The purpose of the tax treaty between the United States and Canada is laudable: to avoid the double taxation of residents. But the problem is that the United States imposes an unconstitutional extra-territorial taxation of “United States persons” no matter where they live in the world, even in the high tax region of Canada. But one huge problem with the treaty is that it does not count HST/GST as tax. It is of course a big reason why Canadians are marred by taxes (as Gary Marr of the Financial Post says).
An example of why this is a huge issue is that last year we bought a RAV4. The HST was about $5600. Now you would think that since these taxes go straight to our provincial and federal governments to pay for education, health care, defense, etc. that this HST could create a legitimate foreign tax credit that could offset the double taxation that could occur with US imposing taxes on US persons resident in Canada. But the foreign tax credit only includes “income taxes”:
Four tests must be met to qualify for the credit:
- The tax must be imposed on you
- You must have paid or accrued the tax
- The tax must be a legal and actual foreign tax liability, and
- The tax must be an income tax.
So this means that if you live in Britain, Canada or any other country with VAT or GST, (1) you are getting the shaft if you owe taxes to the United States (e.g., because of gains in a TFSA, or alternate minimum tax); (2) since the USA does not have a comparable sales tax, it means that many people in the United States pay no federal whatsoever–but they are coming to us to pay taxes when we’ve already paid our fair share of taxes here in Canada, Great Britain, Europe etc.
This sort of thing makes renunciation of citizenship ever more attractive. I wish Canada would renegotiate the tax treaty with the United States to reflect this reality (and RESPs, TFSAs, and RDSP), and get the United States off our back about FBAR and FATCA.