Four Key Changes to U.S. Tax Rules Affecting Cross-Border Strategies

The passing of U.S. tax reform late in 2017 requires a major reset on how U.S. / Canada cross-border planning is accomplished to mitigate impacts on corporations. Highlighted below are four changes to U.S. corporate tax law that will impact business with cross-border interests beginning in 2018. 

• U.S. Corporate Tax Rate

The U.S. corporate tax rate has been permanently reduced from 35 percent to 21percent and the corporate alternative minimum tax has been eliminated. Should a Canadian business be incorporated as a U.S. corporation given the change in tax rates? Is a U.S. corporation now more able to attract U.S. venture capital than a Canadian corporation?

• Net Operating Loss Limitation

Net operating losses (NOL) generated in 2018 and beyond, when carried forward to a subsequent year, may not be used to offset more than 80 percent of taxable income. NOLs generated in 2018 and beyond may no longer be carried back and may be carried forward indefinitely. 

• Immediate Expensing

Immediate, full expensing of expenditures on qualifying property (generally tangible property) apply to new and used property, with a phase out beginning in 2023.

• Interest Deductibility

Business interest deductions are now limited to 30 percent of adjusted taxable income, down from 50 percent in 2017 and prior years, without any debt-equity safe harbour. Unlike in prior years, the new limitations apply to all business interest. Interest not allowed as a deduction is carried forward indefinitely (but is subject to the limitation following an ownership change). 

Impact of Changes

Historically, the value of a U.S. tax deduction was, all other things being equal, greater than a Canadian tax deduction. Cross-border arrangements and payments reflected this simple reality. Although all other U.S. taxes need to be factored in, these U.S. domestic tax changes should invite Canadian business operating in the cross-border space to rethink their cross-border arrangements from the ground up. In some cases, there will be no action required but, in others, unwinding existing structures may be needed.

The combined effect of immediate expensing and the NOL limitation should mean that U.S. corporate taxpayers focus on "matching" current year expenses with current year income, given that any excess expenses will become a NOL that is subject to the 80 percent limitation noted above. U.S. corporate taxpayers (including U.S. branches of Canadian companies) that are able to achieve matching should enjoy a lower long-term effective tax rate. This matching strategy will depend on the ability of taxpayers to accelerate / decelerate items of expense – this may be more applicable to Canadian-based companies than to purely U.S. domestic corporations.

For more information on how MNP can help, contact Gerard Roddis, CPA, CA, at 604.853.9471 or [email protected]