Recent tax reforms proposed by the administration of U.S. President Donald Trump could have an impact on some of your high net-worth clients – particularly those who live in the U.S., own property in the U.S. or are U.S. citizens living in Canada.

Although the net effect of the changes is expected to be positive for affected clients, any tax planning for these clients should be flexible to accommodate the proposed changes, says Jason Ubeika, partner and U.S. personal tax practice leader with BDO Canada LLP in Mississauga, Ont.

“The biggest reform proposed is the repeal of the U.S. estate tax,” says Jamie Golombek, managing director, tax and estate planning with the wealth strategies group at Canadian Imperial Bank of Commerce in Toronto. Although most clients won’t have to worry about the estate tax, the proposed changes could affect some high net-worth clients.

U.S. citizens, including those who reside in Canada, are subject to estate taxes of 18%-40% on their worldwide assets that exceed US$5.49 million.

“For Canadians, however, the estate tax is applicable to only their U.S. situs assets, which include U.S. real estate and U.S. marketable securities,” says Terry Ritchie, director of cross-border wealth services with Cardinal Point Capital Management LLC in Calgary.

A repeal of the U.S. estate tax would eliminate the need for Canadians who may have been subject to the tax to take steps to reduce or avoid it, says Scott Dupuis, managing partner, tax, with Collins Barrow Windsor LLP in Windsor, Ont.

“Non-U.S. residents, including Canadians, who hold property situated in the U.S. are taxed on the fair market value of their property,” Ubeika says.

The proposed U.S. tax reforms include a repeal of the alternative minimum tax (AMT), a provision put in place to ensure that high-income earners pay a minimum amount of taxes, regardless of deductions and loopholes that they take advantage of to avoid paying taxes.

“American persons living in Canada who have moderate to high income levels are subject to AMT annually, even if most or all of their income is from Canadian sources,” Ubeika says. “For these clients, the AMT is not creditable against Canadian taxes. So, a repeal of the AMT would represent a reduction in their overall tax burden.”

This proposal recommends leaving the capital gains tax unchanged. That’s good news for Canadians, Ritchie says, especially snowbirds who might sell their U.S. properties. For single clients, there are no capital gains taxes on gains up to US$37,500; then, a 15% tax on gains between $37,500 and $112,500, and a 20% tax on gains above $112,500. For married clients, the dollar amounts beyond which the capital gains tax is applied are doubled to $75,000 and $125,000, respectively.

Reforms are proposed for a range of individual and corporate taxes, which may have limited impact on Canadian clients.

If you have clients who are U.S. citizens and pay U.S. income taxes, you should be aware of the proposed reduction in the number of tax brackets to three from seven. The tax rate on the lowest bracket will increase to 12% from 10% ; the middle bracket will be 25%; and the highest tax bracket will drop to 35% from 39.6%. The U.S. government may create a fourth tax bracket, which would carry a still higher tax rate.

There also is a proposal to almost double the personal tax-free deductions from gross income – to $12,000 from $6,300 for single people and to $24,000 from $12,600 for married couples.

“Lower [income] taxes would impact American persons living or working in Canada, as well as Canadian residents working in the U.S., who may benefit from paying less taxes,” Ubeika says. “But given that worldwide income is taxed in Canada, that benefit may be mitigated or eliminated. When income is taxed in both Canada and the U.S., the foreign tax credit mechanism conceptually results in [the person] paying the higher of the Canadian and U.S. taxes on any given item of income.”

So, Ubeika says, if your client’s average Canadian tax rate is higher than his or her average U.S. tax rate, a reduction in the average U.S. tax rate won’t result in any net tax savings.

For businesses-owner clients, the new top tax rate for small businesses would be 25%, while the tax rate on corporations would drop to 20% from 35%. Lower business taxes in the U.S., when weighed against increasing tax pressure on Canadian private corporations, Golombek says, “could very well result in Canadian professionals choosing to set up shop in the U.S.”

The U.S. House and Senate tax writing and legislation committees must approve the proposed changes in order for them to come into effect.

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