Schubert receives an important clarification from Finance Minister Jim Flaherty regarding the affect that the recently-signed OECD treaty will have on the Canada-United States tax treaty, specifically regarding the protections afforded to Canadian citizens.
In early November, Finance Minister Jim Flaherty signed on behalf of Canada an OECD treaty called “Convention on Mutual Administrative Assistance in Tax Matters.” I had noticed at that time that Article 11 and a couple of other articles seemed to contradict Article XXVI A of the Canada-US Tax Convention.
Article XXVI A (section 8) states that neither party can be required to collect tax liabilities claimed against a resident by the other party, if those liabilities were incurred while that resident was a citizen of the other party. Article XXVI A is the basis for repeated statements by Canada Revenue Agency and by Minister Flaherty in September and October 2011 that no tax liabilities (and that means both taxes and penalties, including anything arising from forms 1040 and FBAR and all the rest of it) claimed by the US against a Canadian citizen (citizen at the time of the liabilities) would be collected in Canada.
I wrote to Minister Flaherty on November 28 and again on December 27, 2011, asking for clarification of whether the OECD treaty was inconsistent with the protections provided Canadian citizens under the Tax Treaty.
I received in this afternoon’s post a personally-signed reply from Minister Flaherty, dated February 10, 2012. He says point-blank, the apparent inconsistency “is not the case.” He continues, “It is intended that, at the time of the deposit of Canada’s instrument of ratification of the Convention with the Secretary General of the (OECD), Canada will reserve against Articles 11 to 16 of the Convention and consequently, will not be bound by the Convention’s provisions in respect of the assistance in the recovery of tax claims. The Convention therefore does not alter the current application of Article XXVI A of the Tax Convention, which provides for assistance for the collection of taxes between the tax authorities of Canada and the US.” The full text of my November 28 email to Minister Flaherty, and a photograph of the letter I received in reply to my email, appear in the attached PDF file at the bottom of this post.
The “current application” is, as Flaherty has said in writing to at least one MP and to several persons who have posted on this website, that Canada will NOT collect any taxes or penalties claimed by the IRS against anyone in Canada who was a Canadian citizen at the time these alleged liabilities were incurred. FLAHERTY HAS SPECIFICALLY STATED THIS APPLIES REGARDLESS OF WHETHER THE CANADIAN CITIZEN HOLDS DUAL US CITIZENSHIP. (For now, I’ll leave aside the issue of the US claiming you’re a dual citizen when you are certain in your own mind that you are NOT and that any such claim by the US is absurd.)
Depending on whether one speaks of the December IRS announcement of a requirement for filing back six years, or the OVDI standard of eight years, any Canadian resident who was or became a Canadian citizen prior to 2006 or 2004, respectively, has the option of telling the IRS to jump off a very tall cliff, with respect to tax filing (including FBARs, and Form 8854 with respect to expatriated Americans), as long as that resident is prepared never to cross the US border again. The IRS has no jurisdiction on Canadian soil, it can only apply to Canada to collect tax claims on its behalf, under the provisions and limitations of the Canada-US Tax Treaty. That includes Article XXVI A mentioned above and in Flaherty’s letter to me.
I appreciate that some people feel they have to be able to cross the US border, either for family or business reasons. However, I strongly suggest anyone who is concerned about the costs, both financial and moral, of complying with IRS extortion, seriously consider the option of refusing to comply with IRS demands and not crossing the border again. Yes this may have a down-side for you, but what is the trade-off in terms of costs to you, your family, and your retirement if you comply with the IRS?
There is also a very strong moral and political issue for those who firmly believe in good faith they haven’t been US citizens for decades, have made no claims to nor exercised any rights of US citizenship since committing their expatriating acts, and therefore have no logical or even legal reason to pay taxes to a foreign country which has provided them NOTHING by way of protections, goods, services, benefits or rights. Particularly when they have for decades fully, freely and honestly paid taxes (at higher rates than Americans) to Canada and its provinces for protections, goods, services, benefits and rights they HAVE received from their adopted country.
I don’t know what effect the Tax Treaty has with respect to the application of FATCA on Canadian soil. No doubt that is something being raised by Flaherty and his officials even now. Bear in mind, however, that the only real financial cost that can be imposed on you for failure to comply with FATCA, as far as I can tell, is a 30% withholding of certain transactions ARISING FROM US-SOURCE INVESTMENTS. Do you have US source investments? How important are they to you? Can you unload them and re-invest the funds in Canada instead, before FATCA comes into play? Think about it.
If you are not a Canadian citizen, or became one after 2004 and certainly after 2006, this may not help you. If you reside in and are a citizen of a country other than Canada that has a bilateral tax treaty with the US, you need to consult with your government or a tax lawyer in your country about whether your country has similar protections available to you under a dual tax treaty with the US, whether your country has signed the OECD treaty, and whether your country is or isn’t going to “reserve against” Articles 11 to 16 of the OECD treaty. Residents in countries other than Canada, who read this post and investigate what protections they do or don’t have, are encouraged to post the results of their investigations in their own country, as a reply to this thread. Or perhaps someone can start a separate thread for countries other than Canada …
The fact that it has taken two and a half months to get a reply (signed by Flaherty himself, on Minister of Finance stationery), suggests to me the wording of the letter has been vetted very thoroughly by Departmental lawyers. However, I am neither a lawyer nor an accountant, and I am not offering professional advice. If you are in any doubt about the foregoing as it may apply to your own case, I urge you to consult a tax lawyer who is familiar with Canadian, as well as US, tax law. Preferably one based in Canada. I for one have more faith in the motivation, and ultimate loyalty to my concerns, of a fellow Canadian than I would have in any American lawyer. (For anyone residing in and a citizen of a country other than Canada, replace “Canada” with “your country” in this paragraph.)
And, speaking in spite of being a life-long supporter and member of the NDP who has never voted Conservative in his life, God Bless Jim Flaherty. Our government is in fact standing on guard for its citizens. As is the NDP. Who knows what the Liberals stand for?
Thank you for posting this important information.
I too am impressed by both political parties on how well they’ve stood up for the rights of dual citizens in Canada. We’re in good hands.
It’s also nice to read the personal responses folks on this board have been receiving from our elected officials.
@schubert1975: You said, in part, “seriously consider the option of refusing to comply with IRS demands and not crossing the border again”. I’m wondering why I shouldn’t cross.
I filed 1040s and FBARs before the deadline last August but haven’t heard a peep from the IRS or anyone since. I’ve also never had a problem at the border and have always traveled on the only passport I’ve ever had, Canadian, which shows my birthplace as NY. What could possibly happen if I enter the US which, btw, I plan on doing this week?
So, If the IRS decides they want to get money from you, but you don’t cooperate, what happens? Do they assign you a fine, which accumulates endless interest if you don’t pay? Do they have to decide whether it’s worth their while to take you to court? Somehow I can’t see they would just drop it.
Can they prevent you from renouncing if you owe them money?
So then what happens then when you die? There are penalties for executors that don’t report the fact to the IRS if you are a US citizen. While family members who have no intention of going to the US might not tell them, professional executors (i.e. at a trust company) probably wouldn’t risk it. Would the IRS then claim a huge chunk of your estate in interest and or penalties? Would they come after your heirs (if they were US persons still)
I would want to know the answers to all these questions before I took the step of ignoring the IRS
Schubert1975. Thanks for posting this. I too have been impressed with how Flaherty has stood up for us, and we’ve already concluded that crossing the border will be a dangerous activity — not likely this year, but from 2013 on I think it will be a serious gamble.
And on that score — I’m curious if anyone has any more info on the risk at the border. A lawyer told us months ago that if you are apprehended at a land crossing, you are in serious doo-doo because by the time you are talking to a US border guard you are already on US soil, and they can do whatever they want. On the other hand, if you are going through pre-clearance at the airport you are still in Canada, and the US officials have to get the mounties to arrest you. That means you are detained in Canada and they have to extradite you to the US if they want you badly enough. Lawyer seemed to think that for a tax issue, they would be less likely to arrest you at the airport.
Anyone out there got better info on this? I’m wondering if it means a trip south through the airport might get you denied entry, but maybe nothing more than that. I guess it’s a gamble no matter which way you do it.
The principle of low hanging fruit would suggest that Canadians resident in Canada are pretty much off limits, provided they don’t make themselves available for plucking. Why would the IRS go after people they have no hope of ever collecting from? If we don’t make it easy, then they can only use fear tactics to make us comply.
If one day the US arrests a dual citizen or a former US citizen at the border for not filing, well that will become serious diplomatic incident. If we refuse to file, if we refuse to pay, they can lock us up, but they will have to feed us, and it will just cost them money. Why would we want to make it easy for them by sending in OVDI or filing returns and paying money that they think we owe them? I agree with Schubert.
@Arrow It seems exceedingly unlikely that a Canadian resident would be arrested at the border, unless there is already a warrant out for the person’s arrest. I have never heard of anyone being arrested for failing to file unless there was some kind of outstanding issue. Also I someone asked this same question at Hodgen’s blog some months ago: http://hodgen.com/anonymous-story-from-an-ex-citizen/
Apparently it is also possible to check to see if there is a federal warrant out for your arrest before leaving for the US.
@ schubert
You mention Canadian citizenship prior to 2006 or 2004. What is the significance of those dates?
@tiger re 2006 and 2004, I’m just counting backwards 6 and 8 years from 2012 … As far as I know, IRS isn’t asking anyone for tax returns back further than that, and they’re unlikely to get them anyway, I don’t know anyone who keeps tax receipts and returns more than about 10 years, I know I don’t. So if your tax liabilities can only be computed or reported back to 2004 (OVDI) and you’ve been a Canadian citizen since before 2004, your alleged US tax liabilities arose while you were a Canadian citizen and hence you’re protected from collection in Canada under Article XXVI A (8a) of the Canada-US Tax Treaty.
@arrow Yes you can be in deep do-do once you’re at a land crossing into the US. Airport pre-clearance sites in Canada, however, are ALL Canadian soil and governed by Canadian law and Canadian rights. The US border folks in Toronto, Ottawa or wherever can’t arrest you, they can only hold you for arrest by the Mounties if you get violent or make threats or something equally stupid. They cannot ask the Mounties to arrest you for tax issues. Go to Foreign Affairs Canada website http://www.voyage.gc.ca/countries_pays/report_rapport-eng.asp?id=308000 and check out what it says down the page under “preclearance.” (If they have a warrant out for you, they won’t likely say anything in preclearance, they’ll likely let you on the plane and alert authorities at the US destination to nab you as you get off the plane onto US soil. At any time during preclearance you can abort your preclearance interview and return to the airport terminal, see what it says on the weblink above.)
@Petros Not that I care personally, I’m not charged with anything and don’t owe them a cent as I’m not a US citizen (gotta love my CLN!), but if you or anyone else can find where one checks for federal warrants that might be a useful thing to post here, for anyone interested …
As far as I know, under current US law and regulations there is no way that State Department can refuse to issue a CLN for taxation reasons, in fact AFAIK they don’t (and can’t) tell IRS anything about a CLN until it’s been finalized and sent to you, then they notify IRS (when they get around to it).
Re extradition: read the Canada-US extradition treaty (I think Petros posted this on the other website we no longer do business with, a couple of months ago) — Canada and the US do NOT extradite people for non-filing or non-payment of taxes. They do however extradite people for uttering false documents, e.g., knowingly filing false tax returns or swearing false affidavits. But check it on the web (Justice Canada probably has the treaty posted on their website, otherwise maybe Foreign Affairs does), or if you don’t trust your own eyes and have a wad of money burning a hole in your pocket, ask a lawyer.
Let’s not paint the IRS into some all-powerful army from Mordor that can do anything anywhere. They can’t. At least not outside the US, certainly not in Canada, and even in the US they have constraints under which they have to operate, at least until Congress and 38 State legislatures go collectively beserk and repeal the first ten articles of the US constitution. Even I don’t imagine that is ever likely to happen, skeptical and mistrustful though I am of the US, Congress, and all their works.
@tiger
Normal statute of limitations
Question…..
As far as FBAR penalties go, the Canadian government will not collect for the IRS if the individual is a Canadian citizen or a Permanent resident of Canada but not yet a Canadian?
If the aformentioned individual owes tax, then it will be collected because said individual in not a Canadian Citizen
Does this still hold true
(?)
@Mach7
FBAR penalties are not a tax so they aren’t even eligible for collection under the tax treaty. The US would have to go into the Canadian court system where the odds of success are fairly low.
I was quite nervous about visiting America but to my relief entered from the UK completely smoothly last week. 🙂
@schubert1975:
Outstanding work in getting that clarification!
It’s worth noting that the US (which I believe was the first country to sign the “Convention on Mutual Assistance in Tax Matters” back in the 1990’s) also filed a reservation against Articles 11 to 16 of the Convention and so will not assist in the recovery of any other countries’ tax claims under the Convention
The Convention does however contain far-reaching information provisions, including the sharing of information which does not have relevance for tax purposes in the home country. Also negates “bank privacy”. According the the Ministry of Finance . press release:
“It has been updated to ensure that bank secrecy laws or domestic tax interest requirements do not prevent a country from exchanging information for tax purposes. ”
This is not a binding treaty apparently (according to one international observer) and its not really anything until tabled and ratified in Parliament. The Convention does contain some extraordinary concessions on both sovereignty and privacy and the Official Opposition should closely question its ratification.
Here is link to the Min Fin. press release, which has links to the actual Convention itself.
http://www.fin.gc.ca/n11/11-112-eng.asp
@ Mach7, Tim I’d venture to say the ordinary Canadian court system would laugh the US out of the court if they ever tried to collect an FBAR fine through our system. They would never get a ruling in their favor, so I don’t think they’d ever try. It is not a crime in Canada to open up a bank account. The US laws don’t apply here. So FBAR is not collectable here in Canada.
@Mach7 – I’m still trying to find out under what circumstances the CRA will collect for the IRS. I’m not aware of any cases where it has happened.
FATCA is IMO a huge waste of money and time, when applied to “US persons” resident overseas. It should be much simpler and tighter to do as they already are doing, and require US passport applicants and renewals to swear (false statements are extradictable offenses, remember …) on the application that they’re current with their taxes. And then to enforce the law already on the books, AFAIK, that says you don’t get back into the US without a US passport … or a CLN and a foreign passport. People who genuinely are and want to be dual citizens will have no choice; those who don’t care about US passport. But that’s another thread.
Outstanding work in getting that reply!
It is worth noting that the US, which was one of the first countries to sign this “Convention” also filed the same reservation against assistance in collection of other countries’ taxes from its own citizens and residents.
Still, the Convention does contain far reaching concession on both privacy and sovereignty in terms of information sharing, and could conceivable grease the rails for FATCA compliance. It is not binding until tabled and ratified in Parliament. The Opposition should be encouraged to closely question and debate the Convention’s ratification
Sorry butchered that last reply, was intended elsewhere. Was going to reply same as Petros did re FBAR, garbled it. Petros is right. FBAR isn’t covered under the treaty, and good luck Mr. FBAR finding any other Canadian legal grounds for a court action in Canada to collect FBAR penalties.
@Everyone
The other thing I’ll mention is that historically(going back to the 1940s) it has been the US Senate that refused to ratify any treaty that required the US government to collect foreign taxes on behalf of its citizens. So in some way the US has “cooked” its own goose so to speak.
RE: US TAX COLLECTION IN CANADA
Final & summary paragraph from a recent legal opinion article.“US Tax Collection in Canada”, published in “Canadian Tax Highlights” Vol. 19, Number 9, Sept 2011-10-14
That’s the newsletter of the Canadian Tax Foundation.
Article documented the difficulty of enforcing US tax claims in Canada.
The article about enforcement within the Canadian legal system in Canada’s jurisdiction. And is no substitute for legal advice.
Newsletter is subscription only but “Canadian Tax Highlights” newsletter is available from tax lawyers, accountants, and in legal libraries.
Basically article notes:
– Canadian courts have not enforced US tax revenue claims in Canada
– Canadian courts also very unlikely to enforce FBAR penality
– Under the Canada-US tax treaty, Canada Revenue Agency cannot collect US taxes from Canadian citizens, unless the tax claim proceeded their date of citizenship.
Final paragraph:
“In summary, a Canadian citizen need have little concern about the collection of US tax, interest, and ancillary penalties. However, a US taxpayer who is a Canadian resident and not a Canadian citizen and who owes US tax, interest,and penalties may face collection thereof by the CRA pursuant to treaty article XXVI A. It is extremely unlikely that Canadian citizens or residents will have to face collection of FBAR penalties, except in the very unlikely event that those penalties may be characterized as registrable civil judgments.”
The authors are: Erin L. Frew and S. Natasha of Reid Thorsteinssons LLP, Vancouver (leading tax law firm)
Can you guys send Flaherty over here? I think he’d make an excellent import – Somebody who actually defends his own citizens, unlike the IRS pushovers and boot-lickers in my country!
@Peter, I’m curious, what did you do about that letter you got? Are you still mulling it over?
@Anyone, I don’t have any, but I’m curious to know how capital gains are treated? If the US system works off of “credits”: if you pay capital gains where you live, wouldn’t you receive an offsetting credit against anything owed in the US?
@ geeeez, I sent in the tax return before the letter ever came.
capital gains–whatever you pay in the foreign country would count as a dollar per dollar credit against US taxes. There is a problem with way tax is calculated in Canada as opposed to the US. In Canada, capital gains divided by two and added to your base income. Thus, it is difficult to determine how much actual tax you pay on the capital gain, because it is calculated into the whole picture. That is why the Foreign Earned Exclusion is meaningless to traders and investors.
@Schubert: Like you, I have never voted Conservative. I certainly never thought I would be cheering on Jim Flaherty, especially after he was in the Ontario Cabinet during the Mike Harris era. But, JF is my latest hero. Yikes! What does that say about me?!?
@Don: No, you can’t have JF. He’s already taken. I hope, however, he is reaching out to other leaders to try to get them on board on this issue internationally. JF can’t do it on his own.
Happy Valentines Day JF! You have a special place in my heart today.