Departure Tax challenges
Moderator: Mark T Serbinski CA CPA
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Departure Tax challenges
I have a Canadian professional corporation with retained earnings. Don't think lots of good will but have cash and stocks. Moved down to Florida with my wife and kids on a temporary work visa this year. I understand that there are two general approaches to take. 1. dividend out my company over the next few years and then depart. 2. depart now and post my shares as security to CRA to defer the tax. The later approach seems better since dividend tax is very high. And with the time value of money, if I never sell the company I won't have to pay the tax. Question is what is the likelihood CRA will accept my private shares as security?
If you are living and working in US with your family, you don't have much choice as to whan you departe. Since you meet SPT and the treaty definition of US residence (a) CRA will DEEM you non-resident, triggering immediate deemed disposition anyways, and your copr loses CCPC status (b) there will be a mismatch in your incomes for foreign tax credit purposes (others will no doubt explain).
So you may not have much choice at all. Wind-down or sell.
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So you may not have much choice at all. Wind-down or sell.
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nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
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The link I posted above discusses adequate security., which in answer to your specific question, would appear to be positive. they will accept your private shares (or a portion of them ) as security, with some restrictions.
But, as to your other point -- and I maty be wrong -- I think there is some disadvantage to keeping you Cdn corp as a residnt of US. That is why it is best to wind-down or sell before becoming a US residenty (but that ship may have sailed already).
I do agree with yourassessment that winding down is costly -- and it may be even more so once you are US resident, because of foreign tax mismatch.
But, as to "holding" the firm while in US, others, like JGCA might have a better understanding of what you can and cannot do, and what tax liability you may be creating, or devaluation of your corp that you might be causing.
But, as to your other point -- and I maty be wrong -- I think there is some disadvantage to keeping you Cdn corp as a residnt of US. That is why it is best to wind-down or sell before becoming a US residenty (but that ship may have sailed already).
I do agree with yourassessment that winding down is costly -- and it may be even more so once you are US resident, because of foreign tax mismatch.
But, as to "holding" the firm while in US, others, like JGCA might have a better understanding of what you can and cannot do, and what tax liability you may be creating, or devaluation of your corp that you might be causing.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
There is also the stop-loss rules which may prevent you from winding down as non-residents, since you would get a favourable dividend rate over the cap gains you would normaly have paid. Section 40(3.7) comes into play.
Very messy.
Very messy.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
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Thanks for the feedback. You can keep operating your Canadian corp but not as a CCPC and you won't therefore get the benefits. But since there is a tax treaty you will be eligible for tax credits in most cases. The importance of departing is that if you continue to build your wealth, anything accumulated post-departure would not be subject to capital gains.
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Once you leave canada as you know you will have a deemed dispostion at FMW of your shrs in your CCPC that basically will equal at least to the retained earnings on hand plus any other items such as goodwill etc.
You could elect to however the deemed proceeds to occur and them claim your small business capital gain exemption on this sale so it would be tax free as long as its under $ 750K and it meet the qualifying requirements.
The advantage is no tax ( but may have sizabale AMT tax owing in Canada of which you will not get back as a non resident) but you get no step up in the US on this and you use up the exemptipn in Canada so it has no relief to you in the US.
You could dividend out before you leave take advantage of say the dividend tax credit in Canada and low corp tax rate this will lower the FMW on the departure tax.
Or you could post security ( not easy on CCPC shrs) move to US then receive the proceeds as dividends subject to Part 13 tax witholding and the corp will no longer benefit from the say 20% small bus tax rate but pay tax on the full corp tax rate, also note the day you leave Canada you no longer get to enjoy and refundable dividend tax rate addition to future RDTOH ( this may or may not be an issue) but you also have a deemed year end tax return to file the day before you leave Canada your year end is deemed to have been triggered and T2 must be filed this will accelerate any loss carry forwards or other accounts just like a normal year end filing would.
You will find that you can not easily build up money in a CCPC once you leave Canada since the small bus tax rate is no longer available you will be paying corp tax of around 30% plus 15% with tax on dividends even with the FTC in US on the personal side how would you accumulate wealth to defeat the 25% tax on capital gains its not possible.
My advise dividend out before you leave this way you lower the FMW no departure tax and leave the corp inactive or at least if you do activity its only on future earnings.
You could elect to however the deemed proceeds to occur and them claim your small business capital gain exemption on this sale so it would be tax free as long as its under $ 750K and it meet the qualifying requirements.
The advantage is no tax ( but may have sizabale AMT tax owing in Canada of which you will not get back as a non resident) but you get no step up in the US on this and you use up the exemptipn in Canada so it has no relief to you in the US.
You could dividend out before you leave take advantage of say the dividend tax credit in Canada and low corp tax rate this will lower the FMW on the departure tax.
Or you could post security ( not easy on CCPC shrs) move to US then receive the proceeds as dividends subject to Part 13 tax witholding and the corp will no longer benefit from the say 20% small bus tax rate but pay tax on the full corp tax rate, also note the day you leave Canada you no longer get to enjoy and refundable dividend tax rate addition to future RDTOH ( this may or may not be an issue) but you also have a deemed year end tax return to file the day before you leave Canada your year end is deemed to have been triggered and T2 must be filed this will accelerate any loss carry forwards or other accounts just like a normal year end filing would.
You will find that you can not easily build up money in a CCPC once you leave Canada since the small bus tax rate is no longer available you will be paying corp tax of around 30% plus 15% with tax on dividends even with the FTC in US on the personal side how would you accumulate wealth to defeat the 25% tax on capital gains its not possible.
My advise dividend out before you leave this way you lower the FMW no departure tax and leave the corp inactive or at least if you do activity its only on future earnings.
JG
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I agree with you, the article I posted shows that while it is not obligatory that CRA accept those shares a s security, they often do, and protect themselves against devaluation by the stop-loss rules.
But JGCA is correct in suggesting you should be divesting asap.
But JGCA is correct in suggesting you should be divesting asap.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing