With the change in president post in the U.S, we can expect to see several changes in U.S tax policies, several of which may significantly affect Canadians.
It is known that Biden plans to reduce the U.S estate tax exemption from $11.6 million to $3.5 million. At present, American citizens, as well as residents, are subject to U.S. estate tax on the portion of their worldwide estates that exceeds $11.6 million (all amounts in $US unless otherwise noted). Canadians are subject to United States estate taxes on their U.S. properties, including securities issued by U.S. companies.
It is a matter of concern for Canadian as U.S properties held by Canadians will be brought under double taxation as they have to now pay both U.S. estate tax and U.S. capital gains tax.
Canadians own a US$500,000 home. Its global estate is $7 million. There will be no U.S. inheritance tax on his/her death under existing U.S. tax law. Under the Biden tax package, the U.S. inheritance tax will be around $70,000.
Now let us suppose that if the U.S home in scenario 1 was bought for US$400,000 and it is sold by the estate for $500,000 then according to the current U.S tax law no U.S tax exist prior to the death of the owner. Now under Biden’s tax plan, there would be no “step-up” of the property’s tax cost to fair market value at death and the U.S. tax on the gain would be as high as $20,000 ($23,800 for U.S. citizens or residents).
If any Canadian owns $200,000 in U.S securities in his Registered Retirement Savings Plan then its global estate is around US$ 8 million. According to existing law, its U.S estate tax would be 0 but under a new plan, it can be approx. US$ 40,000.
It has been already said by Biden that he will increase United States federal corporate income tax rates from 21% to 28%.
In 2017, Trump reduced the U.S federal corporate income tax by 35 per cent to 21 per cent. In combination with state income tax, Canada’s tax rates were no longer an advantage to Canadian businesses. Corporate tax rates were almost the same between the two nations, allowing other factors important to investment and business structure decisions. Increasing U.S. income tax rates to 28 per cent federally would make Canada a more desirable business place.
Now with this scenario, the Canadian tax rates could be more eye-catching than in the United States and would result in additional corporate investment in Canada.
It is now easy for Canadian organizations to avoid U.S federal income tax under the Canada and United States tax treaty by not making permanent establishment in the United States. Though service and technology business does not require a physical U.S office and they can now have a virtual office without building a permanent establishment.
At present, United States federal personal incomes tax rates are between 10 percent to 37 percent on normal income and 0 percent to 20 percent on capital gains. But Biden has stated that he will bring some changes to this 2017 Trump tax reform and will increase the U.S federal personal income tax rates to up to 39.6%.
Just like United States corporate tax rates, when United States federal and state personal tax rates are combined and 3.8 per cent net investment income tax is applicable, this personal tax rate can rise up to 56.7% in California.
As the United States have a large economy and mild winter temperature, Canadians have loved to settle there by a more attractive income tax rate structure. Now under this Biden tax plan, the tax incentive is reduced.
Many members of Democratic Party which include Biden and Kamala Harris have supported a FTT that ranges between 0.05 to 0.1% on securities traded in the U.S
Why does it Matter?
Financial transactions tax is well known as Wall Street tax but analysts characterized it as a U.S. average tax. Both Canadian and Americans are in some way or other are involved in the stock market. Financial transactions tax will come directly or indirectly from the wallets of both Americans and Canadians.
Scenario: Canadian Employee with U.S. Investments
Now we must know that all Canadian investment plans, including Canada Pension Plan, Employer Pension Plans, Registered Retirement Savings Plans, Tax-Free Savings Plans or Non-Registered Accounts, have direct or indirect investment in U.S. securities. So this move will in surely affect the Canadian investment plans.
Biden aims to boost job (and self-employed) earnings under the U.S social security tax to more than $400,000 when compared to the current limits.
Present legislation imposes 12.4% U.S Social security tax split equally between the employee and employer on employment earnings up to $137,700. There is no Medicare tax cap of 2.9 per cent on all job earnings distributed evenly between the employee and the employer. An extra Medicare levy of 0.9 per cent applies to workers with work earnings over US $200,000 ($250,000 if they are married together). The same rates and restrictions apply to the wages of self-employed individuals.
According to the present legislation, anyone who is earning $500,000 would be subject to $18,487 of United States social security and Medicare tax. His or her employers are expected to pay less than $2,700 for the Extra Medicare Fee. Under the proposal of Biden, the U.S. Social Security and Medicare Tax will rise to $24,687, an increase of 33 per cent.