Obamacare Could Cost Canadians
In the wee hours of Jan. 1, 2013, as most of the country was catching some shuteye after the previous night's New Year's Eve festivities, the U.S. Senate passed the American Taxpayer Relief Tax Act of 2012 or, as some people refer to it, the "fiscal cliff"act.
The legislation contains changes to tax rules which may be relevant to the estimated one million U.S. citizens living in Canada. Under U.S. law, citizens are required to file an income tax return reporting worldwide income no matter where they reside. Most countries, including Canada, have a residency-based taxation system rather than a citizenship-based system.
In the majority of cases, however, U.S. citizens don't end up owing U.S. federal tax due to offsetting foreign tax credits. For example, under the new legislation, U.S. high-income earners now face a top tax rate of 39.6% for income over $400,000, an increase from 2012's top 35% rate. By comparison, Canada's top marginal rate is 29% and kicks in at income of roughly $135,000 in 2013. But when you add in provincial taxes, combined top marginal rates range from 39% to 50%. This means that in nearly all cases, there will be enough Canadian taxes paid to offset any U.S. tax liability owing.
But for those U.S. persons making more than $200,000 in 2013, a separate piece of legislation, the Patient Protection and Affordable Care Act, known informally as "Obamacare," could prove to be a real cost to some Canadians. The PPACA included a new measure, effective for 2013, called the net investment income tax (NIIT), which imposes a 3.8% surtax on net investment income, including interest, dividends and capital gains.
The problem for dual income tax filers, according to an alert issued by U.S. tax lawyer James Gifford of Moody's LLP in Calgary, is that "foreign taxes most likely will not be creditable against the 3.8% Obama-care tax on net investment income." This means that high-income Canadians may have to start writing a cheque to Uncle Sam for the first time in 2013.
Jim Yager, a tax partner in the international executive services group at KPMG LLP, calls this extra non-creditable 3.8% tax "painful" for U.S. persons living abroad who may have been overlooked when the law was designed.
"They have looked at the big picture. Let's tax the rich to pay for our medical system. They've completely ignored issues surrounding people living outside the U.S.," Mr. Yager says.
If the investment income is U.S. source, specifically U.S. rental income or a capital gain from the sale of U.S. real estate, you may be able to get some tax relief, says Ian Macdonald, a senior manager in the human resource services group at PWC who deals with cross-border private clients.
While that U.S.-source income is taxable in both Canada and the U.S. and will also be subject to the 3.8% NIIT, "that tax should be a non-business income tax eligible for Canadian foreign tax credit purposes," Mr. Macdonald says.