Trump tax reform resulting in massive bills for thousands of Canadian residents

Thousands of Canadian residents are facing massive tax bills because of U.S. President Donald Trump's December tax reform, CBC News has learned.

Canadian residents with U.S. or dual citizenship who own Canadian corporations are being slapped by an American measure meant to get big U.S. multinationals to stop parking billions of dollars in offshore subsidiaries — a one-time retroactive tax being levied on all of their companies' retained earnings going back to 1986.

Tax lawyers and accountants say they are struggling to find strategies to soften the blow of what one of them calls a "nightmare" situation for their clients.

Mark Feigenbaum, who specializes in tax law and accounting, said hundreds of his clients — including celebrities and professional athletes who set up Canadian companies to handle their endorsement revenue — are facing bills of "several hundreds of thousands of dollars, if not more than a million."

It's all because of the 1,097-page Tax Cuts and Jobs Act, described as the most significant tax overhaul in the United States since 1986.

When Trump signed the bill into law on Dec. 22, he boasted that it was going to "bring back probably $4 trillion from overseas.

"Who would object to trillions of dollars being brought back into our country?"

Repatriating corporate profits

The act includes a "repatriation tax" meant to apply to the previously untaxed earnings of American firms' foreign subsidiaries. Major multinationals like Apple have been accused for years of parking profits in offshore subsidiaries to avoid paying billions of dollars in U.S. tax.

But the way the legislation was drafted has inadvertently hit Canadian residents with U.S. or dual citizenship and a Canadian corporation.

While the tax is based on a company's retained earnings, it's the person with U.S. citizenship who has to pay it. That means some might be forced to withdraw money from their Canadian companies in order to pay the U.S. tax, which would trigger a higher tax bill in Canada.

Some experts — like Kevyn Nightingale, a partner in the accounting firm MNP — said Canada is being hit harder than other countries because of the large number of U.S. citizens living in Canada, and because Canadian tax rules have made incorporation an attractive option over the years.

'It's a disaster'

"Canada happens to have a very high level of self-employment and incorporated self-employed people," said Nightingale, adding that "thousands" of his firm's clients have been affected by the tax measure. "So that makes the problem bigger in Canada, probably, than anywhere else.

"For many of my clients, it's a disaster. Unfortunately, they are collateral damage in what I think overall is a very good tax move by the United States."

​Some of those being hit are like retired Queens University professor and doctor Brian Arthur — professionals or small business operators who were using corporations to save for retirement. Arthur, a dual Canadian-American citizen, estimates the new tax will cost him between $200,000 and $300,000.

"We have spent our years planning for retirement and saving money and now it's a mess," he said.

Arthur likely will have to sell investments held by his company to pay the tax. He risks having to pay Canadian income tax on the money once he transfers it out of the company.

In Vancouver, Suzanne and Ted Herman are facing a similar tax bill. Now in their 60s, like Arthur, they have been using their company Lemonade Films to save for their retirement.

"We're not sleeping nights," said Suzanne Herman. "We discuss our options and none of them are good."

Others are looking at tax bills that run into the millions, said Beth Webel, a partner in tax services with the accounting firm PwC Canada.

"Another one came through yesterday at $4 million and I'm aware of one that's around $22 million," she said. "So, if you've got a very successful business that has been accumulating profits for a long time, the bill can be very high."

The problem, says Toronto lawyer John Richardson, is that the law was written so broadly it's hitting a lot of small players along with the giant corporations piling up money abroad.

'Yanked out from under'

"The legislation ... literally means all of these people in Canada who are deemed to be U.S. citizens under U.S. law – and understand that most of these are just Canadian citizens living in Canada – are all of a sudden … required to include in their income for 2017 all of the retained earnings of their Canadian-controlled private corporations going back to 1986," he said.

The more prudent you have been in building up a nest egg in your company, the bigger the tax bite, said Richardson.

"How would you like it if you had been careful with your money for 30-35 years ... just to have it yanked out from under you?"

Because the retained earnings have to be declared on an individual's 2017 tax return, and the tax reform was signed into law so late in the year, experts say those affected had no chance to take steps to lessen their tax exposure.

The IRS, meanwhile, has been scrambling to clarify the new rules. Those affected originally had to file their returns by April 15; they have now have until June 15. They can also elect to pay the tax over eight years.

"Even the IRS doesn't know fully how to administer this tax," said Nightingale. "They have been issuing guidance piece after guidance piece since January in order to explain to people how these things are supposed to apply."

For Canadians, ignoring the new tax and hoping the IRS doesn't notice probably isn't a good idea.

Under the Foreign Account Tax Compliance Act (FATCA), Canadian banks and financial institutions have been asking their customers and account holders whether they are U.S. persons for tax purposes for the past few years. They forward that information to the Canada Revenue Agency, which turns it over to the IRS.

Several experts said they expect a spike in the number of Canadian residents renouncing their U.S. citizenship as a result of the tax — but add that it's too late to avoid the repatriation tax.

A second tax contained in the tax reform is going to hit U.S. citizens with Canadian corporations going forward. The Global Intangible Low Tax Income tax (GILTI) will be imposed on annual income earned by "controlled foreign corporations" such as those registered in Canada.

Dan Lauzon, spokesman for Finance Minister Bill Morneau, said the federal government is studying the Trump administration's tax reform.

"The Department of Finance is conducting detailed analytical work to consider the impact of U.S. tax reform," said Lauzon. "This work is expected to take several months."

Applying the tax treaty

Meanwhile, Lauzon said those affected by the tax reform should consult a professional familiar with U.S. tax law.

Officials from the U.S. Embassy referred CBC News' questions to the U.S. Treasury Department, which has not yet responded.

Webel said the Canadian government should look to the Canada-U.S. tax treaty for possible solutions.

"Usually when you have double tax, we would go to the Canada-U.S. (tax) treaty and say somehow, somebody's got to give some relief here."

Richardson said the new tax violates the spirit of that treaty.

"The government of Canada absolutely needs to get involved in this because this is not only the protection of Canadian citizens, this is protecting the economic sovereignty of Canada.

"You can't let another country come in and raid the country's pension plans."

Elizabeth Thompson can be reached at elizabeth.thompson@cbc.ca