From a tax perspective, the impact of the 2020 U.S. election will stretch well beyond U.S. borders. The result will drive future U.S. tax policies and laws that will affect both U.S. persons living abroad and non-residents with U.S assets.
For U.S. tax purposes, U.S. persons include U.S. citizens, residents and green-card holders. U.S. taxation is based on citizenship, while taxation in virtually all other countries in the world, including Canada, is based on residency. U.S. persons living in Canada are subject to the reporting obligations and tax rates under both the U.S income tax and transfer (estate and gift) tax regimes as if they lived in the U.S.
Canadians with U.S-based property and certain U.S.-source income, including rental income on U.S. real estate, are subject to similar requirements.
The Foreign Account Tax Compliance Act1 provides information regarding U.S. personhood and property ownership around the world to the Internal Revenue Service (IRS).
Below is a summary of the two U.S. presidential candidates’ potential tax policies (showing 2020 rates).
Much of the Republican platform makes permanent many changes implemented under the 2017 Tax Cuts and Jobs Act (TCJA), otherwise set to expire after Dec. 31, 2025. The Democrats propose to roll back many of the TCJA’s provisions. (All figures are in USD.)
|Measure||Current||Republican platform||Democratic platform|
|Top federal income tax rate||37%; applicable from 2018 through 2025 under the TCJA at income over $518,400||No change; proposes 10% middle-class rate cut||Restore pre-TCJA top tax rate of 39.6% for income over $400,000|
|Capital gains rates||Tax rates of 0%, 15% or 20% apply to long-term capital gains2||Hints at further rate reductions||Tax capital gains at ordinary income rates for taxpayers with incomes above $1,000,000|
|Estate tax exemption and basis step-up||• Unified credit against estate tax is $11.58 million, adjusted annually for inflation
• Basis of inherited property is stepped up to fair market value at the donor’s death
• Accumulated gain at donor’s death permanently escapes capital gains tax. Taxable gain on actual sale is the increase in value over the stepped-up tax basis
|Proposes to extend existing TCJA provisions beyond 2025 and would make no changes to the step-up in basis||• Return unified credit against estate tax to pre-TCJA amount of $5.49 million, with further reductions considered
• Eliminate the basis adjustment on inherited property to fair market value at the time of the donor’s death
• Tax accumulated gains on inherited assets at time of transfer to heir
|Family credits||Under the TCJA, maximum child and dependent care credit is $3,000 per child or $6,000 for two or more; forgiven student loan debt is taxable unless due to disability or death||Proposes to extend existing TCJA provisions beyond 2025||Increase child/dependent credit to $8,000 for one dependent; $16,000 for multiple dependents; forgiven student loan debt not taxable|
|Limitation on itemized deductions||TCJA eliminates the limitation through the 2025 tax year||Proposes to repeal the limitation permanently||Restore the limitation for taxpayers in tax brackets higher than 28%, and further limitations for taxable incomes above $400,000|
|Measure||Current||Republican platform||Democratic platform|
|Payroll tax||12.4%, split between employer and employee||No official proposals but has indicated intention to reduce or eliminate payroll taxes||Individuals earning more than $400,000 would pay additional payroll taxes|
|Corporate tax rate||21%; corporate alternative minimum tax (AMT) repealed under TCJA||Preserve status quo under TCJA; no plans to reinstate corporate AMT||28%; implement 15% AMT on corporate book profits over $100 million|
|Qualified business income tax deduction||Eligible taxpayers may deduct up to 20% of qualified trade or business income||Phase out deduction for taxable income over $415,000||Phase out deduction for taxable income over $400,000|
|GILTI (global intangible low-taxed income)||GILTI is a tax on earnings beyond a 10% notional return on a company’s foreign assets; effective rate is 10.5%||Proposes no change||Proposes to double the tax rate on GILTI to 21%|
As shown, the Democratic platform increases tax on corporations and also on individuals earning more than $400,000, provides a suite of personal tax benefits targeted at low- and middle-income families, and favours tax credits — often refundable — over tax deductions. Deductions are typically more beneficial for higher-income taxpayers compared to lower- and middle-income individuals.
These potential changes would impact U.S. persons living in Canada who are filing U.S tax returns on their world income and Canadians with U.S.-source income wherein the U.S. tax liability isn’t satisfied through source withholding.
The Democratic platform also proposes to reduce the estate tax exemption and repeal the step-up in basis on death.
U.S. persons, including those living in Canada, face estate tax of up to 40% of the value of their estates in excess of the exemption. The TCJA legislated the highest exemption in history through to the end of 2025. If a U.S. person living in Canada died in 2020, their world estate would have to be more than US$11.58 million before estate tax would apply.
This exemption is set to be cut in half at the end of 2025 and may even decrease under a Democratic administration.
Non-residents holding U.S.-based property are also watching for changes in tax policy. Under the Canada-U.S. tax treaty, Canadians currently have access to a pro-rated exemption based on the value of their U.S. assets relative to their world estates.
In respect of capital gains tax, the repeal in step-up basis could be very costly over time to heirs of appreciated property at any income level.
In aggregate, the TCJA legislated corporate tax cuts permanently and individual tax cuts temporarily, and disproportionately benefited high-income earners. Further, the corporate tax benefits under the TCJA are tempered by increased trade tariffs, which inflate the cost of goods for U.S. manufacturers and consumers.
The TCJA also impacts U.S. persons living in Canada who are incorporated business owners. The U.S. considers these corporations to be controlled foreign corporations (CFCs). In 2017, the TCJA imposed a one-time transition tax on U.S. persons owning 10% or more of the shares of a CFC.
For 2018 and later years, the transition tax gave way to a new tax on global intangible low-taxed income (GILTI). GILTI is the after-tax net business profits of the CFC beyond a 10% return on the depreciated tangible capital assets of the business. GILTI tends to impact service businesses more than capital-intensive businesses. Planning can mitigate tax on GILTI; however, it comes with increased costs and complexity for Canadian business owners who are also U.S. persons.
With U.S. tax policy having implications beyond the U.S. border, Canadians and the world will be watching for election results and subsequent tax changes.
Rebecca Hett, CPA, CGA, TEP, is vice-president, Tax, Retirement and Estate Planning at CI Investments.
1 Under FATCA, certain U.S. taxpayers holding financial assets outside the United States must report those assets to the IRS, with serious penalties for not doing so. FATCA also requires certain foreign financial institutions including banks, brokers and insurance companies to report to the IRS information about financial accounts held by U.S. taxpayers or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. Source: irs.gov
2 applied to assets held for more than a year, at 0%, 15% or 20% depending on income