What Canadian businesses need to know about the candidates and their tax platforms
To say that the past three years have been significant for US tax law and the US economy is likely an understatement. In late 2017, the Tax Cuts & Jobs Act (TCJA), the largest overhaul of the US tax system since 1986, was enacted into law. The TCJA, designed to bring jobs and money back to American soil, introduced major tax cuts that would increase the deficit by $1 trillion over a decade. Just over two years later, the world was taken by surprise with the COVID-19 pandemic, resulting in the US introducing its largest-ever economic stimulus package, with over $2 trillion of incentives aimed at providing critical assistance to the US economy during this time of global uncertainty.
Tax policy and economic recovery are at the forefront of the issues debated in this November’s presidential election. The Republicans, under President Trump, and the opposing Democratic Party, under nominee Joe Biden, have differing views on what the path to economic recovery will be—and those differences extend to their positions on US tax policy. As US tax law has often dictated the way Canadian businesses structure their US operations, Canadian businesses should familiarize themselves with each party’s position on US taxes and what a win by either side could mean for their operations and activities south of the border.
Trump 2.0 = Tax Cuts 2.0?
President Trump has been alluding to future tax cuts for the better part of the year, teasing a “Tax Cuts 2.0” package that would make many of the original TCJA tax breaks permanent and offer further or long-term tax reductions for US taxpayers. Here is a summary of the Republican tax platform and how it pertains to Canadian businesses with US activities:
- No change to the 21% corporate tax rate. US tax reform reduced the overall US corporate tax rate from 35% to 21%. This reduction put a taxpayer’s overall US federal and state tax rate on par with, or sometimes even better than, the Canadian federal and provincial combined rate. A Trump victory could mean maintenance of the status quo and overall tax rate certainty for Canadian businesses with US operations.
- Extension of bonus depreciation provisions. The TCJA provided for 100% expensing of US-based capital asset additions through 2022, after which bonus depreciation is to be phased out 20% per year over five years. The Republican’s tax cuts 2.0 package would result in the extension of 100% expensing provisions through 2025 or longer. These provisions provide incentive for Canadian businesses to expand in the United States by allowing full expensing of many of their costs of expansion south of the border.
- Extension of the Foreign Derived Intangible Income (FDII) tax deduction at its current rate. Beginning in 2018, US corporations became eligible for a deduction that reduces the overall effective federal tax rate on sales and services sold to foreign persons from 21% to 13.125%. The mechanism for the deduction is set to change in 2025, increasing the effective rate on this income to 16.4%. The Republicans would like to extend the current FDII rules through at least 2025, thereby giving US taxpayers a bigger tax break on US exports. This deduction could provide significant tax savings for Canadian businesses looking to expand into the United States post-COVID-19.
Overall, a Trump win would provide more certainty for Canadian businesses with US activities as the current tax rates and incentives would remain in place for the foreseeable future. This would allow Canadian businesses to continue with the status quo or ramp up their US expansion plans without fear of repeal of the current favourable US tax rates.
It’s also worth noting that the Republican’s tax plan includes significant individual tax cuts as well, including permanently keeping the current top rate of 37% and reducing the top capital gains rate to 15% from 20%. President Trump has also been in favour of a permanent repeal of the US estate tax.
Joe Biden: Course correcting the tax burden
A Joe Biden win would likely represent a dramatically different view of US tax policy compared to a Republican win. If voted into office, the Democrats have stated that they plan to change the current course of tax policy by requiring corporations and the wealthiest Americans to “finally pay their fair share” of taxes. Candidate Biden has indicated that individuals making under $400,000 USD per year will not pay a penny more in taxes. Consequently, the revenue raisers in this plan are more focused on corporations and wealthy individuals. The Democratic Party’s primary corporate tax measures include:
- Raising the corporate income tax rate from the current 21% to 28%. This increase would make the US corporate income tax rate, when including the state tax rate (ranging from 2.5% to 12%), greater than the Canadian federal and provincial combined rates. This increase should still be better for Canadian businesses with US operations than the pre-TCJA top federal rate of 35% plus state tax.
- Proposing a new alternative minimum tax (AMT) based on book income. The introduction of a 15% minimum tax on companies reporting more than $100 million in profits in the United States but that have paid zero or negative federal income taxes. This AMT would operate very differently than the prior AMT that was repealed as part of the TCJA.
- Creating a “Made in America” tax credit. The Democratic plan is also focused on job creation in the United States, including the reopening, retooling or expansion of US manufacturing facilities, as well as the costs related to bringing overseas jobs to the United States. As part of this, the Democrats are introducing a 10% advanceable credit, meaning taxpayers can claim it immediately upon incurring an expense rather than waiting to file annual tax returns to receive the benefit. It also includes a 10% offshoring penalty surtax on profits from any production by a US company overseas for sale on American soil. This penalty would bring the overall tax rate on offshore profits to 30.8%.
- Eliminating bonus depreciation provisions. The Candidate Biden proposal would look to repeal the 100% expensing of US-based capital asset additions.
The Democrats also have various provisions around individual tax. Most notably, their plan would increase the top federal rate from 37% to 39.6%. In addition, the capital gains tax rate for people making more than $1 million could increase from 20% to the 39.6% (plus the 3.8% net investment income tax) under these proposals. For estate tax, the Democrats support the elimination of stepped-up basis rules that allow people to pass capital gains to heirs without tax at death, and to return the estate tax to its “historic norms”.
US tax legislation 101
The US tax policy changes would need to follow the legislative process. At a high level, all US tax legislation begins as a bill in the Ways and Means Committee in the US House of Representatives. Once passed, the bill continues to the US Senate, where it must also pass a vote. It should be noted that the version of the bill voted on by the Senate may be drastically different than the version voted on in the House. Following the Senate’s approval, the tax bill generally must go to the joint committee of the House and Senate to make changes both will agree to. That bill is then approved by both the House of Representatives and the Senate. If passed by both, the bill goes to the President to sign into law, which the President can either sign or veto.
Keeping that framework in mind, it is important to note that regardless of who wins the election, we also need to closely monitor the US Congressional elections. US tax law change would have to first be approved by both the House of Representatives, currently held by the Democrats, and the US Senate, currently held by the Republicans. That makes tax law changes much more likely if the same party holds the majority in the House, Senate and the oval office.
For more details, here’s a comprehensive overview of both candidates’ tax platforms. Regardless of this November’s outcome, there could be changes on the horizon for the world of US tax. Canadian businesses should stay tuned to see how their business operations will be impacted. Our team will keep you updated as developments occur.