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GILTI Relief for US Individual Taxpayers

The Internal Revenue Service (IRS) has finally released proposed regulations that permit US individual taxpayers who own a controlled Canadian corporation to claim a 50% deduction against their global intangible low-taxed income (GILTI). This becomes an option when the US individual elects to be taxed “as if” they own a US domestic corporation (known as the Section 962 election).  Prior to the proposed regulations, the deduction was available only to 10% shareholders that are US domestic corporations.

Congress enacted Section 962 to ensure that an individual’s tax burden with respect to undistributed foreign earnings of controlled foreign corporations “will be no heavier than they would have been had they invested in an American corporation doing business abroad.”  The regulations are consistent with Congress’ intent to ensure that the tax burden is no greater than if the individual owned the controlled foreign corporation through a US domestic corporation.

Prior to these proposed regulations, a controlled Canadian corporation would have opted out of the small business deduction to create a Canadian corporate tax of at least 26.25% and eliminate the GILTI tax.  Fortunately, effective for the tax year ending on or after March 4, 2019, the US individual can now elect into the small business deduction and, depending on the province, pay little to no GILTI tax.  In Ontario, the small business tax rate is 13.5%.  A corporate tax rate of at least 13.125% is required in order to eliminate GILTI tax.

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