Why am I taxed on my company's profits when I take no dividend?
Because this inclusion is deliberately built to reach earnings that stay inside the company. It takes the company's active profits, allows a routine return measured on its tangible assets, and attributes what is left to the US shareholders for the year the company earns it. Retention is not a defence against it, and neither is a good commercial reason for retaining. In practice the shareholder ends up owing tax in a year when no cash left the company at all, which is why the size of the inclusion needs to be known before the year end, while the company's remuneration and distribution pattern can still be adjusted.
What is a routine return on tangible assets?
It is the part of the company's profit the regime treats as earned by its physical assets rather than by anything else, and it is taken off before the inclusion is worked out. The offset is computed from the company's depreciable tangible property, meaning the plant, equipment, vehicles and fitted-out premises it owns and uses in the business. What matters is that the offset is driven by assets and not by effort, headcount or profitability. A capital-intensive company can have a substantial offset and a company whose value sits in its people can have almost none, on identical profit.
Does this apply to a small Canadian consulting company?
It is exactly the kind of company the inclusion reaches. A consulting or professional practice typically owns a few computers and some furniture, so the asset-based offset is close to nothing and almost the whole of the profit falls into the inclusion. Size does not help. There is no exemption for a small company, and a one-person practice that retains its profits can face an inclusion every year. The manageable part is what can be done with the company's own numbers: how the shareholder is remunerated, and whether the election to be taxed on the inclusion as though a corporation improves the position.
Can the Canadian corporate tax the company paid offset it?
It depends on how the shareholder is taxed on the inclusion. An individual taxed on it directly does not get relief for the tax the company paid, because that tax is the company's and not his. An election exists that has the individual taxed on the inclusion as though he were a corporation, which opens up relief for the company's own tax but changes the treatment of the money when it is eventually distributed. The election is not automatically the better answer and it is not a decision about one year only, so the comparison has to take in the eventual distribution as well as the current charge.
Does reinvesting all the profit avoid the inclusion?
No. Reinvestment in the business does not reduce it, and reinvestment in tangible assets reduces it only to the extent of the routine return those assets generate under the formula, which is a modest effect and an expensive way to achieve it. Buying equipment for tax reasons rarely makes commercial sense, and the regime is designed on the assumption that earnings stay in the company. What is worth examining instead is the way profit is taken out of the company in the first place, because remuneration reduces the company's earnings before the inclusion is computed at all.
How does this fit with the Canadian tax I already pay?
Canada taxes the company on its profits and the shareholder on distributions. This inclusion falls between those two events, so the same profit is taxed in different years in the two countries, and relief for one against the other generally requires the charges to land in the same period. For a company that retains profits for years before distributing them, the mismatch can run a long time. The practical work is to look at the two systems together when deciding how much comes out of the company and when, rather than settling the Canadian position and then discovering what the other system did with it.
What is FAPI, and how does it differ from GILTI?
Canada's foreign accrual property income taxes a Canadian shareholder currently on the passive income of a controlled foreign affiliate — interest, rent, royalties, certain gains — with a deduction that recognises foreign tax already paid on it. GILTI comes at the problem from the opposite side: it targets active income above a return on tangible assets. A group with both a Canadian and a US shareholder can therefore be inside both regimes on different slices of the same profit. See GILTI against FAPI.
What is double tax relief and how is it given?
Three mechanisms, and which one you get depends on your residence country's law and the treaty. Exemption leaves the foreign income out of the residence-country base. Credit taxes it and then subtracts the foreign tax, capped at the residence-country tax on that income. Deduction merely reduces taxable income by the foreign tax, and is usually the weakest. Canada and the United States lead with credit; several treaties give exemption for specific income types. See claiming the credit.
