Both the U.S Republican House and Senate tax plans (The Tax Cuts and Jobs Act, H.R. 1) propose to lower the maximum U.S. federal corporate tax rate from 35% to 20%. This U.S. Tax Tip looks at the effective overall tax rate for Canadians shareholders who are doing business in the U.S. through a U.S. subsidiary (C-corporation) of their Canadian operating company (CCPC).
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; and
- The maximum (estimated) 2018 combined federal/Ontario personal tax rate for these kinds of dividends is 46.65%.
| 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 (@46.65%) |
$586 Nil (273) |
$722 Nil (337) |
| After tax cash in shareholder’s hand Effective overall tax rate |
$313 68.7% |
$385 61.5% |
Summary
There still is no integration between the Canadian and United States tax systems. While the proposals would lower the U.S. corporate tax by some 15%, the overall impact for Canadian’s doing business through regular U.S. corporations will only drop 7.2% from 68.7% to 61.5%. Overall there is still a high total effective tax rate. If you plan on doing business in the U.S. other structures may be more tax efficient.
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.
