Changes to sections 250 and 960 have resulted in an increase in the tax burden to a CFC on active business income.

GIVEN, for Ontario CCPCs, the 2025 the annual tax rate on active business income on the first $500K is about  12.2%  due to the  federal & Ontario Canadian  small business deduction. Income above this $500K threshold, the active  business income is taxed at 26.5%. 

HISTORY

Commencing in 2017, the December 2017 Tax Cuts and Jobs Act  required  U.S. persons to be taxed on accumulated profits, generally derived from active business income of controlled-foreign corporations (“CFC”s) under section 965 of the IRS Code. This was also known as the transition or repatriation tax. 

Currently and prior to 2017, specific types of income earned by the CFC, primarily investment income, had to be accrued annually and taxable to the CFC shareholder if certain exclusions and exemptions were not available.

For subsequent taxation years, annual active business income as defined as global intangible low-tax income (“GILTI”) under section 951A of the IRS Code must be included in income. This is the continuation of the repatriation tax but in a different form. 

U.S. corporate investors of CFC

Where the U.S. person is a U.S. C corporation, the GILTI provisions provided for a flat 50% deduction of the GILTI under  Section 250 of the IRS Code bringing the tax rate to 10.5% from  the 21% U.S. corporate rate. 

An election is available under section 960  of   the IRS Code for the C corporation to take an indirect foreign tax credit up to 80% of  the foreign tax incurred by the CFC. Where the effective CFC tax rate was at least 13.12%, this election resulted in no tax to the C corporation on GILTI utilizing section 960.

U.S. individual investors of CFC

For individual U.S. investors, GILTI is included in  their reported adjusted gross income reported on the U.S. 1040  tax return, taxed at their marginal tax rate that could be as high as 37%. However, a similar indirect foreign tax credit as outlined in section 960 available to the C corporation investor is available under section 962 of the IRS Code to the individual. 

With an annual section 962 election, the IRS Code pretends that the individual is  a corporation and in lieu of including GILTI in adjusted gross income taxed at the marginal tax rate of the individual,  one could compute separately the tax on GILTI by applying the 21% corporate rate, claim the section 250 deduction in arriving at notional taxable tested income,   with a foreign tax credit up to 80% of the foreign corporate tax. This section 962 tax payable is reported on a separate  line of the U.S. 1040.

This means, prior to 2026,  with an effective  CFC tax rate of at least 13.12%, there would be no tax on GILTI, same as if the actual owner of  the CFC was a C corporation. 

As  the Ontario corporate tax rate on the first  $500K of active business income is 12.2% for 2025 taxation years, the pre-2026 U.S. tax law (ignoring any QBAI), will result is about an incremental U.S. tax burden of about .92%

CHANGES FOR 2026 & BEYOND AS WE KNOW IT

There is no longer the QBAI exemption under the new law. While the U.S. federal corporate rate remains at 21%, the section 250 deduction reduces to 40% from the prior 50% and the allowable FTC hair cut is increased to 90% limitation from 80%.

This means if the effective Canadian corporate tax rate on active business income is at least 14%, there will be  no U.S. tax in utilizing Sections 960 or 962. At  the SBL tax rate, this will result is about an incremental U.S. tax burden of about 1.8%

Therefore, the changes in tax law affecting tested income have increased.

Contact your professional advisor prior to implementing any of the outlined strategies.

A U.S. person say residing in Canada who files married separate their U.S. 1040 only can exclude $250K USD of their capital gain on the sale of their principal residence provided certain prescribed criteria is met. If the property was held more than a year, the maximum tax rate on long-term capital gain is 15% (or  to 20% if their taxable income attains a prescribed threshold).

The foregoing rule means that although there is no  Canadian tax on the sale of  the Canadian real estate, there will be U.S. tax that is not creditable on their Canadian return because the capital gain is not U.S. source.

Often the property is jointly held with their Canadian non-U.S. spouse. Planning opportunity to gift the property to their Canadian spouse may allow full Canadian principal residence exemption  to the Canadian spouse on the sale of the home not withstanding that the U.S. spouse did not own the home for years subsequent to the transfer.  The gift for  Canada would be a spousal rollover. For U.S. reporting, a gift tax return, IRS Form 709  would be filed to report the gift and claim their available lifetime gift tax exemption.

If there is a mortgage on the property that is discharged, there could be IRS Code 899 income exclusion for the foreign currency gain on the discharge to the U.S. debtor.

If one is dealing with such homes that are also rented, the foregoing may or not apply cleanly, depending on the facts.

Contact your professional advisor prior to implementing any of the outlined strategies.

For 2025, the annual exemption  to a non- spouse is $19K and was not changed for 2026 by  the Big & Beautiful Bill that passed in July 2025. The lifetime exemption is $13.99M for 2025  and $15M for 2026 due to the passing of the Big & Beautiful Bill.

U.S. citizens or green card holders domiciled in the U.S. who gift property may be subject to the U.S. gift tax. 

In addition,  U.S. citizens and  long-term residents who are covered expatriates who gift property during their lifetime or have bequeathed property upon their death, to a U.S. citizen or to a U.S.  resident will cause the recipient of the gift to pay gift tax to the extent that the taxable gift exceeds the annual exemption. 

Therefore, any U.S. citizen or long-term resident who has expatriated under S877 of the IRS Code AND who is classified as a “covered expatriate” under S877A of the IRS Code will cause the recipient to pay this tax. The tax legislation applies whether or not the assets gifted or bequeathed were acquired before or after the expatriation event.

Reference may be made to IRS Form 8854 with regards to expatriation by a U.S. citizen or long-term resident who may be a “covered expatriate”. Note that a long-term resident will include a green card holder who expatriated (gave up the card and have an I-407) or have made a Treaty declaration on their U.S. tax return filing (per IRS Form 8833) that they are resident of another country for taxation purposes after possessing the green card for at least 8 out of the last 15 years. A “covered expatriate” will be one whose net worth at the time of expatriation is at least $2M, or, whose average annual U.S. tax liability is $206K (2025), or, who is not able to certify under penalties of perjury, that they have been tax compliant for each of preceding 5 years. Tax compliance would also include filing all of the required international foreign reporting forms.

There are also similar rules or application where the recipient is a U.S. trust. Recipients of a “covered gift” or of a “covered bequest” who are charities are exempt from paying the gift tax. 

IRS Form 709 is the annual gift tax return and IRS Form  708 is filed for recipients of a covered gift or bequest to report the transaction and pay the tax.

Tax planning is necessary for those who are considering gifting or bequeathing assets who are in any of the foregoing categories.

Contact your professional advisor prior to implementing any of the outlined strategies.