The Impact of Biden Tax Proposals on Canadian Residents
By Monica Martinez, CPA, CA, CPA (Illinois)
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Joe Biden has been inaugurated as President of the United States. Now that the new administration is finally in place and the chaos of the campaign and election results are (mostly) a thing of the past, we can start to focus on what tax policy changes President Biden will look to enact.
Like Canada, the US is facing massive revenue shortfalls brought on by pandemic relief and recent tax cuts. It is safe to say that changes to tax rates will likely be high on the agenda. The proposed tax changes will impact US citizens living in Canada and high-net-worth Canadians with assets or business interests south of the border. With Democrats having gained control of the Senate, these changes are now more likely to come to fruition.
Anticipated Tax Changes
The Biden campaign platform contained numerous tax proposals, most notably:
- Reduce the estate tax exemption from the current US$11.7M to perhaps US$3.5M, and increase the top estate tax rate to 45%.
- Reduce the maximum lifetime gift-tax exemption to US$1M.
- Increase the top personal income tax rate from the current 37% to 39.6% for taxpayers with income over US$400,000.
- Increase the top long-term capital gains and qualified dividends tax rate from the current 20% to 39.6% for taxpayers with income of US$1M or more.
- Increase the corporate income tax rate from the current 21% to 28%.
- Increase the tax rate on global intangible low-taxed income (GILTI) from 10.5% to 21%.
Impact on Canadians with US Property or Investments
Canadians with US assets and whose total net-worth exceeds the anticipated estate tax exemption of US$3.5M, could face US estate tax on those US assets on death. It is important to note that US assets include not only US real estate, but also shares in US equities including those held in RRSPs, RRIFs or TFSA accounts, as well as US retirement plans such as 401(k) plans and Individual Retirement Accounts (IRAs).
To decrease the impact of these tax changes and a potential significant US tax bill upon death, high-net-worth Canadians may need to consider some estate planning, such as restructuring their investments to reduce their US assets. For example, direct holding of US securities could be replaced with Canadian-based mutual funds or exchange traded funds that hold US assets within these funds. Note that holding Canadian mutual funds or exchange traded funds is not recommended for US citizens, as this can result in punitive tax implications for them.
Canadians with IRA or 401(k) plans in the US could consider transferring these plans to their RRSPs. Alternatively, if they are already receiving periodic payments from these US plans, they could increase the amount of these withdrawals, before spending their Canadian based investments or Canadian retirement funds.
Some gifting strategies could also be considered in certain cases to reduce their net worth on death.
Impact on US Citizens Living in Canada
US citizens living in Canada will be subject to US estate tax on their worldwide estate, if the fair market value of their estate on death exceeds the reduced estate tax exemption (US$3.5M). To avoid the impact of the proposed estate and gift tax changes, US citizens may want to consider gifting assets to family members soon to take advantage of the current higher gift-tax exemption. This will reduce the size of their worldwide estate, closer to the anticipated US$3.5M exemption, and reduce their exposure to US estate tax on death.
Generally, US citizens living in Canada may not see a significant impact from the proposed increases to US personal tax rates. In most cases, Canadian personal tax rates on income will be higher than the US rates, and the Canada-US tax treaty would eliminate double taxation on the same income.
On the other hand, wealthier US citizens with annual income over US$1M may be impacted. Under the Biden proposals, these US citizens could soon be paying tax on long term capital gains (i.e., gains realized on assets held for more than one year) at the ordinary tax rate of 39.6% plus an investment income tax of 3.8%, for a total tax of 43.4% compared to the current top rate of 23.8% on this income. That far exceeds the top Canadian tax rate on capital gains of 26.77%. A careful review of investments with accrued capital gains, and the sale of some of these assets now could potentially save a significant amount of tax in the years ahead.
Impact on Canadian Businesses
The rise in corporate tax rate from 21% to 28% will have an impact on Canadian companies doing business in the US, if their US profits are not exempt from US tax under the Canada-US tax treaty. Those impacted may want to consider how to restructure their US operations.
The Biden administration has also proposed changes to the global intangible low taxed income (GILTI) provisions. These provisions are meant to discourage US citizens from operating a Canadian business through a Canadian corporation, while trying to achieve tax deferral. Whether or not distributions are made to the US citizen shareholders from their corporation, they are required to include the corporate income on their personal US tax returns annually. The Biden administration proposes to double the tax rate applicable to this income from 10.5 to 21%.
The tax changes outlined above highlight the main proposals likely to impact Canadians with US assets or US operations, and US citizens living in Canada. Taking active steps now to evaluate the impact of these proposed tax changes may result in significant tax savings down the road.
The US & Cross-Border tax team at GGFL is here to assist.