Law Times

Page 12 November 5, 2018 • Law Times www.lawtimesnews.com U.S. tax changes could affect Canadians BY DALE SMITH For Law Times R ecent U.S. tax changes designed to repatriate the profits of large cor- porations such as Apple are subjecting American citi- zens living in Canada who hold shares in closely held corpora- tions to punitive tax measures and potentially double taxation, say Ontario lawyers. The policy could also apply to Canadians who spend too many days in a single year in the U.S. to similar taxation given the breadth of the scope of the legis- lation, add these lawyers. They say that Americans living in Canada, dual citizens and even some Canadians who spend their time in the southern U.S. during the winter need to be aware of the changes, particu- larly if they own a small business or personal corporation. Veronika Chang, a lawyer with Morris Kepes Winters LLP in Toronto, says the issue is im- portant to those who may be captured by U.S. tax laws because the people subject to these tax changes are being taxed on in- come that they haven't received. "We think of paying tax on money you get, and if there's a corporation involved, you may be paying a lot of tax on money you haven't received yet," says Chang. "It's like pre-paying tax. It could create a cash-f low prob- lem for your company." The U.S. tax changes, which were signed into law on Dec. 22, 2017, were intended to tar- get large corporations that have non-U.S. retained earnings, but they wound up also targeting individuals who qualify as U.S. taxpayers. Sunita Doobay, a partner with Tax Chambers LLP in To- ronto, says the changes could impact thousands of people in Ontario because the definition of who qualifies as an "American person" under the U.S. legisla- tion is extremely broad. It goes not only to American citizens, dual citizens and green card holders, but it can also cap- ture non-citizens who meet the substantial presence test, which means that they've spent more than 183 days in the United States and haven't filed a closer connection form, she says. "Lawyers need to know when they have a client before them who is a U.S. person or not, be- cause there are so many reper- cussions from a tax perspective," says Doobay. "If you're a U.S. person for tax purposes, you're taxed on your worldwide income, unlike in Canada, where you're taxed on your residency." Doobay adds that those deemed U.S. persons can also be subject to estate tax as well as income tax. One aspect of the legislation changes the definition of a U.S. shareholder as a U.S. person who holds at least 10 per cent of the votes in non-U.S. corporations to one where 10 per cent of a U.S. controlled foreign corporation's votes or value is held by a U.S. individual or corporation, says Doobay. Doobay says the change to value is important, so corporate- commercial lawyers in Ontario need to pay attention to the shift. Chang says a dual citizen who holds citizenship in Canada and the U.S. used to be able to get around this rule by having pre- ferred stock with some voting rights. "They can't do that anymore," she says. Doobay says this is why American lawmakers' plan to recoup taxes from companies such as Apple started also affect- ing individuals, attributing it to hasty drafting of the legislation. While the U.S. moved to clean up the unintended con- sequences that arose from partnership interests, it has not moved on these small corpora- tion changes, she says. "Are they going to change it?" asks Doobay. "Probably, but when? It is negative for the av- erage [U.S.] person [in Canada] with a corporation." The new U.S. law states that a U.S. CFC shareholder is subject INTERNATIONAL/CROSS-BORDER LAW © 2018 Thomson Reuters Canada Limited 00254DP-93983-NP Order # L7798-8668-65203 $240 Hardcover approx. 340 pages October 2018 978-0-7798-8668-5 Shipping and handling are extra. Price subject to change without notice and subject to applicable taxes. New Edition The 2019 Annotated Crown Liability and Proceedings Act Michael H. Morris, B.A., LL.B., M.P.A., and Jan Brongers, B.Com, LL.B., B.C.L. Let experts guide you through the substantive and procedural law governing the law related to litigation involving the Federal Crown. The Annotated 2019 Crown Liability and Proceedings Act includes the full English and French text of the Crown Liability and Proceedings Act, section- by-section commentary, digests of all relevant judicial decisions, and cross references to related legislative provisions and secondary sources. You'll fi nd expert analysis of the vicarious liability of the Crown, the nature of duties owed by the Crown, the limits on the availability of injunctive relief, and the immunity of the Crown and its agents from provincial legislation. And you'll get all the signifi cant case law so you'll know exactly how the legislation has been applied by the courts. NEW Get expert guidance in proceedings against the federal Crown by leading experts in the area For a detailed Table of Contents, visit store.thomsonreuters.ca/crown-liability Available risk-free for 30 days Online: store.thomsonreuters.ca Call Toll-Free: 1-800-387-5164 | In Toronto: 416-609-3800 Veronika Chang says recent changes to American tax law could mean cash flow problems for those living in Canada. See Intended, page 13 Legal News at Your Fingertips Sign up for the Canadian Legal Newswire today for free and enjoy great content from the publishers of Canadian Lawyer, Law Times, Canadian Lawyer InHouse and Lexpert. 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