IT infrastructure and data are protected by cutting edge security systems.
  • To the extent possible, client meetings will be held through web meetings and other remote solutions.
  • Employees who experience the primary symptoms such as fever, cough and respiratory difficulties will work remotely until cleared.
  • Internally, we emphasize the importance of “social distancing”, and have enhanced our internal cleaning and disinfecting protocols.

UHY Victor will continue to monitor the changing situation and, will respond proactively as this major health challenge evolves.

We encourage all to stay informed and to visit the Public Health Agency of Canada COVID-19 site, and follow the guidelines set out by the government of Canada:

  • Now and always during cold and flu season, stay home if you are sick. Encourage those you know are sick to stay home until they no longer have symptoms.
  • Since respiratory viruses, such as the one that causes COVID-19, are spread through contact, change how you greet one another. Instead of a handshake, a kiss or a hug, a friendly wave or elbow bump is less likely to expose you to respiratory viruses.
  • Practice frequent hand hygiene and coughing and sneezing etiquette. Clean and disinfect frequently touched objects and surfaces, such as toys and door handles.

For more information on the guidelines of the Government of Canada on how to be prepared for COVID-19: Click here.

Share via
Copy link
Powered by Social Snap