Liberty and justice for all United States persons abroad

The Isaac Brock Society

Posted on by Posted in Issues regarding US persons abroad 27 Comments

What concessions does your country make, (as a Treaty Partner of the United States of America), that causes your life to be miserable?

 


 
From the Cook v Tait Book , our much-missed friend , Roger Conklin references a timely paper by Reuven Avi-Yonah , “The Case Against Taxing Citizens”:
 

Finally, we could give up on the “savings clause” in our tax treaties, which we insist upon to enable us to tax nonresident citizens but which we may well have to pay a price for in treaty negotiations.  

 
“..may well have to pay a price for in treaty negotiations…” – USCitizenAbroad explains WHY:

 

This is one of those comments that just has to be a post on its own. Bravo USCitizenAbroad!
 
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@All

Great comments to this post.

I think it’s worth being very specific about what the Savings Clause means for Canadian citizens/residents, who are subject to the full force of Canada’s “low tax” (I am kidding) system. By agreeing to the “Savings Clause” the Government of Canada has:

agreed to allow the United States to impose U.S. taxation, according to the rules of the U.S. Internal Revenue Code (which treats all Canadian assets as foreign and subject to special rules of taxation, reporting and penalties), on:

– those Canadians, which the U.S., in it’s sole discretion defines as U.S. citizens. (You will note that “citizen” is not defined in the Treaty anywhere. You will also note that under the FATCA IGA , “U.S. Person is defined under the terms of the Internal Revenue Code which allows the U.S. to define a U.S. person anyway that it chooses to do so)

What this means practically is that, THE GOVERNMENT OF CANADA HAS AGREED TO ALLOW THE UNITED STATES, to subject the following (and these are just examples) activities of some Canadian citizens/residents to the full force of the U.S. Internal Revenue Code:

– All Canadian bank accounts and financial assets must be disclosed to the U.S. Government (in some cases the Financial Crimes Division – FINCEN)

Looking for Mr. FBAR in search of FBAR fullfillment and consciousness

FATCA Form 8938 – Where it came from, how it came about and what it means for US Citizens Abroad

– All Canadian mutual funds are treated are subjected special rules of punitive taxation (this is so absurd that if a Canadian funds holds the same stocks as the U.S. fund, the Canadian fund is subject to tax rates that can come close to 100& of the gains)

PFICs

– Impose punitive taxation the Canadian shareholders of Canadian Controlled Private Corporations (including on “pretend income” that the Canadian has never received)

Investments Effectively Prohibited to Canada-US Dual Citizens

– impose an Excise Tax when a Canadian citizen buys a Canadian life insurance policy

– impose taxation on the RDSPs (when they are not taxed in Canada) and on the contributions made by the Government of Canada

Why US Citizens in Canada Should not Invest in TFSAs or any other Foreign Trust – RRSPs excepted

– impose taxation on RESPs which are NOT taxable in Canada (in the event that the RESP is created by a Canadian grandparent for a U.S citizen kid, there will be special taxation if it is treated as a “Foreign Non-Grantor Trust” and the punitive throwback rules apply

– impose U.S. capital gains taxation on the sale of the principal residence which is not taxed in Canada

Capital Gains Tax Principal Residence

– impose taxation on “pretend gains – treated as income and not capital gain” if because of exchange rate fluctuations the U.S. dollar amount to discharge a mortgage is less than the principal amount of the loan

How Fluctuating FX Rates Generate Capital Gains Taxes on the Discharge of Debt US Citizens Abroad

– impose taxation on the TFSA which is tax free in Canada

TFSA

Why US Citizens in Canada Should not Invest in TFSAs or any other Foreign Trust – RRSPs excepted

– impose taxation when a U.S. citizen spouse transfers property to an “alien” (non-U.S. spouse) including in the circumstances of a divorce

FBAR Marriage

– threaten Canadian citizens with life altering penalties

The Taxpayer, the IRS and the Professionals Where to go from here

– in the event that the poor Canadian attempts to relinquish their deemed U.S. citizenship, the Government of Canada has agreed to allow the United States to impose it’s draconian Exit Taxes (which are most punitive in relation to assets outside the United States) on Canadians

877A & the Exit Tax

– and certainly more

Now, I want to make it crystal clear that this is what the Savings Clause means. This is what the Government of Canada has agreed to do. For what purpose? Do these morons even know what they did? Furthermore, I want to emphasize again and again that:

(1) the Government of Canada has agreed to

(2) allow the U.S. to impose these rules of taxation on any Canadian citizen/resident

(3) who happened to have been born in the USA and

(4) has not specifically relinquished U.S. citizenship.

Even if you don’t care about the individuals and even if you regard them as the Canadian Government does as “U.S. Taxable Property in Canada”, the Government of Canada is agreeing to “after tax paid Canadian capital being stolen from the Canadian Economy and transferred to the United States!

Furthermore, I want to point out that this is nothing like FATCA (which the Government of Canada pretends is nothing but an information exchange). This is a clear agreement on the part of the Government of Canada (and other countries that have signed this form of agreement) to allow the United States to impose these taxes, penalties and obligations on Canadian citizens. Sure, the treaty states that Canada won’t assist Obama’s IRS in collecting these U.S. taxes on Canadian citizens. But, the fact remains that the Government of Canada (and other Governments in the world have agreed) has allowed the U.S. to impose these taxes on Canadian citizens/residents. This is NOT the same thing as agreeing to an information exchange (even that is not justifiable). I will say it again:

this is an agreement to allow the United States to impose direct taxation:

A. On Canadian citizens/residents

B. According to the rules of the Internal Revenue Code which have been designed to punish “Foreign financial products” (not like the gentle nation of Eritrea which only wants a small excise tax)

It’s time to wake up. It’s time to bring pressure on these people. It’s time to rally people in every country against the U.S. Tax Treaty.

Oh and by the way:

This post ALSO makes reference to the new U.S. Model Tax Treaty. The current savings clause (as offensive as it is) is at least based on existing U.S. tax laws. The Model Tax Treaty has a savings clause that is so broad, that it can be used to enforce taxation on people long after they have ceased to be U.S. citizens and based on laws that do NOT exist today.

Really, it is time to get an organized educational campaign against this going. Maybe there was a reason that Justin Trudeau appointed a Minister of National Revenue who doesn’t understand taxes. Nevertheless, the education and activism must begin.

Sleep tight and don’t let the Obama bugs bite!

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Here’s my question: Where does the Tax Division of Ministry of Finance get the authority to sign “on our behalf?” Does anyone know? Maybe it’s time for all “US Persons” to begin pummelling (and I mean pummel) their politicians and tax agencies about this….well before this nasty piece of garbage is signed in the future……….

27 thoughts on “What Canada Allows by Signing the ‘Savings Clause’ in the US-CDN Tax Treaty”

  1. This post shows why the treaty and the savings clause is completely one-sided and unfair. For example, Canada does not track how long an American spends part of each year in Canada so they can double-tax them, but the US does. And the US can change the formula of how long a Canadian stays in the US for tax purposes anytime they please and get away with it because we share a “treaty”.

    You mentioned the problem about how a “citizen” is not defined in the so-called “treaty” anywhere, but how does that matter when the US demands financial information of a much broader group – “US persons”! In addition to citizens, a “US person” entails the spouse or child of a US-born person, the person with a defunct green card, the person who stays in the US a given amount of days PLUS ANY ACCOUNT HOLDER with an “indicia” flag that prompts any banker to forward financial data to the CRA and US that would be otherwise ILLEGAL to forward to the CRA!

    It’s outrageous! It’s unbelievable that they get away with this, but they do!

  2. By signing the tax treaty Canada has waived its sovereign right to solely determine tax and compliance obligated of Canadians.

    Here is a fight back letter in Australia, responding to the Australian Treasurer’s response that the taxation matters are a matter for the US government in the first instance. (wrong by the way, for an Australian resident the matter should be raised with the Australian Government – Master Nationality Rule). http://isaacbrocksociety.ca/fatca-and-australia/comment-page-33/#comment-7561948

  3. @JC

    That is one hell of a letter! I can see the Australians already lead the pack in dealing directly with their tax agency on treaty matters. WOW!

  4. @Patricia Moon Canada is definitely leading with Isaac Brock Society, Maple Sandbox, ADCS, lawsuit, ADCT, etc.

    @Jak Dac got that response from our Treasurer. I’ll try and get attention to the reply letter to the Treasurer here in Australia via Twitter. There is an election campaign here currently. I have a link to a Tweet by the Canadian Greens leader “we need to repeal FATCA” and I’ll try and get that infront of the Australian Greens leader. Also will try with our Coalition and Labor parties.

    As it is easier here to get a meeting with one’s local MP then with a “representative” in far away US, then what is discussed? I don’t know of account closures here due to FATCA. So then that leaves the injustices of the tax treaty to focus on and Tax Treaty Gaps (you told me that one, which I think you may have gotten from Allison Christians) guaranteeing double taxation.

    I believe the CRA is more upfront with US tax obligations of Canadian residents. In Australia the government seems to be in denial of this.

  5. It seems to me that Mr. Arvay is going to need to include in his arguments an effort to prove that the application of the “Savings Clause” of the Canada/U.S. Tax Treaty is, in itself, unconstitutional on the grounds that it causes some Canadians to be perpetually bound, within Canada’s sovereign borders, to financial servitude to a foreign country.

    Until recently I had thought that treaties were signed to *protect* people. In the case of a Tax Treaty with the United States they are a trap.

  6. My eyes kind of glaze over when people write about the tax treaty, so I could be completely missing something here, but this is what I think. The US/Canada Tax treaty is great. Great for ensuring you don’t pay double tax on ‘foreign’ earnings where foreign earnings are earnings earned foreignly (i.e. not sourced from the country where you live). For example, the tax treaty ensures that a Canadian living in Canada collecting SS only pays tax on the SS to the Canadian government because this is where she lives. Similarly, a Canadian living in USA collecting CPP, pays tax on CPP only to the American government because this is where she lives. In this example, the treaty makes total sense. Each country gets to tax only ONE of the person’ pensions based on where the person lives. Each pension belonging to a person is taxed by only one government. It’s only the fact that the USA is dumb enough to throw citizenship into the tax treaty mix of trying to make taxation fair for citizens and for governments that the whole thing becomes a big joke. Leave the tax treaty to handle the REAL foreign earnings and stop nullifying the whole principle behind the tax treaty by allowing one party in the treaty to tie the ‘foreign earnings’ part to the ‘citizenship’ part. May as well not have the treaty at all.

    Coffee finally kicking in. Have no idea if what I wrote made sense.

  9. “The US/Canada Tax treaty is great. Great for ensuring you don’t pay double tax on ‘foreign’ earnings where foreign earnings are earnings earned foreignly (i.e. not sourced from the country where you live).”

    I don’t think so. When I lived in Canada, held US citizenship, and received dividends from Japanese companies, here’s what happened. Canada gave a foreign tax credit for Japanese withholding paid at the source, but no credit for US tax on the same income. The US gave a foreign tax credit for Japanese withholding paid at the source, but no credit for Canadian tax on the same income. So I paid about 1.5 taxation, not as much as full double taxation but still offensive. (An IRS employee said that the second part of Form 1116 avoids that problem by adding up all amounts of non-US taxes, i.e. one of many many lies by IRS employees. The first part of Form 1116 still prevented getting credit for Canadian tax charged on Japanese income.)

    I couldn’t figure out if a later Canada-US tax treaty actually addressed the problem or not.

  11. I am re-posting the information Bubbles has put on the Media and Blog Articles thread.

    You really have to listen, particularly to the last part where the Reed Amendment is over-emphasized beyond belief and where internet information (read “IBS”) is “bad.” Your blood guaranteed to boil.

    I heard the same thing in Toronto last year.

    Tune in to the May 27 hair raising edition of the Early Edition at 51:25:

    http://www.cbc.ca/radio/popup/audio/listen.html?autoPlay=true&clipIds=&mediaIds=2689581796&contentarea=news&subsection1=regions&subsection2=britishcolumbia&subsection3=earlyedition&contenttype=audio

    the contact info for these people is:

    Host: Rick Cluff
    rick.cluff@cbc.ca

    Producer:Shiral Tobin
    Shiral.tobin@cbc.ca

  13. A few years back I discussed the tax treaty with a former employee of the Australian Treasury. He was well aware of the Savings Clause in the US Aus Tax Treaty and considered it “bullshit.” He even implied more junior staff of the Australian Treasury wanted to put up a fight about it but were overruled by more powerful senior Australian Treasury employees that did not want to antagonize the US.

    This former employee is now quite wealthy himself and travels to the US frequently in addition to having relatives living in the US. However, he made it quite clear to me he will NEVER EVER EVER become a US citizen or green card holder himself due to the tax consequences despite being someone he considers himself fairly pro American by Australian standards.(This was in the earliest earliest days of Brock when FATCA was still not well known).

    **He also was quite opinionated about his poor opinion of Australian Banks. He considers most departments of the Australian government to be better run than the Big 4 Australian banks.

  14. Actually, I’d think that treaties create a different kind of taxpayer, sort of a hybrid that doesn’t exist in either country’s tax system, as they guarantee we pay the higher of each country’s taxes while receiving the less of either country’s deductions.

    I general, residents in either country who are unaffected by tax treaties enjoy much lower tax and compliance fees. Tax treaties seem to be the mechanism for creating “dual citizens” that wouldn’t otherwise exist in either country’s laws, no?

  15. @Ginny, I hope you read the following. It may be helpful for the ADCS lawsuit.

    What both the US Canada Tax Treaty and the FATCA IGA does, is that it results in the “forcible destruction” of Canadian Citizenship of a Canadian Citizen resident in his/her own country of Canada.

    Just as the US Supreme Court ruled in Afroyim v. Rusk in 1967 against the “forcible destruction of his citizenship” by Congressional action, so should a Canadian Court now be upholding the Charter and the rights of Canadian Citizens against the “forcible destruction” of their citizenship.

    It can NOT be argued that either the Treaty itself or the IGA does not result in the forcible and involuntary destruction of ones Canadian Citizenship in favour of the remotest taint of tenuous US nationality, which in your case and that of Gwen was never asked for nor is wanted today.

    Make no mistake, your Canadian Government is a party to the “forcible destruction” of your Canadian Citizenship in favour of a rather tenuous US Citizenship.

    I think Brockers need to start referring to all these actions worldwide as the “forcible destruction” of our respective nationality. Notes to our friends in Australia who are diligent…..

  16. @Bubbles…you are on to something. The Tax Treaties were originally written in an age when dual nationality with respect to the USA did not exist outside the closet.

    Because it did not exist there was no infringement. Further, folks with place of birth indica likely never considered themselves American and everyone was happy with that.

    So the Tax treaties work for the nominal ex pat who is working overseas for a few years and then is coming home. Thats what it is designed for and that is the historical origin.

    The Tax treaties were NEVER designed for the Citizen of X who had tenuous US Citienship and lived her life as a Xian.

  17. The savings clause is redundant.

    The “forcible destruction” of our citizenships by turning us into hybrids, or “dual citizens” George.

    Next time someone tells me that the tax treaty relieves double taxation, I’ll tell them that it causes it. We have RDSP’s and RESP’s to prove it.

  18. @Bubblebustin –

    as they guarantee we pay the higher of each country’s taxes while receiving the less of either country’s deductions.

    I general, residents in either country who are unaffected by tax treaties enjoy much lower tax and compliance fees.

    More explanation than just tax treaties guarantee double taxation. Not only are you talking about double taxation, but address lower deductions, and much higher compliance fees. Yet also restrictions on investment/employment.

    Then people will say renounce. Then the explanations go on.

  19. @JC

    It would be interesting to explore what conditions would be like for us today should these treaties not have existed. Does the creation of “dual citizen” vis a vis the treaty actually encourage renunciation?

    If it weren’t for these treaties, the US may have done away with CBT a long time ago.

  20. @Bubbles, “It would be interesting to explore what conditions would be like for us today should these treaties not have existed. ”

    Short term expats with blue books would have had problems.

    “Tenuous Americans” would have been just fine and likely better.

    Pre-2009 we would have never ever known the whirlwind.

  21. @Brockers….I have been thinking of other ways to skin this cat and if it can be done for one country it will bloom around the world.

    Let me use the USA and UK treaty as an example.

    It defines in general definitions; “(j) the term “national” of a Contracting State, means: (i) in relation to the United States,……(ii) in relation to the United Kingdom, (A) any British citizen, or any British subject not
    possessing the citizenship.”

    The treaty also has tie breaker rules to determine residence and the last statement on that says; “(d) if he is a national of both States or of neither of them, the competent authorities of the Contracting States shall endeavour to settle the question by mutual agreement.”

    Where am I going on this?

    Can the savings clause of the Treaty be enforced against in this example a UK Citizen resident in the UK with tenuous US nationality?

    I am now wondering if my question resolves this matter?

    I think the next generation of treaties MUST cover what is the status of so called dual nationals.

    Personally I believe as in my example if the person is resident in the USA they should be treated as USC and if in the UK as a UK citizen.

    The reason that the treaty needs to define the status of so called duals is the treaty frankly falls apart with duals, it does not work!!! Because of that the treaty needs reworking.

    Wonder of John Richardson or Haydon Perryman have any thoughts in that regard?

    It would be a quick and easy and face saving fix for a lot of people.

  22. Fact is, George, the more our countries do to help us save for our retirements, the more the US Treasury has to gain – and our governments are more than happy to facilitate that through the treaties!

  25. “I doubt the current tax treaty prevents this;
    https://tax-expatriation.com/2016/05/06/the-life-insurance-gotcha-tax-irs-assesses-excise-tax-on-normal-life-insurance-policies/”

    The tax-expatriation guy understated part of the problem and overstated part of the problem.

    First the good news. The casualty insurance part of it is overstated. Most of us have nothing to worry about.
    https://www.law.cornell.edu/uscode/text/26/4371
    4373(1): “4 cents on each dollar, or fractional part thereof, of the premium paid on the policy of casualty insurance or the indemnity bond, if issued to or for, or in the name of, an insured as defined in section 4372(d);”
    https://www.law.cornell.edu/uscode/text/26/4372
    4372(d)(1) only applies to US residents.
    4372(d)(2): “a foreign corporation, foreign partnership, or nonresident individual, engaged in a trade or business within the United States, against, or with respect to hazards, risks, or liabilities within the United States.”
    So as long as we have no trade or business in the US, and don’t buy insurance with respect to problems in the US, casualty insurance isn’t taxed by the US.

    Now the bad news. Other kinds of insurance are taxable by the US, no matter which non-US company issues the insurance, no matter what kind of person (US or non-US person) buys it, no matter which country (US or non-US) they reside in, etc. For example if a single-citizenship German in Germany buys life insurance from a German company in Germany, and none of them ever have any connection to the US whatsoever, the US taxes it.
    https://www.law.cornell.edu/uscode/text/26/4371
    4371(2): “1 cent on each dollar, or fractional part thereof, of the premium paid on the policy of life, sickness, or accident insurance, or annuity contract”
    Reinsurance gets hit too.

    Hey North Korea, why don’t you levy a 150% assets tax on all US insurance companies who have no connection whatsoever to North Korea? Though by the way, as you’ll soon be capable of enforcement, please kindly leave Canada alone when you enforce your collection from the US.

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