If you’re a US citizen living in Canada, it’s essential to understand the tax implications that come with your expatriate status. One particular area of concern is the Global Intangible Low-Taxed Income (GILTI) provision, which was introduced as part of the Tax Cuts and Jobs Act (TCJA) in 2017. In this blog post, we will provide a comprehensive guide to help US expats in Canada understand GILTI, its impact on their tax obligations, and how to navigate this complex tax provision.

What is GILTI?

GILTI is a provision that aims to prevent US multinational corporations from shifting their profits to low-tax jurisdictions by taxing their global intangible income. It requires US shareholders of controlled foreign corporations (CFCs) to include a portion of their CFC’s income as taxable income in the US, regardless of whether the income is distributed or not.

Key Components of GILTI

To better understand GILTI, let’s explore its key components:

  1. Controlled Foreign Corporation (CFC): A CFC is a foreign corporation in which US shareholders own more than 50% of the total voting power or value of the corporation’s stock. US shareholders can include individuals, partnerships, trusts, or certain entities.
  2. Global Intangible Low-Taxed Income (GILTI): GILTI refers to the income earned by a CFC from intangible assets, such as patents, trademarks, copyrights, or other intellectual property. This income is subject to inclusion as taxable income for US shareholders.
  3. Qualified Business Asset Investment (QBAI): QBAI is the tangible property used in the CFC’s trade or business. It serves as a threshold to determine the amount of GILTI that can be excluded from taxable income. A US shareholder can exclude a deemed return on their QBAI from GILTI calculation.
  4. GILTI Inclusion Amount: The GILTI inclusion amount is the portion of a US shareholder’s pro-rata share of a CFC’s tested income that is included in their taxable income. The inclusion amount is subject to US tax at the shareholder’s applicable tax rate, with a potential deduction available.

Impact of GILTI on US Expats in Canada

US expats in Canada who own interests in CFCs may be subject to GILTI. Here are a few important considerations:

  1. Taxable Income Inclusion: US expats who are US shareholders of CFCs must include their pro-rata share of GILTI in their US taxable income. This means that even if the income is not distributed to the shareholders, it is still subject to US taxation.
  2. Foreign Tax Credit: To avoid double taxation, US expats in Canada may be eligible for a foreign tax credit to offset the US tax liability resulting from GILTI inclusion. The foreign tax credit can be claimed for taxes paid or accrued to Canada on the same income.
  3. Impact on US Expats’ Canadian Taxes: GILTI inclusion may also have implications for Canadian taxes. US expats should consult with a tax advisor to understand the potential impact on their Canadian tax obligations, including the availability of foreign tax credits or deductions.

Compliance and Reporting Requirements

US expats in Canada who are subject to GILTI have certain compliance and reporting requirements. These include:

  1. Form 5471: US shareholders of CFCs are required to file Form 5471, “Information Return of U.S. Persons With Respect to Certain Foreign Corporations,” to report their ownership and transactions with the CFC. This form provides detailedinformation about the CFC, its financials, and other relevant information.
  2. Form 8992 and Schedule I: US shareholders of CFCs who have GILTI inclusion are required to file Form 8992, “U.S. Shareholder Calculation of Global Intangible Low-Taxed Income (GILTI),” to calculate their GILTI inclusion amount. Schedule I of Form 8992 is used to report the QBAI and other relevant information.
  3. Foreign Bank and Financial Accounts (FBAR): If the US expat has financial accounts in Canada with an aggregate value of $10,000 or more at any time during the year, they must file FinCEN Form 114, also known as the FBAR.
  4. Additional Reporting: US expats in Canada may have additional reporting requirements, such as Form 8938 (Statement of Specified Foreign Financial Assets) or Form 8621 (Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund).

Seek Professional Guidance

Given the complexity of GILTI and its implications for US expats in Canada, it is highly recommended to seek professional tax advice to ensure compliance with both US and Canadian tax regulations. A qualified tax advisor with expertise in international tax matters can help navigate the intricacies of GILTI, optimize tax planning, and ensure accurate reporting.

Conclusion

Understanding GILTI is essential for US expats in Canada who are shareholders of CFCs. It is crucial to comprehend the tax implications, compliance requirements, and available strategies to mitigate potential tax burdens.

Consulting with a tax professional experienced in international tax matters is strongly advised to ensure compliance with both US and Canadian tax laws, optimize tax planning opportunities, and achieve the most favorable tax outcomes. By staying informed and seeking professional guidance, US expats in Canada can navigate the complexities of GILTI and fulfill their tax obligations effectively.