In the face of sending the United States over the much-publicized “fiscal cliff,” the US Senate hammered out a tentative deal before midnight on New Year’s Eve.
What are these changes and how will they impact Canadian businesses in the U.S. or vice versa? Below are a few notable areas where you will see changes.
Canadian Employers Sending Employees to the US
A new top tax bracket of 39.6% applies to:
- Individuals earning more than $400,000 a year
- $450,000 for joint filers
- $425,000 for heads of households.
- Dividends and capital gains are taxed at 20% for individuals earning at least $400,000, or $450,000 for joint filers. This is in addition to the 3.8% Medicare tax.
This may force employers to alter compensation to employees.
US Employers Sending Employees to Canada
The change in rates noted above may alter any equalization payment with the employee.
Athletes and Entertainers Working in Both The US and Canada
The tax rate increase on ordinary income will significantly impact the professional athletes and actors working on both sides of the border.
New laws extend the $5.12 million exemption amount and this amount will be adjusted for inflation. Therefore, if a Canadian owns US assets (real estate or US securities) worth more than $60,000, and dies with worldwide assets valued in excess of $5 million, there will be US estate tax payable. The maximum tax rate will increase to 40%.
There’s no change to The Gift Tax exemption. It remains at approximately $5 million (indexed for inflation).
Income and Capital Gains Tax
Canadian residents are taxed on their worldwide income. Any US sourced income will be added to existing Canadian income and taxed at a relatively high marginal rate.
Canada will allow a foreign tax credit for US taxes paid. Since the US marginal rates will be lower than the Canadian marginal rate on the same income, the increased US tax rates will have little impact.
However, an increased US tax rate on long-term capital gains may be felt in Canada. If state level tax is applicable, the US capital gains tax may exceed the amount owed in Canada, resulting in a higher overall tax burden.
The Bottom Line
It’s still unclear if the recent changes in the US force Canada to increase the top marginal rates?
The recent US changes appear to be the tip of the iceberg. Revenue shortfalls still need to be addressed. Perhaps new legislation will target corporate tax loopholes and include additional limitations on certain itemized deductions.