Canadians who invest and operate in the U.S. through passthroughs will be affected by new U.S. tax reform changes.
KPMG has released a handy reference guide that outlines how passthrough businesses will be affected by the new U.S. tax law. Affected Canadian taxpayers can use this guide to determine how their investments may be affected by new U.S. changes, including dealing with related-party benefits, repeal of the technical termination provisions and the application of the new interest expense limitation rules for partnerships.
Related party payments to hybrid entities or in hybrid transactions
The new U.S. tax changes may deny the tax benefit for related-party payments in a hybrid transaction, or to or from a hybrid entity. Cross-border structures commonly include hybrid entities (i.e., entities that are viewed as passthrough entities by either Canada or the U.S. and as a taxable entity by the other country).
Technical termination provisions
The new U.S. tax changes repeal the partnership technical termination provisions, which may affect merger and acquisition (M&A) transactions. Previously under these provisions, triggering a taxable year-end following certain ownership changes could be favorable depending upon the specific facts and circumstances. As a result of these changes, the deal documents in M&A transactions will likely need to be updated to remove language specifying the requirement to and responsibility for filing returns and making elections.
Interest expense limitation
A significant change of the new U.S. law that will affect most business taxpayers is the limitation on interest expense deduction to 30% of adjusted taxable income for both third party interest and related party interest. The guide explains how this limitation and the carryforward rules apply to partnerships and their partners, as well as the election available to certain businesses to elect out of these rules.
For more information, contact your KPMG adviser.