2017 U.S. TAX REFORM: SENATE PASSES TAX REFORM BILL

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1 MNP U.S. Federal Tax Update

2 2017 U.S. TAX REFORM: SENATE PASSES TAX REFORM BILL On December 2, 2017, the U.S. Senate passed legislation that includes tax reform, by a vote of 51 to 49. The version that passed the Senate had a number of last minute amendments from the version of the Act that had previously been approved by the Senate Finance Committee, including: Timeline: April 26, 2017 Trump Administration releases tax reform principles November 16, 2017 House Passes Tax Cuts and Jobs Act (House Version) December 2, 2017 Senate Passes Tax Cuts and Jobs Act (Senate Version) Allowing a state and local property tax deduction up to $10,000 Eliminating the repeal of the alternative minimum tax (AMT). The Senate-passed Act leaves the corporate AMT as it was before the Act and increases the exemption amounts and phaseout thresholds for the individual AMT Making the provision allowing full write-off of new capital investments a temporary rather than a permanent provision There are a number of differences between the House and Senate bills, which a conference committee will now begin to reconcile. The following summary was provided by MNP s Praxity partner, Plante Moran as Senate passes Tax Cuts & Jobs Act and work begins to reconcile the House and Senate bills. Please note all figures in the summary are in U.S. dollars. The full release is available here.

3 Passage in the Senate The reappearance of the alternative minimum tax (AMT) in the Senate bill may prevent corporations from claiming certain credits such as the research credit. During debate in the Senate, two key issues emerged within the Republican ranks. First, the costs associated with the tax bill were raised as a concern by some Senators. On November 30, the Joint Committee on Taxation released an analysis indicating that the Senate bill would increase the federal deficit by more than $1 trillion during the 10-year budget window, even after accounting for increased economic growth. Second, other Senators raised concerns about whether sufficient benefits were being provided to pass-through businesses. The latter concerns were addressed through several amendments that were made to the bill prior to its passage in the Senate. The former concerns were left unaddressed leading to the one Republican dissenting vote, Senator Bob Corker of Tennessee. Changes to the Senate bill Senators offered amendments to the Tax Cuts & Jobs Act (TCJA) that made the following changes from the version of the bill that was previously approved by the Senate Finance Committee: Increased the deduction for pass-through income from 17.4 to 23 percent. Retained the alternative minimum tax (AMT) for both individuals and corporations but with modifications including a significantly increased exemption amount. Previously, the Senate bill matched the House bill by fully repealing the corporate and individual AMT. With the Senate maintaining the AMT on corporations while also reducing the regular corporate tax rate to 20 percent, many corporations will be unable to take advantage of credits that would otherwise reduce their regular tax liabilities to an amount less than their AMT liabilities. This would include credits such as the research credit and new markets tax credit. Added a $10,000 property tax deduction, which mirrors the provision included in the House bill. The state and local income tax deduction would continue to be eliminated under both bills. Temporarily expanded the medical expense deduction. Increased the deemed repatriation tax rates for accumulated non-us earnings and profits to percent for cash (up from 10 percent) and 7.49 percent for illiquid assets (up from 5 percent). Those changes bring the Senate closer to the House bill, which included rates of 14 and 7 percent, respectively. Removed the provision that would have repealed the Interest Charge Domestic International Sales Corporations (IC-DISC) regime. Next step: Reconciling the bills The passage of the Senate version of the TCJA sets the stage for the formation of a conference committee that will reconcile the House and Senate bills. The following are among the items that will need to be resolved:

4 Tax on pass-through business income The House and Senate have approached passthrough business income in mechanically different ways. The House bill generally provides a maximum tax rate that would apply to qualifying pass-through business income. The maximum rate ranges from 25 to 39.6 percent depending on the type of the business, whether the taxpayer is passive or active in the business, and the amount of basis in depreciable assets held by the business. Conversely, the Senate bill provides a 23 percent deduction for a specified portion of qualifying pass-through income leading to an effective maximum tax rate of 29.6 percent. Ultimately, both bills reduce the tax burden on many pass-through businesses. However, the conference committee will need to determine which approach to take (maximum tax rate v. deduction), which businesses will qualify, and how to determine the amount of income that will qualify. Corporate taxes There are minimal differences between the House and Senate bills related to corporate income taxes except that the Senate would delay the effective date of the 20 percent tax rate by one-year until The conference committee will need to reconcile the effective date. Alternative minimum tax With the Senate s last-minute removal of the repeal of the AMT, the conference committee will need to determine if it will keep this provision and, if not, what others provisions will be used to offset the revenue loss. Child tax credit The House and Senate bills both use enhanced child tax credits to soften the blow of the elimination of personal exemptions and many itemized deductions. However, the conference committee will need to reconcile the amount of the credit, the amount that will be refundable, and at what income levels it will phase out. Sunset of individual tax provisions Most tax provisions related to individuals sunset after 2025 in the Senate bill. Those terms were necessitated by procedural rules in the Senate. The House bill does not contain similar sunset provisions since different procedural rules apply in that chamber. It is expected that the conference committee will need to adopt the sunsets contained in the Senate bill in order to allow for final passage in the Senate. The conference committee will need to determine which pass-through income approach to take, which businesses will qualify, and how to determine the amount of income that will qualify. The Senate s passage of the TCJA is a significant milestone. While taxpayers cannot yet count on these provisions becoming law, they should certainly consider tax-planning ideas for 2017 that take into consideration the likelihood of decreasing tax rates and the elimination of certain deductions in future years. MNP s Initial Thoughts Both versions of the TCJA passed by the House and the Senate must now be reconciled but three takeaways are clear. First, U.S. federal corporate tax rates are being slashed to 20 percent. Adding state income tax and the combined US corporate federal and state income tax rates approximates Canadian corporate tax rates. This certainly benefits Canadian companies with U.S. business activities but eliminates the tax rate arbitrage between the two jurisdictions.

5 Secondly, the U.S. federal estate tax is on life support. The House bill would eventually eliminate the US federal estate tax in six years and both the House and Senate bills double the exemption to approximately US$11 million per person. Canadian residents that own U.S securities and / or U.S. situs real estate with a net worth under US$11 million should not have US federal estate tax exposure after this change. Finally, both bills would limit interest deductions to 30% of earnings after certain limited deductions. This provision will limit the ability of Canadian parent corporations to finance their U.S. subsidiary with debt and deduct interest payments. Everything Counts When it comes to tax, it s all about the details. Knowing the rules and regulations, what qualifies, what doesn t and how to structure your business and claims most effectively. Our specialized teams are focussed on every facet of tax in Canada and abroad. We have the indepth knowledge and experience that will allow you to capitalize on all the opportunities available. We know what to look for, right down to the smallest details. And it s the small details that can add up to make a big difference. About MNP MNP is a leading national accounting, tax and business consulting firm in Canada. We proudly serve and respond to the needs of our clients in the public, private and not-for-profit sectors. Through partner-led engagements, we provide a collaborative, cost-effective approach to doing business and personalized strategies to help organizations succeed across the country and around the world. Regional Tax Contacts Name Region Phone Number Dennis Werkman Vancouver Katri Ulmonen Vancouver Gerard Roddis Abbotsford Sid Rao Surrey Jyothi Rao Surrey David Cender Surrey Ved Aswani Calgary David Turchen Calgary Todd Jenkins Winnipeg Michael Shumate Toronto Kevyn Nightingale Toronto Anthony Bellomo Toronto