Category Archives: Subpart F income

US tax reform bill appears to confiscate 12% (updated to 14%) of retained earnings of certain Canadian Controlled Private Corporations

Update November 9, 2017

Today Chairman Brady concluded the “Mark Up” period of his proposed tax legislation. The “Mark Up” period contained NO move to “territorial taxation” for individuals. It did increase increase the “proposed confiscation” of the retained earnings of certain Canadian Controlled Private Corporation, from 12% to 14%.

See the “Manager’s Amendment” here:

summary_of_chairman_amendment_2

Now back to our regular programming …

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Kudos to Max Reed for his quick analysis of the how the proposed U.S. tax reform bill might affect Canadians citizen/residents who also have hold U.S. citizenship. You will find the bill here. His analysis, which has been widely discussed at the Isaac Brock Society (beginning here) includes provisions that are very damaging to those who are the owners of Canadian Controlled Private Corporations (noting they are also under assault from Messrs Trudeau and Morneau). The damaging provisions are both prospective and retrospective.

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The worldwide trend of attacking the use of corporations as a way to reduce or defer taxation for individuals

Introduction – The war against corporations and the shareholders of those corporations

Corporations as entities that are separate from their shareholder/owners

As every law students knows, a corporation is a legal entity that is separate from its owner. As a legal entity that is separate from its owner, a corporation is capable of holding assets, carrying on a business and investing in a way that results in separation of the shareholder(s) from the business itself. It is a mistake to infer that the corporation’s status as a separate legal entity means that the corporation’s income will not be taxed to its shareholders.

Corporations as legal instruments of tax deferral

When corporate tax rates are lower than individual tax rates, there is incentive for individuals to earn and invest through corporations rather than to earn and invest as individuals. In other words, in certain circumstances, corporations can be used to pay less taxes.

Corporations as instruments of tax evasion

In many jurisdictions is it possible to create a Corporation and NOT disclose the identities of the beneficial owners. Because of this circumstance:

1. Corporations (as was made clear in the “Panama Papers Story”) can be used to hide income and assets for either legitimate or illegitimate reasons; and

2. Corporations can be used to avoid the attribution of income earned by the corporation to the shareholders.

Corporations and the rise of @TaxHavenUSA
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Form 8621 and Form 5471 are required even if the tax return is NOT!

The Internal Revenue Code of the United States requires two things:

1. The calculation of taxes; and

2. The reporting of information.

The Internal Revenue Code of the United States is based on three basic principles:

1. A dislike of all things “foreign”. (If you see the word “foreign” a penalty is sure to follow.)

2. A hatred of all forms of non-U.S. “tax deferral”

3. An attempt to stop the “leakage” of “U.S. taxable assets” from the U.S. tax base. (Examples include the U.S. tax treatment of the “alien spouse” and the U.S. S. 877A “Exit Tax” that may be payable when one makes the decision to renounce U.S. citizenship).

“Forms” AKA “information returns” are for the purpose of forcing disclosure of information relevant to  “foreignness”, “deferral” and “leakage”.

The above tweet references an earlier post describing many of the “forms” required of Americans abroad. The post also describes the significant penalties which can be potentially imposed for the failure to file those forms.

For Americans abroad the information reporting requirements are extensive, burdensome and penalty laden. Normally (but not in all cases) the “forms” are filed as part of the tax return (1040 or 1040NR).

NEVER FORGET MR. FBAR – THE NEW SYMBOL OF U.S. CITIZENSHIP – AND THE POTENTIAL FBAR PENALTIES FOR FAILURE TO FILE THE FBAR! THOSE WHO HAVE FAILED TO FILE MR. FBAR SHOULD BE CAUTIOUS ABOUT HOW THEY “FIX THE FBAR PROBLEM“.

(Interestingly, Mr. FBAR has been used as a model for Russia which now has (for lack of a better term) the Russian FBAR.)

Many people do NOT understand that they may be required to file “information returns”, even though they may NOT meet the income thresholds to file a tax return!
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