U.S. businesses with significant property holdings in Canada could be taxed directly by that country under a proposal pending in Ottawa, a prospect that has alarmed many in Congress and the Clinton administration.
A proposed change in the definition of taxable Canadian property would expose some U.S. companies to double taxation during certain transactions, such as sale of a major ownership stake in the business, experts said this week.It's unknown exactly how many companies would be snared by the change, which Canada hopes will prevent foreign corporations with more than half of their assets in Canadian real estate from escaping local taxation. Canada is the United States' largest trading partner, with $250 billion in bilateral trade in goods and services in 1993, according to the Commerce Department.
Canada, a major exporter of timber, crude oil, natural gas and aluminum, currently doesn't tax U.S. citizens or U.S. corporations on money made from sale of stock in private companies or large blocks of publicly held companies.
Nine senators and five House members - mostly from states bordering Canada - have written the Treasury Department urging quick intervention before the measure becomes law.
"I am concerned that this legislation would negatively affect U.S. family business and small business owners," Sen. Rod Grams, R-Minn., said in a letter this week to Treasury Secretary Robert Rubin. "If adopted, this Canadian tax would result in double taxation of U.S. citizens."
Privately held companies and multinationals with major holdings in Canada are most likely to be affected.
"It will apply to most U.S. multinationals (with) natural resources, mineral operations, and timber property operations up there. And it potentially could apply in manufacturing plant situations," said Michael Cooper, an international tax specialist at Deloitte & Touche LLP in Washington. "We think it potentially affects an awful of lot corporations."
A Treasury official, who spoke on condition he wouldn't be identified, said department officials are speaking to their Canadian counterparts about the measure.
At the Canadian Department of Finance in Ottawa, a senior official said they believe the current treaty with the United States makes it clear that it can tax U.S. businesses with major property holdings.
"Some people are holding Canadian real estate through foreign corporations and immunizing themselves from Canadian tax," said a Department of Finance official in Ottawa, who spoke on condition of anonymity.
The change in definition of Canadian taxable property would tax a privately held U.S. company when its shares were sold to another party. In addition, an investor that owns more than 25 percent of a company with publicly traded stock would face such taxes if they elected to sell the shares.
The Canadian government believes the U.S. corporations could apply for a foreign tax credit to deduct the cost of the Canadian tax. But the Treasury Department official said it's not clear that such foreign source income tax credits would be available.