Personal Tax Planning: GILTI—Introduction to GILTI and Its Application to US Shareholders of Canadian Corporations

Abstract

The new global intangible low-taxed income (GILTI) regime, introduced as part of the 2017 US tax reform, attributes income of certain foreign corporations in excess of an arbitrary 10 percent return to intangible assets and subjects such income to US tax on a current basis for certain US individual shareholders. This article explains how US citizens resident in Canada who are subject to the GILTI rules may effectively manage the adverse implications of the regime by utilizing an election under section 962 of the Internal Revenue Code. The election allows individual shareholders to be taxed at the US domestic corporate tax rate of 21 percent (instead of a maximum personal tax rate of 37 percent), claim a deduction for 50 percent of the GILTI inclusion, and claim foreign tax credits for a portion of Canadian corporate taxes paid. With this election, a combined corporate and personal global tax liability may remain mostly consistent with the pre-GILTI era. On the other hand, if the GILTI exposure is not appropriately managed, the result is significantly different. With proper advice and reporting, for some US shareholders, the GILTI provisions may be a case of "much ado about nothing." However, for US shareholders of corporations that pay the small business rate, there is a small tax cost to the GILTI inclusion for maintaining the benefit of deferral. For all US shareholders of Canadian corporations, there are still some unaddressed issues that add complexity and uncertainty to the preparation of those individuals' US income tax returns.