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By Dan Lundenberg, BDO Canada LLP
Special to the Financial Independence Hub
For Canadian businesses that have been wanting to explore their prospects south of the border, the United States’ recent tax reforms could provide that impetus to finally make that happen.
In mid-December, the U.S. Congress agreed to aggressively cut its corporate tax rates from a maximum of 35 per cent to 21 per cent. In addition, the U.S/ reduced its top personal tax rate to 37 per cent and this can be reduced for certain owners of pass-through entities to 29.6 per cent. These changes open the door for Canadian business owners to invest or set up a shop in the U.S. without fear of higher taxation.
The U.S. tax reform comes on the heels of the Trudeau government’s move to roll out proposed tax changes that would make it more difficult for Canadian businesses to use private corporations to be tax-efficient. After receiving backlash from small business and industry groups, Finance Minister Bill Morneau in October unveiled a gentler tax plan geared to target mainly high-income Canadians.
But still, the revised tax changes would constrain the ability of businesses to implement tax efficient structures through income “sprinkling” with family members. Using small business corporations as a vehicle for making passive investments would also be more cumbersome under proposed changes.
While Canada is making it harder for private corporations to reduce taxes on certain income, the U.S. just widely opened its door to slash taxes for private businesses. In Ontario alone, assuming profits are paid to its shareholders, an integrated top rate of 54 per cent would apply. In the U.S., the tax hit in a pass-through vehicle would only be roughly in the mid-30s, depending on the state where the business is conducted.
Winners and Losers
So, what does this new U.S. tax environment mean for Canada?
