How does the ‘fiscal cliff’ compromise affect Canadians?

gartner_gary-02470-64453Although most of the major legislative changes resulting from the New Year’s “fiscal cliff” negotiations has been widely covered, Lexpert wondered, on behalf of our readers, about something that has not been covered as much: how the changes affect Canadians.

So Lexpert asked US tax lawyer (and Canadian-born) Gary Gartner of Kaye Scholer LLP about how this will affect Canadian companies and investors.

Gartner says the biggest story for Canadians is that the the tax rate on dividends and long-term capital gains will increase to 20 per cent (up from 15 per cent). With the Medicare surcharge tax of 3.8 per cent, that makes the rate now 23.8. Although this is a big increase (5 per cent), it was, like the increases on individual rates that were widely covered, not as bad as expected, which could be seen as a “good news” story for investors. There was some concern that the preferential rate on dividends would be eliminated (as the tax rate on ordinary income in the top tax bracket will increase to 39.6 per cent), but it remains.

The inclusion of a preferential  rate on gains and dividends in the new legislation will also apply to Canadians investing in the United States, and to US taxpayers investing in Canada. Gartner is cautiously optimistic that Canadian companies relying on the US individual investors to support their stock price and raise additional capital will still be able to attract US individual investors:

A lot of Americans look at the Canadian income trusts, and Canadian income trusts and Canadian public companies say “you know what, I like my US marketplace because they like my dividends and they especially like us because we are paying these distributions and they are getting taxed at only 15 per cent last year.” So they were nervous, [saying] “oh my God, we are not going to be as exciting to US investors, because if the tax [went] up to 39.6 per cent plus 3.8 per cent [it] would be a disaster” So, now that it is only 23.8, it is not as exciting as 15 but nevertheless, it is still a whole lot better than on our income so I am not sure whether there is going to be a big drop off because it is still a reasonable investment decision.

Gartner thinks the tax changes will also affect Canadians owning or operating real estate in the US since it “changes the calculus” for these kinds of investments.

Finally, in a surprise move, the US estate tax exemption remained at $5.12 million and the tax rate increased from 35 per cent to 40 per cent of value, which will benefit Canadian snowbirds who own property in the US:

The fact that we have a 5.12 million dollar exemption from estate tax might make life a little bit easier because…it takes a lot of pressure off  Canadians from doing estate tax planning.

Of course, a lot the big problems are still unresolved, including those that will have huge effects on Canadians:

The wildcard is of course our corporate taxes. A lot of this is deferred. We have our spending limits that we are going to be reaching in 2 months. We are going to have to do some stuff to reduce our deficit and reduce our spending.

Kaye Scholer has a detailed outline of many of the other changes that were made – and weren’t made, in the New Year’s “fiscal cliff” changes, on their website.

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