Potential tax implications of the U.S. election

From a tax perspective, the impact of the 2020 U.S. election will stretch well beyond U.S. borders. The result will drive future U.S. tax policies and laws that will affect both U.S. persons living abroad and non-residents with U.S assets.

For U.S. tax purposes, U.S. persons include U.S. citizens, residents and green-card holders. U.S. taxation is based on citizenship, while taxation in virtually all other countries in the world, including Canada, is based on residency. U.S. persons living in Canada are subject to the reporting obligations and tax rates under both the U.S income tax and transfer (estate and gift) tax regimes as if they lived in the U.S.

Canadians with U.S-based property and certain U.S.-source income, including rental income on U.S. real estate, are subject to similar requirements.

The Foreign Account Tax Compliance Act¹ provides information regarding U.S. personhood and property ownership around the world to the Internal Revenue Service (IRS).

Below is a summary of the two U.S. presidential candidates’ potential tax policies (showing 2020 rates).

Much of the Republican platform makes permanent many changes implemented under the 2017 Tax Cuts and Jobs Act (TCJA), otherwise set to expire after Dec. 31, 2025. The Democrats propose to roll back many of the TCJA’s provisions. (All figures are in USD.)

Table: Comparison of U.S. presidential candidates’ tax platforms

As shown, the Democratic platform increases tax on corporations and also on individuals earning more than $400,000, provides a suite of personal tax benefits targeted at low- and middle-income families, and favours tax credits — often refundable — over tax deductions. Deductions are typically more beneficial for higher-income taxpayers compared to lower- and middle-income individuals.

These potential changes would impact U.S. persons living in Canada who are filing U.S tax returns on their world income and Canadians with U.S.-source income wherein the U.S. tax liability isn’t satisfied through source withholding.

The Democratic platform also proposes to reduce the estate tax exemption and repeal the step-up in basis on death.

U.S. persons, including those living in Canada, face estate tax of up to 40% of the value of their estates in excess of the exemption. The TCJA legislated the highest exemption in history through to the end of 2025. If a U.S. person living in Canada died in 2020, their world estate would have to be more than US$11.58 million before estate tax would apply.

This exemption is set to be cut in half at the end of 2025 and may even decrease under a Democratic administration.

Non-residents holding U.S.-based property are also watching for changes in tax policy. Under the Canada-U.S. tax treaty, Canadians currently have access to a pro-rated exemption based on the value of their U.S. assets relative to their world estates.

In respect of capital gains tax, the repeal in step-up basis could be very costly over time to heirs of appreciated property at any income level.

In aggregate, the TCJA legislated corporate tax cuts permanently and individual tax cuts temporarily, and disproportionately benefited high-income earners. Further, the corporate tax benefits under the TCJA are tempered by increased trade tariffs, which inflate the cost of goods for U.S. manufacturers and consumers.

The TCJA also impacts U.S. persons living in Canada who are incorporated business owners. The U.S. considers these corporations to be controlled foreign corporations (CFCs). In 2017, the TCJA imposed a one-time transition tax on U.S. persons owning 10% or more of the shares of a CFC.

For 2018 and later years, the transition tax gave way to a new tax on global intangible low-taxed income (GILTI). GILTI is the after-tax net business profits of the CFC beyond a 10% return on the depreciated tangible capital assets of the business. GILTI tends to impact service businesses more than capital-intensive businesses. Planning can mitigate tax on GILTI; however, it comes with increased costs and complexity for Canadian business owners who are also U.S. persons.

With U.S. tax policy having implications beyond the U.S. border, Canadians and the world will be watching for election results and subsequent tax changes.

Rebecca Hett, CPA, CGA, TEP, is vice-president, Tax, Retirement and Estate Planning at CI Investments.

Notes:

1 Under FATCA, certain U.S. taxpayers holding financial assets outside the United States must report those assets to the IRS, with serious penalties for not doing so. FATCA also requires certain foreign financial institutions including banks, brokers and insurance companies to report to the IRS information about financial accounts held by U.S. taxpayers or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. Source: irs.gov

2 applied to assets held for more than a year, at  0%, 15% or 20% depending on income

Rebecca Hett

Tax & Estate

Rebecca Hett, CPA, CGA, TEP, is vice-president, Tax, Retirement and Estate Planning at CI Global Asset Management.