Liberty and justice for all United States persons abroad

The Isaac Brock Society

Posted on by Posted in Issues regarding US persons abroad 14 Comments

cross-posted from the Alliance for the Defence of Canadian Sovereignty blog

 

Prologue: Prime Minister Pierre Trudeau speaking to the Washington, DC Press Club – 1969

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The Elephant Today: FATCA, FBAR and U.S. Citizenship Taxation – How “even-tempered” is the beast?

I have been watching with interest a recent discussion at the Isaac Brock Society about U.S. citizenship taxation. Much of the discussion was focused on whether the Alliance For The Defence of Canadian Sovereignty  should initiate a lawsuit against U.S. citizenship taxation. (This post is NOT to comment on that specific question.) Interestingly, much of the discussion centered around the question of whether,  U.S. citizenship impacts on Canada’s Sovereignty. Some commenters believe it DOES impact on Canada’s sovereignty. Others believe U.S. citizenship taxation does NOT impact on Canada’s Sovereignty. I use the word “impact” to mean “effect” and NOT “intent”.

sovereignty

What if one were to ask the question this way:

Can one country forcibly impose taxes on the residents of another county? If so, does the imposition of those taxes burden the sovereignty of that other country?

Does U.S. citizenship taxation impose either direct or indirect taxes on Canadian citizens resident in Canada? If so, does the U.S. taxation of Canadian citizens resident in Canada  interfere with Canada’s sovereignty? Remember that FATCA is a deliberate attempt by the United States to enforce U.S. tax law on Canadian soil.

Let’s review some basic principles that are NOT in dispute.

1. The U.S. claims the right to define who it’s citizens are. In fact, the FATCA IGA specifically allows the U.S. to define who its citizens are. (Interestingly, the IGA specifically says that U.S. citizens are defined by the Internal Revenue Code.) The U.S. has the right to expand it’s definition of U.S. citizen.

2. The U.S. subjects its citizens to taxes on WORLDWIDE income wherever they live (including in Canada).

3. Many people who the U.S. claims as its citizens are Canadian citizens resident in Canada.

4. Therefore, the U.S. imposes taxes on Canadian citizens who are resident in Canada.

5. There are numerous examples of U.S. citizens residing in Canada being subjected to both:

– double taxation (for example the 3.8% Obamacare Surtax,  etc.); and

– taxation on income that is NOT taxed in Canada (sale of principal residence, TFSA, RESP, gambling winnings, etc.)

6. Therefore, the effect of U.S. citizenship taxation in Canada is to transfer Canadian capital to the United States. If a Canadian resident (deemed U.S. citizen) sells his house 23.8% of the capital gain (that exceeds $250,000 USD floor) will be transferred to the U.S.

To put it another way:

Through “citizenship taxation taxation” (imposed primarily because of a U.S. “place of birth”), the U.S. is actually EXPANDING ITS TAX BASE INTO CANADA AND OTHER COUNTRIES. (See the recent discussion of the large number of U.S. born residents of Stanstead, Quebec.) Does U.S. taxation of Canadian residents burden Canada’s sovereignty?

Here is a possible answer coming from ProudAussie:

In June of 2012, a fascinating discussion of FATCA (which included Dick Harvey and Jackie Bugnion) took place in Switzerland. Both Professor Harvey and Ms. Bugnion have played important roles in the FATCA debate. To his credit, (although an advocate of FATCA), Professor Harvey has acknowledged the difficulties that FATCA has created for Americans abroad. (See his paper: “Worldwide Taxation of U.S. Citizens Living Abroad – Impact of FATCA and Two Proposals“.)

I strongly recommend the ENTIRE video. It is highly educational and a comprehensive introduction to FATCA. What is most interesting is Richard Harvey’s claim that the U.S. has the right to use FATCA to PROTECT it’s tax base (which is defined to include citizens and residents of other nations). Such is the reality and immorality of U.S. citizenship-based taxation.

FATCA may have been initially intended to protect America’s “legitimate” tax base. In actuality and effect, FATCA has allowed the U.S. to more easily expand it’s tax base into other countries. (If you consider the evolution of U.S. citizenship law, more and more people have become or retained U.S. citizenship. In fact, there are many people who are not even aware they are considered to be U.S. citizens.)

See in particular this two minute clip:

Is FATCA about “protecting” the U.S. tax base or about “expanding” the U.S. tax base?

A better way to view the “tax base” issue  would be that:

U.S. “citizenship taxation” allows the U.S. to EXPAND it’s tax base into other countries. This is reinforced by the “Savings Clause” in U.S. tax treaties. The “Savings Clause” in the U.S. Canada Tax Treaty reads as follows:

Article XXIX
Miscellaneous Rules

2. Except as provided in paragraph 3, nothing in the Convention shall be construed as preventing a Contracting State from taxing its residents (as determined under Article IV (Residence)) and, in the case of the United States, its citizens (including a former citizen whose loss of citizenship had as one of its principal purposes the avoidance of tax, but only for a period of ten years following such loss) and companies electing to be treated as domestic corporations, as if there were no convention between the United States and Canada with respect to taxes on income and on capital.

As I have previously argued, the “Savings Clause” has three clear effects:

First: to ensure three that a tax treaty cannot defeat “citizenship taxation”. The “savings clause” operates so that the treaty partner country agrees that the United States can levy taxes on its citizens who live in that country.

Second: by allowing the U.S. to levy taxes on residents of the treaty partner country, the U.S. will be able to impose a “capital tax” on that country.

Third: to ensure that a U.S. citizen resident in the treaty partner country will always pay an amount of tax that is as great as he would pay under the Internal Revenue Code. (Although, some of this total tax payable would be paid to Canada, the U.S. citizen pays a total tax equal to the amount he would pay under U.S. law.)

In other words, the “tax treaty” is of no use to Americans abroad for the purpose of reducing the total tax payable. In fact:

The tax treaty ensures that U.S. citizens abroad will always be subjected to the “worst of both worlds”.

This has led one commenter to suggest that:

There is a very strong argument to be made that:

I presented this theory to the Government of New Zealand in “Paying Tribute to America” (how U.S. citizenship taxation affects the economy of New Zealand).

In conclusion …

For it’s worth, I believe that U.S. citizenship taxation is IN EFFECT a threat to Canada’s sovereignty and the sovereignty of every country where U.S. citizens (as defined by and only by the U.S.) reside.

For the record this does NOT mean that the Alliance For The Defence of Canadian Sovereignty is planning to initiate a lawsuit against U.S. citizenship taxation.

John Richardson

14 thoughts on “U.S. citizenship taxation burdens Canada’s sovereignty by imposing U.S. taxes on Canadian residents”

  2. I spoke with an accountant recently. He stated that interest from accounts (not discussed about dividends), according to the US Norway tax treaty was attributable to the country of residency.

    His position was that every US citizen is automatically a US tax resident.

    Therefore, he stated that one could request Norway to have a refund of the tax I paid to Norway upon interest.

    The Norwegian treaty was signed in the 90’s or earlier.

    I requested clarification. If it is true, than FATCA indeed is a method of sucking tax revenue from countries to USA

  3. The US can change the definition of ‘US Person’ at will, but there’s more they can do.

    In future they could change the data set required from FFIs. For example requiring transactional data so anyone’s life could be mapped out. Who they work for, where they spend their money, potential medical history, where they dine, spend their free time, etc, etc.

    The USG could require someone who uses a US IP / or US telephone number too often for that that account suddenly becomes as ‘Reportable.’ This happens without the customer’s knowledge or notification.

    They could tighten residency rules to trap more and more snowbirds.

    Indeed what is exactly the definition of a Foreign Financial Institution. For example, how about a Credit Card company now subject to FATCA reporting, online money sending service, etc, etc. How about make property in Canada subject to FATCA reporting? The USG pushes to get the Registry of Deeds defined as a FFI. Sounds far fetched, I don’t think so.

    Force Canada to sign a MCAR (Mutual Collection Assistance Request). The IRS asks the CRA to collect US tax using the CRA collection system. A small handful of countries already have stupidly signed.

    That’s why this legal challenge needs to succeed and show others that suing your government for signing up to FATCA / IGA works.

  5. “Sovereignty can describe the power of one state or thing over another or the freedom a state or thing has to control itself.”

    http://www.vocabulary.com/dictionary/sovereignty

    Maybe the relationship Canada has with the US when it come to US citizens in Canada would be best described as a sovereignty association. Canada foots the bill for us when necessary while the US accesses revenue at will (the threshold and amount determined solely by the US). The US pays nothing while Canada assumes all the risk associated with the citizen. Canada loses revenue while the US skims off the top. Decide for yourselves what it means when that money meant to benefit the Canadian economy and make the lives of Canadians better leaves Canada to benefit another nation.

    Some would argue that US taxpayers in Canada pay tax to the US voluntarily, but when our government serves us up on a platter and our banks threaten us with account closures leaving us with little recourse other than to comply, is it really voluntary? Stopping FATCA in Canada won’t however stop the flow of revenue to the US, only an end to CBT will do that. Canada should remain a sovereign nation as much for US taxpayers as it should for accidentals, because until things change, we’re all considered the same – on both sides of the border.

  6. Someone please refute how this is not an infringement of Canadian sovereignty:

    The Canadian government sets policy [think any policy, in this case of example] to help residents save for their retirement, and provide option of a tax deferred retirement account to help residents achieve this end. Then US taxation policy penalises the account neutralises any benefit, and adds penalty on top for Canadian residents (who are US persons). Thus the Canadian government internal policy for its residents gets undermined by an outside power – the US. How is that not interference into the internal affairs and sovereignty of Canada? !

    Yes it is interference into Canadian sovereignty and internal affairs. However, legally it is not !! In comes the Canadian-US tax treaty that Canada signed, allowing US tax law to flow across the border unchecked, because the treaty covering all matters tax between the countries does not say otherwise.

    I am not understanding how this point is not gaining purchase at IBS: that the Canadian-US Tax Treaty is as much if not more an infringement on Canadian sovereignty as FATCA is. A difference is FATCA forced Canada to change Canadian internal laws.

  7. The US would most certainly find a similar claim by another nation on their citizens in the US to be an infringement of their sovereignty. Would anyone expect them to feel otherwise?

  8. You’re right, JC, Canada gave up its right of self-determination where it concerns its citizens in our treaty with the US.

  9. I feel like the tax professionals and indeed the Canadian politicians who refer to us as residents of the U.S. for tax purposes are missing the fundamental difference between RBT and CBT. I don’t see anything on the forms I fill out to suggest the U.S. considers me a resident for tax purposes. It’s just perfectly happy to tax me regardless of the fact I am not a U.S. resident and haven’t been so for many years. Despite the supreme court challenge (which I support) and the promises of the Republicans while not in office, I don’t see that changing any time soon.

  10. John, thank you for this excellent piece. And JC, thank you for such a clear description of a key problem; especially appreciate your second paragraph.

  11. Pingback: U.S. citizenship taxation burdens Canada’s sovereignty by imposing U.S. taxes on Canadian residents | Alliance for the Defence of Canadian Sovereignty

  12. It seems like a no-brainer to me that US CBT and it’s enabler, FATCA, are an infringement on Canadian sovereignty. The Canadian Conservative politicians who signed that IGA and rammed the implementing legislation through Parliament would have been brain-dead to not understand that. But they did it anyway. The question is why?

    The only thing I can figure is that after doing the math they calculated that the resulting flow of Canadian wealth across the border would be less than the potential damage to their sacred big banks and the potential damage to relations between the two countries. When the US passed FATCA it sure as hell wasn’t worried about potential damage to the relationship. The Cons were fond of commenting that “the US has a sovereign right to determine its own tax policies” but ignored the fact that Canada has also has a sovereign right to determine its tax policy as well and is under no obligation to bow to the US when there is a conflict.

    Harper and his cronies were so keen on getting Keystone approved they were willing to sell out so as to not make any waves which might put his pet project at risk. As we have seen with the continuing delay and obstruction of Keystone, that double-crossing Obama can not be trusted to do anything unless it works to his own political advantage.

    That’s why this lawsuit is so important. Canadians (and indeed the world) need to understand what the Canadian government has done to our sovereignty, to loyal Canadian citizens, and to the Charter of Rights. I’m hoping it will all blow up just in time for the upcoming Federal election. The Harperites like to beat their breasts about how they are standing up for Canada but nothing could be further from the truth.

  13. Every country has the right to define its citizens WITHIN its country borders, such as defining those who can be issued its passports. However, the USA defines citizens (and adds the concept of US persons for tax purposes) BEYOND the American borders to impose IRS obligations on tax-paying citizens of OTHER countries. In addition, since the USA also force banks in those countries to spend whatever it costs to collect data on “US persons for tax purposes” and force their compliance, these bank costs have to be passed on to everyone else. No matter what you decide to call this, the EFFECT is still the same: the expenditures by all overseas bank account holders to fund the FATCA data collection plus the pay-outs of “US persons for tax purposes” equals money extracted from these countries. Since this is REAL money that is lost from each country and the people therein, it is less money that the banks have to extend for loans, and less money for the double-taxed people to spend. That is the EFFECT of FATCA.

    Until the USA actually reciprocates by forcing its banks to collect data and making Americans in the homeland pay money to the CRA and other foreign tax agencies, the USA is not playing by the rules everyone else has to play by. In other words, no one else is imposing the equivalent of FATCA on Americans. Sure, they talk about it and pretend they might do something, but homeland Americans are not being double-taxed at this point in time. Even the Eritrean-Americans who pay a flat 2% tax do NOT impose any fees onto American banks and other people. Therefore, what the USA is doing is an over-reach of American sovereignty because it is actually extracting data and money from other sovereign countries, while not reciprocating.

    Moreover, the US does not get away with this in Canada because of its claim to be able to define its citizens so broadly per se, and Canada agreeing that ANY country has a right to do so (although our gov’t said it was all right for the USA to do so). If a little Central American country came to Canada to request the same thing, they’d get turned down so fast, it wouldn’t even make the news. We all know the US gets away with their outrageous definition of citizenship and “US persons for tax purposes” by being the reserve currency that global banks rely on, and forcing the banks to cooperate or else cough up even more punitive penalties. It gets away with this because it’s recently forced specific global banks to pay them BILLIONS of dollars and banks are scared. They remember what they did to a major bank in a country that is supposedly their friend — France. http://www.wsj.com/articles/bnp-agrees-to-pay-over-8-8-billion-to-settle-sanctions-probe-1404160117

  14. I recall how my MP John Weston was so proud that the IGA exempted certain accounts from reporting. I laughed and told him that only benefits the banks, not USP’s as they’re still reportable by the taxpayer to the IRS. He also mentioned how Canada wouldn’t collect against Canadians under the treaty. So you propose US tax evasion as a remedy for the problems created by the IGA, I asked him. No response. And what are you doing about all those treaty gaps, Mr Weston?

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