Some U.S. tax changes may be on the way that U.S. citizens living in Canada and Canadian companies doing business in the U.S. should be aware of. Although the ‘Build Back Better’ legislation passed by the U.S. House last month didn’t include many of the proposals contained in previous versions, there are still several significant changes on the table and it’s important to know what was, and currently is, being proposed.
Key items that were included in prior versions of the bill, but not included in the bill passed by the U.S. House on November 1st (and so are probably off the table for now) include:
- increasing the corporate income tax rate
- increasing the top individual income tax rate
- increasing the top capital gains tax rate
- accelerating a reduction in gift, estate, and GST exemptions
- limiting the use of grantor-type trusts
- eliminating the stepped-up basis for appreciated assets in estates
Among other changes, here is what the bill (as currently drafted) does propose to do:
- introduce a new 15% corporate alternative minimum tax (on adjusted financial statement income over the corporate AMT foreign tax credit) for corporations with a three-year average income in excess of $1 billion
- change the effective tax rates for global intangible low-taxed income (GILTI) to 15% and foreign-derived intangible income (FDII) to 15.8%
- amend the foreign tax credit regime to determine foreign tax credit limitations on a country-by-country basis and increase the deemed paid credit for taxes attributable to GILTI to 95% (from 80%)
- modify the application of the 3.8% net investment income tax (NIIT) to trade or business income of certain high-income individuals
- limit the interest deduction of domestic corporations that are part of an international financial reporting group
- modify the base erosion anti-abuse tax (BEAT) determination and gradually increase the BEAT rate to 12.5% for 2023, 15% for 2024, and 18% for 2025 and beyond
- impose retirement account contribution limitations and increase the minimum required retirement account distributions on high-income taxpayers (individuals making over $400k per year or married couples making over $450K) with retirement account balances in excess of $10,000,000
- impose a surtax on estates and trusts of 5% of the adjusted gross income of a non-grantor trust in excess of $200,000, with an additional 3% tax applied to the adjusted gross income of a non-grantor trust in excess of $500,000
- impose a surtax of 5% on individual modified adjusted gross income in excess of $10 million plus an additional tax of 3% in excess of $25 million
- reinstate rules to prevent downward attribution of stock ownership from a foreign person to a U.S. person for purposes of determining whether a U.S. person is a U.S. shareholder or whether a foreign corporation is a controlled foreign corporation (CFC), subject to certain exceptions
- subject members of a foreign reporting group to additional limitations on their business interest expense deductions and apply the limitation for flow-through entities at the partner or shareholder level rather than the entity level
A couple of things to keep in mind
The U.S. federal estate tax exemption amount is still scheduled to drop from $11 million to approximately $6 million on January 1, 2026. That is only four years away and changes could still be made to U.S. estate tax laws in the interim—so keep the lower threshold is mind when doing your estate planning.
It remains to be seen what revisions may be needed in order for the U.S. Senate to pass the bill, and then how the U.S. House will respond to the proposed changes. U.S. tax reform tends to be a lengthy process and it’s not over until it is over. Stay informed and be prepared, but don’t act prematurely or hastily.
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