US Doctor Living in Canada with Canadian Corporation and Subpart F Income

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Question

Hi

I’ve had a terrible year dealing with these new transition tax rules and I’ll be looking for a new cross border accountant once my current accountant gets through the 2017 tax filings. Here’s my situation as it stands currently

  • I’m a retired doctor with dual Canadian and US citizenship
  • I’ve lived in Canada with my Canadian wife and 3 kids for over 30 years
  • I’ve accumulated over $3,000,000 in my professional corporation
  • I have over $100,000 or investment income earned each year within my corp. Other personal income totals approximately $80,000

I’ve been hit hard by the Trump transition tax and I’ll need to pay out sizeable dividends to cover any tax payable on my 2017 US filings (to be filed in October). Going forward I need someone to walk me through what needs to be filed and taxes paid on my US return to ensure I get caught with another accountant that is not familiar with my situation. My current account is good on the Canadian side, but he’s always outsourced our US returns to a Washington firm.

I think they have a handle on the transition tax payment, however the US guy mentioned that I’ll need to pay US tax on the investment income my corporation earned. This doesn’t make any sense to me. I already have to pay a high percentage of tax within my corporation on this income and then personally when I withdraw it. It seems now like I’ll be paying tax three times on the same amount of income!

You seem to have good handle on these issues from the articles you’ve written on your blog. I this something you have lots of experience with?

Thanks

XXXXX

Answer

Hi XXXXX

Thanks for the email and sorry to hear about your challenges with the 2017 tax year. This year has not been easy on some of our clients. It also makes it much more difficult for you considering you have 2 separate tax firms doing your returns. In my opinion having one firm with both Canadian and US specializations is the best approach.

Assuming they have properly handled the transition tax calculations (I would be willing to give them a quick review if you can send me them via PDF) you’ll most likely have to worry about 2 additional issues going forward:

  • Taxation of corporate investment income for US purposes
  • New GILTI tax for 2018 and subsequent years

Taxation of corporation investment income for US purposes

A technical discussion of the taxation of investment income within Canadian corporation for US citizens is beyond the scope of this email, however let me provide some general comments.

In my opinion having one firm with both Canadian and US specializations is the best approach.

US citizens that are controlling members of foreign corporations (in this case a Canadian corporation) are unable to defer investment income generated from the corporations investment assets. Consequently, this investment income will be automatically reportable and taxed on their US income tax return in the year it is earned regardless of whether the cash is actually paid out of the company. This differs from Canadian tax rules as this income, although taxed high internally, is not taxable personal until actually distributed from the corporation.

The difference in tax rules requires planning to ensure that double tax does not result from the transactions. For instance, in a year where you earn $100,000 of investment income within your corporation this income will be fully taxable on your US return. Because these amounts are not taxable for Canadian purposes and you cannot receive a foreign tax credit on your US return for corporate taxes paid on this income, you’ll end up paying tax twice on the same income once the income is distributed personally.

In very general terms we can plan around this potential double tax by ensuring Canadian dividends are paid in the same year the income is earned to ensure you can obtain a foreign tax credit in the US on this income. We also may have the ability to exempt this tax through additional “high tax” regulation rules.

New Guilty tax

In addition to the 965 tax outlined above, the US government implemented an additional set of rules requiring taxpayers of controlled foreign companies to report their active business income earned. The calculations for this inclusion under the new Global Intangible Low-Taxed Income (GILTI) rules are complex, however you should be aware that if not properly planned your active income earned for corporate purposes may be fully taxed on your US return in future years.

Once again I’m assuming that all required disclosures have been properly filed for previous years. Those would include any 8833 treaty disclosures and forms 5471 reporting the activity of the Canadian corporation. If you’re unsure I would be glad to take a quick look at the returns. Please don’t hesitate to reach out again if you want to discuss the preparation and planning for 2018 and beyond. I can be reached via email at phil@hutcheson.ca or on my cell at 250-661-9417.

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