New Canadian tax changes may be coming later this month to respond to recent U.S. tax reform
Finance Canada has announced it will deliver its Fall Economic Update on November 21, 2018, where it has been widely speculated that new measures will be proposed to address the sweeping tax changes enacted by the United States at the end of 2017. Many of these U.S. tax changes also significantly affect Canadian companies doing business in the United States.
Canada previously indicated in its 2018 budget that it intends to conduct a detailed analysis of the U.S. federal tax reforms to assess any potential impacts on Canada. Although it's not yet certain what new changes Finance Canada may introduce in its Fall Economic Update, it is likely considering amendments to some of the areas that have been most affected by the U.S. changes.
The U.S. tax changes include substantial amendments to the taxation of businesses in all industries (including multinational enterprises), individuals and other taxpayers (see TaxNewsFlash-Canada 2017-68, "U.S. Enacts Tax Changes"). Highlights of these measures include the following.
Corporate tax — The United States permanently reduced in the corporate tax rate to 21%, repealed the corporate alternative minimum tax (AMT), changed the rules to allow immediate expensing of certain capital investments placed in service after September 27, 2017 and before 2023, and limited the deduction for interest expense, among others.
Hybrid limitations — The United States introduced new rules that affect structures commonly used by Canadian multinationals to finance their U.S. operations, such as "repo" transactions and transactions involving 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). The new rules no longer allow a deduction for related-party interest or royalties paid or accrued in connection with certain hybrid transactions or by/to hybrid entities, to the extent that the related party does not have a corresponding inclusion, or is allowed a deduction, under foreign tax law with respect to the amount paid.
Hybrid territorial system — As part of its tax reform, the United States introduced changes to the taxation of U.S. multinational entities, including a shift from the current system of "worldwide" taxation with deferral to a "hybrid territorial" system. This system features a participation exemption regime with current taxation of certain foreign (i.e., non-U.S.) income, a minimum tax on low-taxed foreign earnings (i.e., non-U.S.), and new measures to deter base erosion.
Passthrough entities — The United States introduced a new deduction for certain individuals, trusts, and estates with respect to qualifying income of passthrough entities and sole proprietorships.
When Finance Canada introduces the new Fall Economic Update measures on November 21, 2018, it may address some of these measures that have affected the international taxation of Canadian companies. Whatever tax changes (if any) are ultimately announced, your KPMG adviser can help you understand their effect on your personal finances or business affairs. You will be able to find the latest information and insights on the Fall Economic Update from your KPMG adviser and on our website.
Information is current to November 13, 2018. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500