Some changes enacted in the December 2017 US Tax Reform legislation significantly and adversely impacted many Americans living in Canada. For example, the new mandatory repatriation tax and global intangible low tax income (GILTI) regimes caused many US shareholders of closely held Canadian corporations to incur significant US tax where none existed in the past.
On the other hand, Tax Reform liberalized many provisions including those regulating charitable giving. This note addresses some of these changes.
As a point of background, the US allows married taxpayers to file joint returns. This note considers only a Canadian resident married couple where both spouses are US taxpayers. Other common filing options not addressed herein. Similar conclusions would apply for non-married Americans in Canada.
Until 2017, the US provided both a personal exemption deduction and another deduction equal to the higher of (i) the applicable standard deduction or (ii) net itemized deductions to arrive at taxable income. Tax Reform suspends the personal exemption for 2018 through 2025. The standard deduction was $12,700 for married individuals filing a joint US return for 2017 which nearly doubles for 2018 under Tax Reform to $24,000 for married taxpayers.
Itemized deductions commonly include property taxes, mortgage interest and relevant to this note, charitable donations. Prior to Tax Reform, total allowable itemized deductions were reduced by the lesser of 3% of a taxpayer's adjusted gross income (AGI) over a threshold amount (on top of other limitations not discussed herein) or 80% of the amount of otherwise allowable itemized deductions. For 2017, the threshold amount was $313,800 for married taxpayers filing a joint US return. Tax Reform suspended this overall limitation for 2018 through 2025 to the benefit of higher income taxpayers.
Regarding charitable contributions prior to Tax Reform, the total itemized deduction for cash contributions paid to public charities, private operating foundations and private distributing foundations was limited to 50% of AGI (e.g., $50,000 limitation if AGI were $100,000) and 30% of AGI for cash contributions to private nonoperating foundations. Tax Reform increased the AGI limitation on cash contributions from 50% to 60% beginning after 2017 and before 2026 (3.g., $60,000 limitation if AGI were $100,000).
Americans in Canada can claim a US itemized deduction for contributions to registered Canadian charitable organizations including the Jewish Foundation of Greater Toronto. Article XXI, paragraph six of the US Canada Income Tax Treaty regulates deductions for donations by Americans to Canadian charitable organizations. The Treaty rules are in addition to the normative charitable donation deduction rules discussed above. Under the Treaty, a Canadian charitable organization must meet the same qualifications that apply to a US charitable organization under U.S. tax law. Canada Revenue Agency’s website provides a complete search function for all registered Canadian charities including its current status. As well, deductions for contributions to a Canadian charitable organization are only deductible if a taxpayer has income from Canadian sources such as wages. If a taxpayer has no gross income from Canadian sources, charitable contributions to Canadian organizations generally will not be deductible. Finally, a taxpayer claiming deductions on a US tax return for donations to Canadian charitable organizations must attach Form 8833 disclosing a Treaty position with regard to the deduction.
Similarly, contributions to US charitable organizations may be deductible on an American’s Canadian income tax return under Artticle XXI, paragraph seven of the Treaty.
Tax Reform also temporarily (until 2015) doubled the basic exclusion amount of $5 million to $10 million after which US estate, gift and generation transfer taxes may trigger. and is indexed for inflation to $11.18 million for 2018.
This note should not be taken as advice but rather as a reminder that taxpayers, particularly Americans in Canada, need to seek personalized professional US and Canadian tax advice that considers all possibly relevant Tax Reform changes.