This U.S. Tax Tip follows up on the US Tax Tip issued on November 30, 2017. The facts/assumptions are similar in that we look at the effective overall tax rate for Canadian shareholders who are doing business in the U.S. through a U.S. subsidiary (C-corporation) of their Canadian operating company (CCPC). The difference here being that the shareholders will make the designation to treat the Canadian dividend as coming out of the Canadian company’s GRIP balance and, as such, will be an eligible dividend.
This example assumes the following:
- The reduction in U.S. corporate taxes will be effective January 1, 2018 (though the Senate plan proposes January 1, 2019 instead);
- State corporate taxes will still be deductible in computing federal taxable income (the plans look to eliminate state and local taxes as a personal itemized deduction but not as a corporate tax deduction);
- The state corporate tax rate is 5% (actual rates vary from a low of 4% to a high of 12%). 6 states do not charge a corporate income tax.
- The Canadian parent owns at least 10% of the voting stock of the U.S. subsidiary such that dividends qualify for the 5% nonresident withholding rate under Article X(2)(b) of the Canada- U.S. Tax Treaty;
- The income, earned in the U.S. is from an active business and, thus, is not subject to Canadian Part I tax when repatriated;
- The dividend from the U.S. company will be added to the Canadian company’s GRIP balance;
- The possible application of Part IV tax (which may apply in certain circumstances) has not been considered; and
- The maximum (estimated) 2018 combined federal/Ontario personal tax rate for eligible dividends is 39.34%.
| Current | Proposed | |
| U.S .Taxable Income U.S. federal tax U.S. state income tax (@5%) |
$1,000 (333) (50) |
$1,000 (190) (50) |
| Cash available for distribution U.S. nonresident withholding tax (@5%) |
$617 (31) |
$760 (38) |
| After (U.S) tax cash in Canadian company Canadian corporate Part I tax Personal tax on dividend (@39.34%) |
$586 Nil (231) |
$722 Nil (284) |
| After tax cash in shareholder’s hand Effective overall tax rate |
$355 64.5% |
$438 56.2% |
Summary
Consistent with the prior US Tax Tip, there still is no integration between the Canadian and United States tax systems. Though the proposals would lower the U.S. corporate tax rate by 15%, the overall impact for Canadians doing business through regular U.S. corporations, and in receipt of eligible dividends, will only drop 8.3% from 64.5% to 56.2%. Whether the dividends are eligible or non-eligible, these structures are not tax efficient and investors should consider alternate structures.
TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.
The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.
