March 4, 2016, Troy Lewis – “AICPA Pushes to Ease Tax Burden on U.S.-Canada Accounts”
The American Institute of CPAs is asking the Treasury Department to provide tax relief to the cross-border savings accounts of U.S. and Canadian citizens.In a letter that the AICPA sent Friday to the U.S. Treasury Department, the Institute asked the Treasury to adopt three specific recommendations that would provide tax relief to citizens of the United States and Canada who have various cross-border deferred and tax-exempt savings accounts which are often subjected to double taxation and unexpected current inclusion in income.
In addition, the AICPA urged the Treasury Department to work with the Canadian Department of Finance to provide similar relief as appropriate. Requests comparable to the AICPA’s are being submitted by the Chartered Professional Accountants of Canada (CPA Canada) to the Canadian Department of Finance and by The American Chamber of Commerce in Canada (AmCham Canada) to both the U.S. Treasury and Canadian Department of Finance.
In the March 4, letter, AICPA Tax Executive Committee chair Troy K. Lewis explained that both the U.S. and Canada have tax provisions that allow individuals to establish tax-deferred and/or tax-exempt savings accounts. Article XVIII of the United States-Canada Income Tax Convention and associated protocols provides bilateral deferral of tax or inclusion in income for various qualified or registered pension or retirement plans, he wrote, but does not provide any relief from double taxation or current inclusion in income for other plans and accounts such as education plans, disability savings plans and, under certain circumstances, Roth IRAs.
Lewis identified individuals who are impacted as Americans living in Canada, Canadians living in the U.S., Americans living in the U.S. who contributed to Canadian plans while living in Canada and Canadians living in Canada who contributed to a U.S. plan while living in the U.S.
“Frequently, a cross-border move will result in adverse tax consequences such as unanticipated inclusion in income of amounts saved in a tax-deferred or tax-exempt account which may require the cross border individual to liquidate the accounts to avoid the adverse tax consequences,” said Lewis. “Often, the forced liquidation itself can result in unanticipated taxable income. Furthermore, the U.S. imposes complex reporting requirements, such as those regarding foreign trusts and Passive Foreign Investment Companies (PFIC), for individuals participating in Canadian plans. These tax implications can adversely impact the individuals and their families, the social objectives of the countries and cross-border mobility.”
In the letter, Lewis wrote that the AICPA recommends that Treasury implement the following measures in order to reduce the tax and reporting burdens associated with various cross-border deferred and tax-exempt savings accounts:
1. Provide U.S. citizens and residents tax-deferred or tax-exempt treatment, comparable to that offered by Canada to its citizens and residents, for their contributions, income and withdrawals from properly established Canadian Registered Education Savings Plans (RESP), Canadian Registered Disability Savings Plans (RDSP) and Canadian Tax Free Savings Accounts (TFSA).
2. Exempt properly established Canadian RESP, RDSP and TFSA from classification as grantor trusts. Additionally, exempt U.S. citizens and residents from various onerous statutory filing requirements for foreign trusts and PFICs which can currently exist for these plans.
3. Work with their Canadian counterparts at Finance Canada to provide similar relief from taxation and burdensome reporting requirements for Canadian citizens and residents who hold and contribute to properly established 529 Plans, qualified ABLE (Achieving a Better Life Experience) accounts and Roth IRAs in the United States.
I am glad to see this is recognized and support (as a start) — American Institute of CPAs (AICPA) recommendation that Treasury implement measures to reduce tax and reporting burdens associated with various cross-border deferred and tax-exempt savings accounts.
They missed the HSA. Of course this is a single country and the problem exists between many countries and the US. It’s a total mess. The more people that get caught up in it the more chance it gets fixed. Too late for me though.
You’re absolutely right, Neill, this is not a problem only in the US / Canada Treaty (and much too late for you and others). It is a start and I’m glad to see some awareness. Will the Government of Canada be able to see this (as a start) as well?
You folks are working on the wrong plan…all this cross border and tax forms of all kinds are not the problem. The problem is the Marxist Income Tax. Here is the solution for you and those of us who stayed home.
1. Void all federal Tax laws.
2. Abolish the IRS.
3. Pass the FairTax which has anyone with an ounce of brains, approval This is a tax everyone will have to pay as they spend–IT also has the added attraction of rolling back some of the socialist plans the world government people are promoting… Support the FairTax and fire your accountant as well as the possibility the IRS will some day make you the object of their affection.
My thanks to the AICPA for the recognition that something is terribly wrong and needs repair. The suggestions made in this letter are certainly a step in the right direction. But what we really need, at the end of the day, is a complete abandonment of CBT.
Well, that’s a nice idea but the US government will never make those adjustments for 2 reasons:
1. They want the money.
2. They don’t care about the compliance nightmare.
@maz57 – spot on.
This demonstrates how CBT requires other nations to all ways be playing catch-up after the fact, and after their citizens have already been caught. It doesn’t correct the problem AT ALL! This is not a preventative measure – it’s a corrective measure against the devastating effects of CBT and only AFTER the damage has been done. To do otherwise, governments will have to consider how their tax-deferring vehicles affect USP’s BEFORE they implement them. What governments really should be doing is pressuring the USG to dump CBT – not accept the recommendations of organizations that benefit from CBT.
All this does is create a nicer CBT.
What about the sale of principal residences?
If it’s right to exempt someone from double taxation then it’s wrong to subject them to it in the first place.
This is just tinkering around the edges. The fundamental problem is CBT (as mentioned in the comments above this one).
This discussion and the one about FBAR have started me thinking about how CBT vs RBT is analogous to the Copernican Revolution. Before the 16th century the powers in charge had a geocentric view of the universe (much as the US with CBT thinks that the universe revolves around the “greatest country on earth”). Over time scientific evidence destroyed the geocentric view, replacing it with a heliocentric view of the solar system and better knowledge of the wide array of galaxies that populate the universe. I can only hope that at some point the US government, like the Catholic Church in the 16th century, will realise that they are not the centre of the universe.
“The fundamental problem is CBT… I can only hope that at some point the US government, like the Catholic Church in the 16th century, will realise that they are not the centre of the universe.”
In my opinion, the fundamental problem is not CBT. The fundamental problem is that the rest of the world apparently agrees that USA is the center of the universe. Until that changes US persons will always be owned by the USA, subject to its whims, CBT or not.
And where are is our new brave leader Justin and his team. Why is it accounting professionals on both sides of the border who are trying to persuade the US Treasury, to treat RESPs, RDSPs and TFSAs as US tax exempt when the federal Liberals are fully aware of the tax treaty gaps and the US extraterritorial tax and penalty regime that Canadians are not protected from. Where is the commitment of our own Prime Minister and his fellow Parliamentarians to protect Canadians by giving up the defense to the ADCS lawsuit, and to renegotiate the Canada US tax treaty to protect those Parliament have a duty of care for and fiduciary duty towards, and are sworn to serve?
And let us never forget that Conservative Flaherty shed a tear for his creation of the RDSP http://www.cbc.ca/news/politics/disability-savings-plan-hits-home-for-flaherty-1.1050186 , yet didn’t get them and RESPs and TFSAs exempt under the Canada US tax treaty, despite being one of the longest serving Finance Ministers. Flaherty didn’t shed a tear for those Canadians with a disability whose RDSPs and disability benefits were and are still unprotected in the Canada US tax treaty. And he knew that those deemed incompetent could never renounce. This is the most specific he got in terms of responding to the plight of Canadian citizens and residents deemed by the US to be taxableUSPersons/citizens http://maplesandbox.ca/wp-content/uploads/2012/11/Flaherty-letter-November-8-2012.pdf c/o schubert who posted it at Maple Sandbox back in 2012 http://maplesandbox.ca/2012/flahertys-november-8-letter-note-same-day-link-with-call-for-fatca-comments/
I like that nugget of wisdom @Bubblebustin:
“If it’s right to exempt someone from double taxation then it’s wrong to subject them to it in the first place.”
>The fundamental problem is CBT
No actually it’s not. Even with RBT loads of people will get screwed over when they move from country to country. RBT is only part of the solution. Think about the problematic accounts for a bit and then think about people who want to work in some other country and still have the option to return or stay as they see fit.
None of my problems were caused by CBT. If the UK tried to put it in place I could renounce to escape. I can’t really every leave the US and live int he UK under the current laws of both the US (exit tax) or the UK (PFIC like taxes).
@Neill – I agree having a foot in more than one country can bring problems, even when both countries are RBT. The UK has a ton of tax treaties with other RBT countries, trying to sort out the double taxation problems, and no doubt it’s the same for many other countries.
But I still think the two examples you mention – the IRS exit tax and the IRS treatment of UK mutual funds as PFICs – are both due to CBT.
The exit tax is a way to try to tax renouncing, foreign-dwelling US citizens in advance, and get as much out of them as possible to compensate the US for all those future years when, as renunciants, they won’t be US-taxable.
The IRS perversity of calling UK mutual funds PFICs is so that the IRS can tax them punitively to encourage foreign-dwelling US citizens to invest in US funds instead – in other words, it’s a CBT-facilitated way to bring capital from the UK to America.
I think ending CBT would be wonderful. I’m not optimistic though.
@badger @Neill @iota
I’m probably completely off the wall here, but I think we make a mistake when we say that CBT subjects US persons to double taxation…by the US.
Because the US reserves the right to tax its citizens wherever they reside, does it not in fact translate to the US treating the tax other nations levy on their residents as double taxation – which tax treaties continuously fail to offset by virtue of the fact that other nations must continually play catch-up to exclude its tax-deferring investments from US taxation for their residents?
CBT by nature will always result in double taxation, as long as other countries continue to introduce tax-deferring investments for its residents. Might this be a valid argument against CBT?
@Bubblebustin – As I understand it, bilateral tax treaties are in theory supposed to
a) make sure nobody gets away with using tax treaty benefits to escape tax in both countries
b) relieve double taxation through tax credits
So ideally all would pay tax and none would pay double tax.
But the second aim doesn’t always work, when one of the countries is the US, because if the other country gives its residents a tax break, that means they don’t have any tax credits, so instead of the taxpayer getting the intended tax break, they pay tax to the US instead of the country where they live.
So tax-deferred investments, tax allowances, child benefit, everything that’s tax-free in the country of residence is vulnerable to CBT. It feels like double taxation, but America would probably not see it that way.
Well let’s see how the Treasury Department responds to the AICPA’s recommendations. Think they’ll get something like “Treasury doesn’t believe that we should cut breaks to people who choose to leave the country”?
The fact that we would pay the higher of the two tax systems sure feels like double taxation to me!
“The fact that we would pay the higher of the two tax systems sure feels like double taxation to me!”
Yes, to me also.
More on the AICPA recommendation here:
“1. They want the money.”
“2. They don’t care about the compliance nightmare.”
Precisely. If 1 and 2, then 3…
3. No one complies.
You miss my point. The UK has PFIC like laws for foreign mutual funds. So I can’t live in the UK without selling my portfolio and paying all the tax, I can’t live in the UK because of my HSA, my two 529s. I also can’t live in the UK because of the IRS and it’s PFIC laws and the fact that I might want an ISA or the exit tax if I don’t want to pay anymore.
Also reported in AccountingToday,
AICPA Recommends Changes in IRS Offshore Voluntary Disclosure Program
Relief may be on the way for people who pay tax on both sides of the border