Outbound U.S. Planning and Immigration Cross-border Tax Planning - PowerPoint PPT Presentation

Outbound U.S. Planning and Immigration

Cross-border Tax Planning Considerations Tax Cuts and Jobs Act (“ TCJA ”) business tax rate changes: • U.S. corporate federal tax rate: flat 21% federal. • U.S. state corporate tax rate varies e.g. 8.84% in CA, 5.5% in FL. • Canadian federal corporate tax rate: 15% or 9% for small business rate. • U.S. and Canadian corporate tax rates are now pretty much the same depending on state. Business friendly tax incentives: • Foreign Derived Intangible Income (“ FDII ”) under Code Section 250, gives corporations a deduction on income from sales they make to foreign persons or for foreign use. Effective tax rate on FDII is 13.125% for 2018-2025, increased to 16.406% after 2025. • Deduction for most investments in new or used capital assets that have a depreciation recovery period of 20 years or less. Full deduction for qualified property placed in service before 2023, but it is scheduled to be reduced by 20% per year from 2023 through 2026, and fully phased out by 2027. • New deduction for qualified business income (QBI) under Code Section 199A. Generally, income from a pass- through entity (or sole proprietorship) may be entitled to a deduction equal to the lesser of the deductible amount of QBI (generally 20% subject to wage limitation) or 20% of taxable income.

Business Considerations - Non-Corporate Structure • Investment Cost ‒ Relatively low investment cost for sole proprietorship as no formal entity required. ‒ Limited partnership involves forming a company to act as the general partner and drafting limited partnership agreement reflecting U.S. partnership tax principles. • Liability Concerns ‒ Sole proprietorships offer no liability protection and limited partnerships aren’t perfect. • Complex Tax Compliance ‒ Sole proprietorships require the proprietor to file an individual U.S. tax return and claim a foreign tax credit in Canada. ‒ A partnership is required to file a U.S. partnership return, make quarterly tax remittances or income allocated to non-U.S. partners and then each partner must file their own U.S. tax return reporting their share of the income. This income is also reported on the partner’s Canadian tax return and foreign tax credits are available to eliminate double taxation.

Business Considerations - Corporate Structure • Investment cost ‒ Relatively higher investment cost as formal entity required and ongoing maintenance. • Liability is isolated in the U.S. corporation. • Relatively simple tax compliance. • If U.S. rates are comparable to Canadian rates there is little incentive to strip out income through interest, royalties or management fees – this drives down the risk profile. • Dividends paid out of active business earnings to Canco generally flow back tax free subject to a 5% U.S. withholding tax. • Foreign Accrual Property Income rules may apply to passive investments in a U.S. Corporation. • Such dividends are added to Canco’s general rate income pool (“ GRIP ”) which means “low” rate eligible dividends can be paid to Canco’s shareholders.

Personal Investment In U.S. Pass-through Prior Law U.S. personal tax (39%+State) $45 Canadian personal tax: Basic tax owing $48 Less foreign tax credit ($45) Canada Tax payable $ 3 United States Global tax payable $48 New Law U.S. personal tax (37%+State) $43 Canadian personal tax: . Basic tax owing $48 U.S. Sole U.S. . Partnership Proprietorship Less foreign tax credit ($43) Tax payable $ 5 Earns $100 of net income Global tax payable $48 No difference to status quo.

Corporate Investment In U.S. Pass-through Prior Law U.S. corporate tax (35%+State) $40 U.S. branch tax ($60 @ 5%) $3 Canco’s Canadian tax implications as follows: Basic tax owing $27 Foreign tax credit ($27) Canadian corporate tax payable $0 Distributable cash to Canadian individual $57 Canco Personal tax on eligible dividend @ 32% $18 Global tax payable $61 Canada New Law United States U.S. corporate tax (21%+State) $26 U.S. branch tax ($74 @ 5%) $ 4 Canco’s Canadian tax implications as follows: Basic tax owing $27 U.S. Sole U.S. Sole U.S. U.S. Proprietorship Proprietorship Foreign tax credit ($27) Partnership Partnership Canadian corporate tax payable $0 Earns $100 of net income Distributable cash to Canadian individual $70 Personal tax on eligible dividend @ 32% $22 Global tax payable $52

Personal Investment In U.S. Corporation Prior Law U.S. corporate tax (35%+State) $40 U.S. withholding tax of 15% on $60 dividend ($9) Canadian personal tax on $60 dividend @48% $29 Foreign tax credit on U.S. withholding tax $ 9 Canada Global tax payable: $69 United States New Law U.S. corporate tax (21%+State) $26 U.S. withholding tax of 15% on $74 dividend ($11) Canadian personal tax on $74 dividend @ 48% $35 U.S. C Corp Foreign tax credit on U.S. withholding tax $11 Global tax payable: $61 Earns $100 of net income

Corporate Investment in U.S. Corporation Prior Law U.S. subsidiary corporate tax $40 Distributable cash to Canco of $60 Less U.S. withholding tax @ 5% $3 Canco – no corporate income tax due to surplus regime; no FTC for U.S. withholding tax. Distributable cash to Canadian individual $57 Personal tax on eligible dividend @ 32% $18 Canco Global tax payable $61 New Law Canada U.S. Subsidiary corporate tax (21%+State) $26 United States Distributable cash to Canco of $74 Less U.S. withholding tax @ 5% $4 U.S. C Corp Canco – no corporate income tax due to exempt surplus regime; no FTC for U.S. withholding tax. Distributable cash to Canadian individual of $70 Earns $100 of net income Personal tax on eligible dividend @ 32% $22 Global tax payable: $52

What About Using Debt To Strip Out Profits? Prior Law U.S. C Corp corporate tax $0 Interest paid to Canco of $100 (No U.S. withholding tax) Canco’s corporate tax after RDTOH refund: $20 Distributable cash to Canadian individual $80 Personal tax on non-eligible dividend @ 42% $34 Global tax payable $54 New Law Canco If U.S. C Corp annual gross receipts >$25 million, interest deduction limited to 30% of EBITDA. Canada U.S. C Corp corporate tax on $70 @ 26% (21%+State) $18 United States U.S. withholding tax of 5% on dividend portion ($70 less U.S. $ 3 corporate tax of $18) Canco’s corporate tax on $30 interest after RDTOH refund $ 6 U.S. C Corp Distributable cash to Canadian individual of $72 Personal tax on eligible dividend of $52 @ 32% $16 Personal tax on non-eligible dividend of $20 @ 42% $ 8 Earns $100 of net income Global tax payable $51

U.S. Immigration – Introductory Concepts • Visa v. Status. • Adjudicating/Controlling Agencies. ‒ Department of State (“ DOS ”). Embassies/Consulates. o ‒ Department of Homeland Security (“ DHS ”). U.S. Citizenship and Immigration Services (“ USCIS ”). o U.S. Customs and Border Protection (“ CBP ”). o U.S. Immigration and Customs Enforcement (“ ICE ”). o ‒ Department of Justice (“ DOJ ”). Board of Immigration Appeals (“ BIA ”). o ‒ Department of Labor (“ DOL ”). Employment and Training Administration (“ ETA ”). o

U.S. Immigration – Business Utilization B-1 - Business Visitor: • Generally Permissible Activities – meetings, conferences, trade shows, contract negotiations. • Exceptions – Expanded Permissible Activities. ‒ **Investigating Investment Opportunities. ‒ After Sales Service (NAFTA). ‒ B-1 in lieu of H-1B. ‒ Training Programs. ‒ Professional Athletes. ** Utilized for start-up activities prior to E-2 or L-1

U.S. Immigration – Business Utilization – Cont’d TN – NAFTA Professionals: • Nonimmigrant visa category permitting citizens of Canada and Mexico to work in the US in prearranged business activities for U.S. for foreign employers. • 60+ NAFTA Professional Categories, including: ‒ Accountant, Architect, Computer Systems Analyst , Disaster Relief Insurance Claims Adjuster, Economist, Engineer, Forester, Graphic Designer, Hotel Manager, Industrial Designer, Interior Designer, Land Surveyor, Landscape Architect, Lawyer, Librarian, Management Consultant , Mathematician, Range Manager, Range Conservationist, Research Assistant, Scientific Technician/Technologist , Social Worker, Sylviculturist, Technical Publications Writer, Urban Planner, Vocation Counselor, Dietitian, Dentist, Medical Laboratory Technologist, Nutritionist, Occupational Therapist, Pharmacist, Physician, Physical Therapist, Psychologist, Recreational Therapist, Registered Nurse, Veterinarian, Agriculturist, Animal Breeder, Animal Scientist, Apiculturist, Astronomer, Biochemist, Biologist, Chemist, Dairy Scientist, Entomologist, Epidemiologist, Geneticist, Geochemist, Geologist, Geophysicist, Horticulturist, Meteorologist, Pharmacologist, Physicist, Plant Breeder, Poultry Scientist, Soil Scientist, Zoologist, Teacher.