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Law Times • November 5, 2018 Page 13 www.lawtimesnews.com to a transition tax regime levied on all profits and earnings accu- mulated since 1986 until Nov. 2, 2017 or Dec. 31, 2017, whichever is higher. If the U.S. shareholder is a corporation, it is to pay 15.5 per cent on cash assets and eight per cent on other assets. U.S. in- dividual shareholders are not able to benefit from a f lat rate, but they will have the transition tax rate of 17.5 per cent for cash and nine per cent for non-cash assets. Chang says the IRS doesn't like it when Americans use vehi- cles to defer tax outside of the U.S. "Basically, it's saying that you may have money in your Cana- dian corporation and you're de- ferring taxes on it," says Chang. "They're saying that they will tax you on the income you've accu- mulated since 1986 on what is essentially retained earnings." Gregory Sanders, head of the tax law group at Perley-Robertson Hill & McDougall LLP in Ot- tawa, says there tend to be two sources of income within those CCPCs — active business income and passive income, and passive income has always been caught by existing rules, whereas active business income was not. "What they didn't want people to be able to do is turn around and reinvest that defer- ral in the United States," says Sanders. "They said that if you're going to take that money and in- vest in a U.S. asset, we're going to pretend that you distributed to yourself and that you lent it back to your company, so that we can collect tax on that money." Sanders says the distribution is a taxable event for U.S. tax pur- poses whether the person affect- ed lives in the U.S. or Canada, so that when the U.S. person resid- ing in Canada actually receives the dividend in the future, it will be taxable in Canada and not the U.S., as it was already taxed there, which results in double taxation. "The US citizen pays tax in the U.S. and gets no credit for Cana- dian tax because there is none at that time," says Sanders. "Later, the U.S. citizen pays tax in Can- ada and there is no credit for the previous U.S. tax paid, because it was not in the same year." Chang says there is no cor- responding tax credit in Canada for this one-time tax. Because of the way in which the law was written, she says, it was impos- sible to plan for this tax change because it had a retroactive ef- fective date. "The only saving grace is that you can pay it over eight years, and it's heavier in the back end so that it gives you cash f low so you can plan," says Chang. Doobay says these Canadian Controlled Private Corpora- tions are retirement vehicles for many Canadians and can have millions in retained earnings, which can be caught up in the transition tax. Doobay says it's possible for those living in Canada to re- structure their personal corpo- rations in order to minimize exposure to the transition tax by treating the U.S. individual shareholder as a U.S. domestic corporation through a mecha- nism known as a s. 962 election. "When the retained earnings are f lowing back to a U.S. corpo- ration, the rates are lower," says Doobay. "The election treats the U.S. individual shareholder as a U.S. domestic corporation, and it's as if the dividends are going into a U.S. corporation, thereby getting the more favourable rates." Doobay points to recent case law from a U.S. Tax Court de- cision released in September called Barry M. Smith and Ro chelle Smith v. Commissioner of Internal Revenue (151 TC No. 5). That decision provided an overview of the election and explained that it does "not cre- ate hypothetical corporations or change real-world facts. [It] simply provide[s] a mechanism that enables an individual U.S. shareholder to elect what he or she may deem more desirable tax treatment." Doobay adds that a 962 elec- tion can allow individuals to be treated as a corporation for these tax purposes in order to get the 15.5-per-cent rate instead of the higher individual rate and also benefit from a foreign tax credit levied on the earnings within the Corporation by Canada post-1986. Doobay says the individual rate is much higher if the funds are going back from a Canadian corporation to a U.S. individual shareholder as opposed to a Ca- nadian corporation going back to a U.S. parent corporation. As well as the transition tax, income that has accumulated in the non-U.S. corporation that was not subject to the transi- tion tax will also be subject to a Global Intangible Low-Taxed Income, to be taxed at the high- est tax rate of 10.5 per cent. "Given the punitive treat- ment brought in Canada to ac- cumulation of passive income with the latest Canadian tax re- forms, a U.S. person in Canada is likely not going to amass mas- sive retained earnings after Dec. 31, 2017 from a practical per- spective, looking at a U.S. person in Canada with a CCPC," says Doobay. LT INTERNATIONAL/CROSS-BORDER LAW SOLVING CANADIAN CUSTOMS & TRADE PROBLEMS ISN'T ROCKET SCIENCE! WE HELP CANADIAN LAWYERS ON THESE ISSUES EVERY DAY! 416.864.6200 | 416.864.6201 (FAX) | TAXANDTRADELAW.COM Third Floor, 24 Duncan St. Toronto Ontario, Canada M5V 2B8 2015-16 TOP 5 Tax Law BOUTIQUE C A N A D I A N L AW Y E R M A G A Z I N E AW A Y W E E C A N A D I A N M A M G A A Z I N E 2015 16 OP 5 T w BOUTIQU 22001155--1 -1 - 6 16 TTOO TOP O 55 TTax Law ax Law Tax Law ax L x L BBO BOU O T UTIIQ IQU QUE U A N L A L W A Y W E Y R M A M HELPING YOU. HELP YOUR CLIENTS. ® TAX & TRADE LAWYERS MillarKreklewetz_LT_Apr9_18.indd 1 2018-04-05 9:55 AM Continued from page 12 Intended to target large corporations Sunita Doobay says that Canadian Controlled Private Corporations are retire- ment vehicles for many Canadians, and they may be affected by recent U.S. tax changes. What they didn't want people to be able to do is turn around and reinvest that deferral in the United States. Gregory Sanders

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