Wednesday, 27 September 2017

Tax Proposals - US and Canada

President Trump released his tax proposals today while in Canada the Morneau proposals consultation period will be ending soon on October 2nd, 2017. The Morneau proposals have caused many of us tax practitioners sleepless nights given how far reaching the proposals are. As I have stated in a presentation - the Morneau proposals discourage Canadians from operating their businesses through a corporation. A corporation is a necessary shield for liability purposes Canadians. Americans are often puzzled as to why Canadians operate through a corporation. We do because of the liability shield and  the preferential tax rate on the first $500,000 of active business income earned annually by a Canadian Controlled Private Corporation. The combined Ontario Federal rate for the first $500,000 is 15%. Aside from the tax rate and liability shield - a corporation is a necessity to access the R&D credit regime (SRED) of the Income Tax Act.

The sleepless nights caused by these proposals is that Canada does not have a limited liability company regime. Limited liability company (LLC) provide the same liability shield that a corporation would provide. The LLC is a structure adopted by the Americans from the Mexicans. It is a flow through similar to a partnership but at the same time provides liability coverage similar to that provided by a corporation. A Canadian limited partnership does not provide that level of coverage.

The proposals in essence leave us in a limbo in Canada.

The Trump Tax proposals focus, unlike the Morneau proposals, on economic growth. It allows for businesses who have made investments into capital assets prior to the 27th of September, 2017 to immediately write off the cost of such assets. The US which had the highest corporate tax rates of all OECD members is proposed to have a tax rate of 20%. And the proposals appear to copy Canada's exempt surplus regime making inversions into Canada not desirable anymore. The Code has implemented provisions to discourage inversions into Canada but who can forget the Burger King inversion in 2015.

The proposals also speak to the repatriation of funds held by US businesses outside of the US and to implement a regime making it less attractive for US companies to shelter their non-US profits in jurisdictions such as Ireland.

Last but not least - the Trump proposals speak to the repealing the U.S. estate tax.

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