In recently released proposed regulations related (see pages 49-50, 53, 70-71) to the impact of GILTI on individual US taxpayers, the IRS has surprisingly taken a taxpayer friendly position. They are allowing the 50% deduction against GILTI income if an individual taxpayer makes a 962 election. For a Canadian resident US citizen, this has significant implications. Put simply, the 962 election allows an individual US taxpayer to be taxed as a US domestic corporation. This means a) the tax rate on net GILTI is reduced to 21% b) the taxpayer can take an 80% foreign tax credit against GILTI income for corporate tax paid to Canada and now c) only 50% of the GILTI income is taxable. Taken together these factors indicate that all Canadian resident US citizens with corporations should make a “962” election on an annual basis to mitigate GILTI. From an integrated Canada-US tax perspective, the 962 election can also preserve the Canadian small business rate and still result in zero GILTI inclusion. For instance, assume that for 2018 Dr. Jones was a US citizen living in Toronto. She had a medical corporation through which she earned CAD $250,000 and qualified for the small business deduction. She sought to defer all of that income in the corporation. Making the 962 election on her 2018 US tax return would allow her to utilize the small business deduction and not have any excess US tax owing.
This won’t be true in all provinces. In BC, for example, the small business tax rate is 12%. Assuming Dr. Jones lived in Vancouver, instead of Toronto, and made the same amount of money. Her 962 election would not cover off all of her US tax exposure. She would owe .9% on the total corporate gross income to the United States, which would represent (marginal) double taxation. With proper advice, she could generate tax in Canada to offset this. This is a substantially better outcome than some of the other GILTI planning ideas.
Regardless, the proposed regulations represent good news for Canadian resident US citizens with corporations.