US Cross-Border Tax Blog

Published by W.L. Dueck LLP

Warren Dueck

Trump’s Tax Plans

Donald Trump’s surprise election win has people wondering about his tax plans. Many things said on the campaign trail never result in any change.  To achieve any of his tax plans, Trump will need the cooperation of Congress, including those he likely alienated, if not excoriated during the campaign.

Trump has made the common but elusive, if not contradictory promises of tax relief for the middle class, simplification of the tax code and growing the economy without adding debt or increasing the deficit. They give rise to a broad set of proposals for both individuals and businesses. The latter is the area where he may have Democratic support but his own supporters want tax relief for both.

US Income Tax on Married Couples

Trump would eliminate US income tax on married couples jointly earning $67,000 ($33,500 for singles) (all amounts in C$) eliminating 75 million households from US income tax rolls or about 50% of all taxpayers. The expected saving would average $1,300 for each taxpayer affected. Canada exempts taxpayers with less than $11,474 from tax and filing income tax returns.

Reduce the Number of US personal tax Brackets

During the campaign Trump said he will reduce the number of US personal tax brackets from seven ranging from 10% to 39.6% to three ranging from 12% to 33%. Canada has five personal tax brackets federally ranging from 15% % to 33%. When BC provincial income tax is added in the top tax rate is 47.7%. In contrast, Washington does not have a state income tax.

Married filers in the US would only hit the current top marginal US federal income tax rate of 39.6% when their joint taxable income exceeds $622,600. Residents of BC hit the top marginal tax rate of 47.7% at $200,000 of taxable income and are not allowed to file jointly with their spouse.

Elimination of US Federal Estate Tax

Trump also proposes to eliminate US federal estate tax with tax rates currently ranging up to 40% on a decedent’s net worth. There has been no indication whether the elimination of US estate tax would also eliminate US federal gift tax which applies to transfers made during an individual’s lifetime. Canada does not have an estate or gift tax. It subjects a decedent’s unrealized appreciation to income tax on death.

Reduction of US Federal Corporate Tax Rates

Trump would reduce US federal corporate tax rates from 35%, one of the highest tax rates in the developed world, to 15%, one of the lowest. When state income tax rates are added, the effective combined corporate tax rate in the US would be approximately 20%. In contrast, the top marginal corporate tax rate in BC is 26% including both federal and provincial taxes.

Repatriation of Offshore Earnings

A big issue for US multinationals would be Trump’s plan to allow them to repatriate offshore earnings on a one-time basis for a US tax rate of 10%. Apple, Google and others have left over $3 trillion in earnings offshore to defer payment of US tax at rates up to 35%. Canada does not generally tax the repatriation of offshore earnings.

What About US Citizens Resident in Canada?

None of Trump’s plans speak to the issues of US citizens resident in Canada who are required to file US and Canadian tax returns with conflicting and complex requirements associated with them. Existing US law may have adverse US tax implications for US citizens in Canada who hold Canadian mutual funds, Registered Educational Savings Plans, professional corporations and other common Canadian investment vehicles.

One issue that would be of interest to many Americans living in Canada is Trump’s plan to eliminate Obamacare. Its passage included an additional 3.8% Net Investment Income Tax on investment income that cannot be offset by Canadian tax paid on the same income. This tax results in double taxation which is not protected by the Canada-US tax treaty. Many high-income Americans have a US tax liability even though they have no US source income and their Canadian tax exceeded their US tax.

Trump’s ability to pass any of these plans through Congress will likely require a different set of skills than he showed on the campaign trail and plot lines which will make the House of Cards look like a tea party.

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