[Many readers living outside the U.S. who are not IRS compliant, have sought advice from tax attorneys on whether they should or should not enter into a lifetime of IRS compliance, and what would be the “cost”. Maybe your tax attorney living in Canada etc. is also an Enrolled Agent of the U.S. IRS, possibly affecting the nature of the interaction between attorney and you the client. What were the options suggested and especially disclosures made to you by your attorney? Attorneys must adhere to the professional and ethical standards of their law societies. See discussion below:]
In a recent post I mentioned the situation of a “Caroline” who seeks advice from a Canadian tax attorney (let’s say in B.C.) regarding a question of (IRS) tax compliance with a country foreign to Canada.
How should the Canadian tax attorney advise this frightened Canadian citizen– specifically, regarding the disclosure of relevant options she (or any Canadian) should consider before entering, or not entering, into tax compliance with United States Internal Revenue Service?
What information should (must) the attorney disclose to the Canadian to comply with professional standards and ethical obligations of an attorney?
USCitizenAbroad suggests that the Canadian tax attorney needs to disclose two relevant facts:
“It seems to me that the first thing that a Canadian lawyer (I note that the rules of B.C. Professional Conduct are included in this post) might be to say:
1. You are living in Canada. There is NO Canadian law (no matter who you are) that requires you to comply with U.S. tax laws. Canada may [find] it amusing. But Canadian law does not require compliance.
2. The Canada U.S. Tax Treaty means that Canada will not assist the IRS in collection on Canadian citizens”
In other words, must the Canadian tax attorney say something like this to Caroline in order to comply with professional and ethical codes of conduct?:
“Caroline, you have come to me for advice on whether you, a Canadian resident for 50 years, and a Canadian citizen, should enter into a lifetime of compliance with the IRS. Well, I’m going to talk to you about the US laws that I think are relevant, but I also need to disclose to you, because I must alert you to all the relevant facts, that there is no law in Canada requiring you to be compliant with the U.S. IRS, and at present Canada will not assist the IRS in tax collection for Canadian citizens. By the way, even though I am a tax attorney in Canada, I must also disclose to you that I am an enrolled agent of, and have obligations to, the IRS — and this represents a conflict of interest that you need to know…”
By not making this disclosure, are these Canadian tax attorneys in violation of their law society’s (the governing body) Professional Code of Conduct? For example. the British Columbia Professional Code seems to be pretty clear on disclosure of facts and options:
“A [Canadian] lawyer should obtain sufficient knowledge of the relevant facts and give adequate consideration to the applicable law [This must include Canadian law — correct?] before advising a client, and give an open and undisguised opinion of the merits and probable results of the client’s cause…”
Similarly, the Rules of Professional Conduct of the Law Society of Upper Canada say:
“The lawyer’s duty to the client who seeks legal advice is to give the client a competent opinion based on a sufficient knowledge of the relevant facts, an adequate consideration of the applicable [including Canadian] law, and the lawyer’s own experience and expertise. The advice must be open and undisguised and must clearly disclose what the lawyer honestly thinks about the merits and probable results.”
It would also seem that any Canadian tax attorney who is an “enrolled agent” with the IRS must disclose that significant conflict of interest (additional loyalty) to the client. Yes? See:
“A lawyer should disclose to the client all the circumstances of the lawyer’s relations to the parties and interest in or connection with the controversy, if any, that might influence whether the client selects or continues to retain the lawyer. A lawyer must not act where there is a conflict of interests between the lawyer and a client or between clients.”
Do these issues of “reasonable disclosure” need to be brought up with the law societies? Could someone from one of the Canadian provincial law societies please respond and address these questions?
More on interacting with a Canadian tax attorney who is an IRS-approved “enrolled agent”:
According to Circular 230, this Canadian tax attorney who is an enrolled agent of the IRS appears to be obligated by IRS to inform an IRS non-compliant client of the consequences of IRS non-compliance, but there seems to be no obligation to generally represent the total interests of the Canadian client (i.e. what a good (e.g., family) attorney is supposed to provide even if this involves disclosure of an option of non-compliance to a foreign state):
“§ 10.21 Knowledge of client’s omission. A practitioner who, having been retained by a client with respect to a matter administered by the Internal Revenue Service, knows that the client has not complied with the revenue laws of the United States or has made an error in or omission from any return, document, affidavit, or other paper which the client submitted or executed under the revenue laws of the United States, must advise the client promptly of the fact of such noncompliance, error, or omission. The practitioner must advise the client of the consequences as provided under the Code and regulations of such noncompliance, error, or omission.”
There is in Circular 230 a section on conflict of interests, but there is no mention of a conflict of interest that will occur because of competing loyalties (U.S. IRS vs. a sovereign Canada):
“§ 10.29 Conflicting interests. (a) Except as provided by paragraph (b) of this section, a practitioner shall not represent a client before the Internal Revenue Service if the representation involves a conflict of interest…”
So, do Canadian (etc.) Tax Attorneys advising Canadian Clients on United States IRS compliance typically comply with the “Professional Code of Conduct” of their law societies? What is your experience?
I am not sure where this belongs but it seems to highlight and clarify the fight going on in the Republican Senate in regard to the pressure from Obama AND Republicans on Senator Rand Paul and his blocking of eight tax treaties from ratification and his reasons for doing so.
Rand Paul’s Stand against Tax Treaties Is More Important than You Think
(Accounting Today, May 13, 2016)
President Barack Obama has now joined personally in renewed efforts to pressure Kentucky Senator Rand Paul to stop blocking the ratification of eight tax treaties pending before the U.S. Senate. Paul is sticking to his guns, and it’s important for Americans to understand why these treaties present a grave threat to our constitutional liberties.
Of the eight treaties, seven of them are bilateral agreements with various countries to facilitate cooperation to avoid double taxation and to lower compliance costs. Regrettably, these agreements also unnecessarily change the standard for providing personal financial information to law enforcement agencies from probable cause of criminal behavior, such as fraud – which Paul correctly regards as the only constitutionally permissible standard under the Fourth Amendment – to what amounts to wholesale bulk collection on the pattern of the NSA’s violations of email and phone privacy.
This is Paul’s only concern with these seven bilateral treaties. A simple amendment could conform them to constitutional standards and they could move forward expeditiously.
It is the argument of some practitioners abroad, including David Treitel if I have correctly understood him and the professional references he cited, that practitioners there may be obliged to advise clients to obey the [tax] laws of all countries, not just the one us which s/he practices. Interesting. Our interpretation is that we are protected by the First Anendment etc only if we don’t accept the prospective client and don’t take a fee. One goes broke that way, or joins the Compliance Mafia. Or quits practice and becomes a law librarian (like a friend of mine).
“If FIs were able to help the IRS whenever they want, IGAs would not have been needed.”
The IGAs are needed because some FIs don’t voluntarily want to help foreign governments.
“FIs, like individuals and government agencies, are subject to local law.”
Did Canadian law in 2002 prohibit TD Waterhouse in Canada from deducting 30% US withholding from Canadian sourced interest income in my account in Canada? If Canadian law did prohibit the FI from helping the IRS, I can sue TD Waterhouse, right?
‘Christians and Cockfield said;
“…Canada should only transfer data associated with U.S. persons who are not Canadian residents. This approach accords with longstanding practice and emerging global information exchange standards….”’
One would have thought they would know better. Longstanding practice and emerging global information exchange standards are to transfer to B country data associated with C country’s accounts of B country’s RESIDENT persons who are not C country’s residents. Longstanding and emerging practices are not to transfer to A country data associated with A country’s non-resident citizens who are B country’s residents.
“It is the argument of some practitioners […] that practitioners there may be obliged to advise clients to obey the [tax] laws of all countries, not just the one us which s/he practices.”
190 countries would all like to pass laws requiring US citizens living anywhere in the world to pay a 2% tax to each of those countries. And jail anyone who doesn’t pay the total 380%.
@Norman Diamond –
“The IGAs are needed because some FIs don’t voluntarily want to help foreign governments.”
The UK IGA is needed because without it the USC account information couldn’t legally be transferred to the IRS.
“Did Canadian law in 2002 prohibit TD Waterhouse in Canada from deducting 30% US withholding from Canadian sourced interest income in my account in Canada? If Canadian law did prohibit the FI from helping the IRS, I can sue TD Waterhouse, right?”
Can’t tell you, being neither Canadian nor a lawyer. In the UK, if a bank withheld money from my account, I’d take it up with the regulator.
“In the UK, if a bank withheld money from my account, I’d take it up with the regulator.”
Yes, when TD Waterhouse didn’t answer my question about whether it was correct to deduct two countries’ withholding from Canadian sourced interest, I asked the regulator. The regulator also didn’t answer me byt TD Waterhouse closed my account instead of answering.
@Norman Diamond – That sounds very frustrating, but it doesn’t (in my view) mean that banks in countries with Model 1 IGAs aren’t subject to local law due to the IGA. The IGA rests on the tax treaty, and the tax treaty is supposed to prevent double taxation, not legalize it. Did you consider referring it to the CRA under the Mutual Agreement article?
“the tax treaty is supposed to prevent double taxation, not legalize it”
That was 2002 so there was no IGA. Tax treaties already have defects that don’t prevent double taxation, which I’ll get to in a minute. I figured this particular case would eventually not result in double taxation because it was just withholding. I didn’t ask for Mutual Agreement assistance about TD Waterhouse’s double withholding because I expected it eventually to not result in double taxation.
Canada properly kept its withholding because in SBT+RBT, Canada’s withholding was deducted at the source and it was the correct amount of tax because I live in Japan.
The US should have refunded my US withholding when I declared it on my US return. In fact the US did refund US withholding when it was only reported on Form T-5 or (later by a US payer) on incorrect US forms, but the US delayed and/or refused to refund withholding that was partially or fully reported on Form 1099, which eventually became attributable to embezzlement by Monica Hernandez and cohorts rather than a law to prevent refunding.
TD Waterhouse had previously reported US withholding from US sourced income on Form T-5, and the IRS refunded it. TD Waterhouse had previously reported Canadian withholding from Canadian sourced income on Form T-5, and Canada properly kept it due to SBT+RBT. But 2002 was the first and only time that I had double withholding from Canadian sourced income, and it should have resulted in a US refund so it wouldn’t really be double taxation.
Now here are cases where tax treaties don’t help. When I lived in Canada and had Japanese sourced income, Canada gave a foreign tax credit for Japanese SBT but not for US CBT on the income, and the US gave a foreign tax credit for Japanese SBT but not for Canadian RBT on the income. The IRS used to have an office in the US Consulate in Toronto, so I asked someone there, and her answer was a lie. I probably should have asked for Mutual Agreement assistance.
I’m not sure if the 1984 Canada-US treaty might have made the US give a credit for the amount of tax paid to Canada, because the treaty was so much more complicated than the previous treaty which clearly did not provide for such cases, and I no longer owned shares of Japanese companies.
@Norman Diamond – I think we’re talking about different things. The point I was making, is that for a dual citizen it’s local law that counts. Hence, if the treaty says they won’t collect on Canadian citizens, then (IMO, and speaking as a non-Canadian layperson), Canadian citizens resident in Canada must surely be entitled under local law to rely on that provision. I only wish the US-UK treaty had a similar commitment for UK citizens. But perhaps the general UK policy of not collecting on foreign debts has the same effect.
“Hence, if the treaty says they won’t collect on Canadian citizens”
That depends on which “they” you’re talking about. We don’t seem to know if Canadian law prohibits TD Waterhouse’s Canadian operation from collecting for the IRS, but the treaty doesn’t prohibit it. The treaty prohibits the Canadian GOVERNMENT from collecting for the IRS, from a Canadian citizen.
Uh, wait. Is withholding a tax debt if it turns out that the person doesn’t owe any US tax? Maybe the Canadian government is allowed to collect withholding for the IRS, on condition that the collected money isn’t actually a debt. Laws are perverse.
It’s two different issues, isn’t it?
a) does Canada collect US taxes from Canadian citizens? Answer, no.
b) does Canadian law state when a bank is or is not forbidden to withhold US tax on payments to a US citizen resident in a third country? Answer? I don’t know, being non-Canadian and not a lawyer.
I was at the time a dual Canadian and US citizen. If I were solely a US citizen, then even the Canadian government would be allowed by the treaty to help the IRS.
It’s not “whether the Canadian government will HELP the IRS” but “whether they’ll COLLECT FOR the IRS”.
The bank withheld the money, and it wasn’t against Canadian law for them to do so. Correct? Canada didn’t collect the money.
‘It’s not “whether the Canadian government will HELP the IRS” but “whether they’ll COLLECT FOR the IRS”.’
I think collection assistance means both.
‘The bank withheld the money’
Yes. That’s why I corrected someone who said the IGAs weren’t necessary for the US’s purposes. The IGAs are necessary for the US’s purposes because SOME financial institutions don’t volunteer to lick the US’s butt the way TD Waterhouse did.
‘and it wasn’t against Canadian law for them to do so. Correct?’
You and I don’t know the answer to your question. Those who know aren’t saying.
‘Canada didn’t collect the money.’
Right. That’s why the IGA’s SOMETIMES aren’t necessary for the US’s purposes.
Why are we going around in circles?
Thanks for having your website to help us duals out there. I had a question that I wasn’t sure the answer to and I was wondering if maybe you guys could help me. If you are a dual us/Canada citizen and each country knows you are a citizen of the other country, what inherent dangers are there to your private information? As I understand, tax and banking information is shared between both countries and there have been documented cases of Canadians unable to cross the U.S. border due to past suicide attempts being on an uploaded police database, but is there any other information that is shared? If a federal Canadian govt agency is requiring proof of American citizenship for a legally accepted reason, is there any danger in providing a copy of American passport for them to keep on file? Is that any different than entering Canada with your American passport?
I can only address this part of the question, and don’t know if the answer might have changed since my experience.
“If a federal Canadian govt agency is requiring proof of American citizenship for a legally accepted reason, is there any danger in providing a copy of American passport for them to keep on file?”
When I was a dual and needed some number of pieces of identification to renew my Canadian passport, and very few of my pieces of identification were written in one of Canada’s official languages, I used my US passport as a piece of identification to renew my Canadian passport. The Canadian consular officer wrote details of my pieces of identification and there was no problem.
Though that wasn’t exactly “requiring proof of American citizenship”. If I’d wanted to pay for a certified translation of my driver’s licence, I didn’t have to use my US passport to renew my Canadian passport.
Latest from Rettig on FBAR Compliance;
Rettig, Charles P., Why the Ongoing Problem with FBAR Compliance? (October 20, 2016). Available at SSRN: https://ssrn.com/abstract=2856781
As US attorney, of course asserts that the problem is that the IRS needs to appear more ‘trustworthy’, and that coming into ‘compliance’ is simply the ‘right thing to do’.
Of course, accepting the base assumption that CBT is right because it is ‘the law’ no matter where in the world you reside, and that that is sufficient rationale and justification for the US extraterritorially taxing and punishing based on one’s birthplace or parentage.
Mentions Canada and Mexico specifically in speculating why the majority of those the US says are US taxpayers ‘abroad’ aren’t complying. Ignores ‘accidentals’, sovereignty, high cost and complexity, etc.