Category: Tax

M&A / Tax

Canadian Corporations Acquiring U.S. Target Companies in Tax-Deferred Transactions: When Business Activities Outside the U.S. Matter

In transactions in which a Canadian corporation seeks to acquire a U.S. target entity for shares of the Canadian acquiror in a transaction intended to be tax-deferred for U.S. federal income tax purposes, the ability of U.S. shareholders of the U.S. target to qualify for tax-deferral may depend on the activities the Canadian acquiror conducts in Canada (or other non-US jurisdictions). Under the general rule in Code Section 367(a), if a U.S. person transfers stock in a U.S. corporation to a Canadian corporation (as characterized for U.S. federal income tax purposes), such transfer will not be characterized as a tax-deferred exchange for U.S. federal income tax purposes (even if the transaction would otherwise...

M&A / Tax

President Biden’s Made in America Tax Plan Would Treat More Cross-border Transactions as Inversion Transactions

Generally, an “inversion” is a transaction in which a non-U.S. corporation directly or indirectly acquires substantially all of the properties held by a U.S. corporation or partnership, after which the former owners of that U.S. corporation or partnership are in control of the acquiring non-U.S. corporation. Inversion transactions can take many different forms.  Over the years, inversion transactions have continually drawn scrutiny, perceived to be transactions pursuant to which a U.S. company effectively changed its domicile to a non-U.S. jurisdiction and, accordingly, reduced its U.S. income tax liability. In response, Congress enacted the anti-inversion rules under Code Section 7874 as a means of discouraging inversion transactions and preserving the U.S. tax base. Under...

Tax

Critical Reporting Obligation: Canadian-Owned U.S. Corporations and Disregarded Entities

Canadian persons and entities owning a significant interest in a U.S. corporation or U.S. entity classified as a “disregarded entity” for U.S. federal income tax purposes should ensure they are compliant with IRS Form 5472 filing requirements to avoid substantial U.S. federal income tax penalties. IRS Form 5472, “Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business” must be filed by: (i) any U.S. corporation which has a Canadian shareholder that owns, directly or indirectly, 25% or more of the voting power or value of that corporation; (ii) any U.S. entity classified as a “disregarded entity” for U.S. federal income tax purposes that...

Tax

Often Overlooked Exception to Withholding and Reporting Requirements under FATCA

An often overlooked exception to U.S. withholding taxes may result in a lower overall U.S. tax burden. The Foreign Account Tax Compliance Act (“FATCA”) was enacted in an effort to ensure that U.S. taxpayers could not avoid U.S. federal income tax on investment income through the use of non-U.S. accounts or entities. FATCA requires that certain foreign financial institutions (“FFIs”) and nonfinancial foreign entities (“NFFEs”) comply with information reporting requirements intended to identify U.S. account holders or U.S. owners. FFIs generally include banks, investment companies or similar financial institutions, and certain non-U.S. trusts while NFFEs generally include any entity that is not a financial institution. Under FATCA, a withholding agent that does not...

Tax

“ECI” and its Trap for Unwary Canadian Investors in Partnerships and LLCs

A Canadian which holds a partnership interest in a U.S. or non-U.S. partnership that has “effectively connected income” (“ECI”) is subject to U.S. tax withholding with respect to the Canadian partner’s allocable share of the partnership’s ECI.  That withholding tax must be remitted by the partnership to the IRS irrespective of whether any distributions are made by the partnership in that tax year and irrespective of the Canadian partner’s ultimate U.S. federal income tax liability for that tax year.  For this purpose, a “partnership” includes any entity classified as a partnership for U.S. tax purposes, including a limited liability company or “LLC” classified as a partnership. ECI generally includes all income from U.S....

M&A / Tax

Covid-19 Tax Relief Makes Winners out of Losses (for some)

The CARES Act, signed into law on March 27, 2020 in the wake of the onset of the Covid-19 pandemic, contained numerous changes to U.S. federal income tax law. One such change applied to the deductibility of net operating losses (“NOLs”). Legislation enacted in December 2017 commonly known as the “Tax Cuts and Jobs Act” (the “TCJA”) prohibited the carrying back of NOLs to prior tax years and limited the amount of NOLs which could be deducted in any particular tax year to 80% of a corporate filer’s taxable income. Reversing course, Section 2303 of the CARES Act delayed the effective date of certain limitations in the TCJA by allowing a corporate taxpayer’s...

Corporate / Tax

COVID-19 Delays EIN Process for Canadian Applicants

Current closures at the Internal Revenue Service (“IRS”) have caused significant delays in obtaining an Employer Identification Number (“EIN”) for some U.S. businesses formed by Canadians, including new U.S. subsidiaries formed by Canadian companies. An EIN is a nine-digit number that the IRS assigns to businesses, which is necessary for many essential tasks, including making U.S. federal tax filings, hiring employees, or opening and maintaining a U.S. bank account. Applicants with a “U.S. Responsible Party” (i.e., a CEO, CFO, or President with a U.S. Social Security Number or Individual Taxpayer Identification Number) are generally able to obtain an EIN through the IRS’ online application portal, which remains open. Most applicants lacking a U.S....

Tax

Stranded Canadians Taxed in the Time of Covid-19

As Covid-19 continues to spread, many countries, including the United States and Canada, are increasingly closing their borders in an attempt to slow the rate of infection. This precaution may, however, have unintended tax consequences for Canadians who find themselves stranded on the U.S. side of the border for the duration of the shutdown. Under the substantial presence test, Canadians who are present in the United States for at least 31 days during the current year, and 183 days in the aggregate during the current calendar year and the two preceding calendar years, will be considered U.S. residents for U.S. federal income tax purposes. Specifically, this three-year test is calculated by adding: (i)...

Benefits / Tax

Reviewing Compensation Arrangements for Employees Subject to U.S. Income Tax Before Year-End Could Avoid Costly Tax Penalties

We have written about this in the past [here], but the message bears repeating each year. It is easy to overlook that employment agreements, change-in-control agreements, and severance agreements with U.S. taxpayers frequently contain provisions that subject them to U.S. Internal Revenue Code Section 409A (“Section 409A”), and failure to comply can result in onerous tax penalties. However, to the extent that rights under such agreements are not yet vested, it may be possible to correct them before year-end without penalty. Even if rights under an agreement are vested, in some cases correction is available with payment of reduced penalties under IRS correction programs. It is important to remember that U.S. residents, and U.S....

Benefits / Tax

Tax Reform to Impact Compensation Deduction Claimed by Foreign Private Issuers

While the recently enacted U.S. tax reform legislation did not overhaul executive compensation to the extent proposed in early forms of the bill, Section 162(m) of the U.S. Internal Revenue Code was dramatically revised in a way that affects Canadian companies that file reports with the SEC and that employ, or may in the future employ, executives in the United States. Previously, Section 162(m) limited the amount of compensation that an SEC reporting company that was a “domestic issuer” for securities law purposes, or its subsidiaries, could deduct with respect to its most senior executives. Important for many of our Canadian clients, we believe that under the rule changes, U.S. tax deductions for...