The specific problem in the U.S. tax reform bills related to U.S. person-owned incorporated businesses in Canada, Australia, France, UK, etc. appears to have been identified.
However, apart from the general solution of changing the bills’language to end U.S.-imposed worldwide taxation on individuals, WHAT IS THE ONE SENTENCE CHANGE IN WORDING OF THE TAX BILLS LANGUAGE THAT WOULD FIX THE PROBLEM IDENTIFIED IN THIS POST?
This one sentence change could be sent to the drafters and supporters-antisupporters of the bills.
IF YOU ARE INTERESTED, YOU CAN FORWARD OUR PRESS RELEASE WITH YOUR COMMENTS TO POLITICIANS AND OTHER ORGANIZATIONS IN U.S., CANADA, AND ELSEWHERE.
Tricia has some thoughts that you might include (in a comment below).
— In this press release we ask United States Congress to fix a problem in the present House/Senate tax bills that targets certain Canadian citizen/residents who own an incorporated business — and more broadly — to “stop imposing worldwide taxation on any Canadian resident”.
The press release is being sent in part to members of U.S. Congress and also to Canadian politicians who should be in the business of defending Canadian citizens from harm caused by a foreign state.
The focus of the press release is intentionally on “Canadians”. The word “American” is not mentioned. Our use in the text of the now-offensive term “U.S. person” (defined by the U.S. Internal Revenue Service) does not imply that U.S. person law applies to any Canadian resident or that any of these so-designated (by the U.S.) Canadians have ever consented to be U.S. persons.
Here is the link to the press release.
November 24, 2017
For Immediate Release
U.S. CONGRESS: DO NOT CONFISCATE OUR SMALL CANADIAN BUSINESSES AS PART OF YOUR TAX REFORM
On November 16, 2017 Rep George Holding, of the House Ways and Means Committee, in an exchange with Chairman Brady, urged that as part of tax reform that: The United States join the rest of the world by adopting “residence-based taxation”. This would END the U.S. current practice of imposing worldwide taxation on certain residents of other countries.
As U.S. law currently stands, many Canadian citizen/residents (who are deemed by the U.S. to be “U.S. Persons”) find themselves subject to U.S. taxation (ON THEIR CANADIAN INCOMES and CANADIAN ASSETS), even though they live in Canada and pay taxes to Canada.
The application of U.S. tax law into Canada – a principle enforced by FATCA – has profoundly negative consequences, some of which are intended and some of which are unintended.
This is a request that the wording of the United States “Tax Cuts and Job” bill be revised so as not to harm, even more, small Canadian businesses possibly included, we believe inadvertently, by your proposed tax reform legislation.
As your tax Senate and House tax reform bills are presently worded, Sec. 14103, for example in the Senate bill, might be interpreted to confiscate a significant percentage of the retained earnings of certain small “Canadian Controlled Private Corporations”. This is evidently part of broader legislation to implement “territorial taxation”, in order to enhance the competitiveness of publicly traded U.S. multinational corporations.
We believe that this section is intended to apply ONLY to the foreign subsidiaries of U.S. domestic corporations. However, a strict reading of the language of the bill suggests that this “transition tax” MIGHT also be paid by those who are deemed by your country to be “U.S. persons” living overseas who happen (as is common in Canada) to own an incorporated small business. The “minnows” swept up by your bill will then include small businesses such as a one-person incorporated medical doctor’s clinic, should the owner be designated by U.S. law to be a “U.S. person”.
We do not believe that this was your intention and ask that you fix the language of the bills accordingly. Surely you would agree that “territorial taxation” for U.S. multinational corporations does NOT mean that the United States should extend its taxable “territory” to Canadians who happen to own small Canadian Controlled Private Corporations!
As part of U.S. tax reform, we conclude by asking that the United States stop imposing worldwide taxation on any Canadian resident AND clarify that the “Tax Cuts and Jobs” Bill does NOT apply to Canadian residents who are shareholders of Canadian Controlled Private Corporations.
On behalf of the
Alliance for the Defence of Canadian Sovereignty (www.adcs-adsc.ca) Information@adcs-adsc.ca;
Alliance for the Defeat of Citizenship Taxation (www.citizenshiptaxation.ca)
Contact Mr. John Richardson at email@example.com
Alliance for the Defence of Canadian Sovereignty/Alliance for the Defeat of Citizenship Taxation 283 College Street, P.O. Box 67678 Toronto, Ontario, CANADA M5T 3M1
Thanks for emailing Nathan Cullen, NDP Deputy Critic for Finance. He is a Canadian government representative who, I think, would *get it*.
Even though you appear to respond to a comment which is not mine, yet is intended for me, “Your message of noncompliance comes through loud and clear. It’s fairly obvious that that those who have not complied to date will not comply”,
Will you comply? Can anyone who has a wholly owned and operated Canadian (or any “foreign”) corporation comply without ruining themselves by complying? I think not.
BB – I read USCA’s comment as being addressed to Nononymous, who was quoted.
“Non-compliance” means different things to different people. Some may non-comply by not filing; some may non-comply by lying; some may non-comply by filing but providing incomplete or carefully edited information; some may non-comply by filing accurate returns but refusing to pay the resulting unfair and life-destroying assessment; and some may non-comply by renouncing.
Whatever’s best, or least worst, or possible.
Surely no one other than specially reptilian and brainless condors would be recommending compliance with this insane unenforceable unreal proposal.
I wonder. Those who use tax advisors aren’t necessarily so mindlessly obedient.
“Surely no one other than specially reptilian and brainless condors would be recommending compliance with this insane unenforceable unreal proposal.”
Some people will comply even if it ruins them, the sort of people we see on the video of Dutch citizens meekly handing over tens of thousands of dollars because they believe that is what is required of them. Rule followers, sheeple.
BB: “Big accounting firm suggests some countries might retaliate.”
Looking at the full report, I got the impression they might be envisioning retaliation in response to the excise tax. That seems like the kind of retaliation a non-US country could easily do under its existing structures, whereas retaliating in kind in response to the casual demand for huge piles of cash from owners/shareholders of non-US corporations, purely on the basis of shareholder citizenship, might not be possible.
@BB In response to your:
As noted by Plaxy, I was responding to nononymous and not to you.
But to answer your question:
The extent to which compliance would ruin any individual would depend on the amount of the retained earnings since 1986 in the company.
But, before you think about compliance, it might be better to consider whether this law definitely applies in the circumstances described. I am not sure that it does.
Clues as to who the proposed law is intended to include can be gleaned from various articles discussing the question of the repatriation of non-US earnings of US corporations, and how to grab the tax they wish they’d been imposing for past 30-odd years:
Susan B. Morse:
Which I interpret, rightly or wrongly, as meaning that the writer is thinking only about foreign subsidiaries of US multinationals, which have the option to “repatriate” their trillions to the US, thus avoiding the transition tax – said transition tax being intended as a stick to drive repatriation rather than primarily to raise revenue. (With the reduced US corporation tax being the carrot that goes with the stick.) And the reason the proposed rates are 10-14% rather than 35% is to make allowance for earnings that will never be “repatriated.”
A non-US corporation, 100% of whose earnings will never be “repatriated” to the US, is clearly not in their thoughts, then or (I suggest) now.
I also think the writer’s absurd comments on treaties not applying would not hold international water for a minute. More likely, US corporations would not choose to take a treaty-based position; non-US corporations certainly could and certainly should (in my view, obviously).
Ok, I obviously misunderstood. My apologies. Getting paranoid I guess (doesn’t mean they aren’t out to get me though).
Unfortunately the IRS doesn’t see the various avenues of non-compliance as anything other than wilful – even though someone can’t.
BB – “Unfortunately the IRS doesn’t see the various avenues of non-compliance as anything other than wilful – even though someone can’t.”
Not complying generally means trying not to allow the IRS an opportunity to choose between inflicting murderous wilful penalties or slightly less murderous non-wilful penalties.
We don’t know yet what, if anything, is actually going to get passed.
RO may succeed in getting non-US corporations explicitly excluded, or if not, and the bill passes and gets signed into law, the eventual forms and guidance may allow scope for the filer to simply assume that the law doesn’t apply to them.
If that avenue is also closed off, it would still be possible to complain under the treaty procedures, as this retroactive double-taxing proposal drives a coach and horses through what is supposed to be the treaty’s raison d’être. (In my non-expert view, obviously.)
Republicans Overseas wants to kill the tax in its entirety – not just get a carve out for non-US corporations. At least I take their statement to me to mean that:
“…We plan to take your concerns of 14% tax charge for small business abroad to the Congress by launching another petition drive next week. We will deliver those petitions to the White House and Congress the week of December 11. Our goal is to remove the 14% language at the conference.”
That would make sense. Let’s hope they succeed.
Both the House and Senate seem to want the tax, in some amount. So RO’s attempt to quash it entirely may at least draw attention the fact that CBT exists, and something I agree with USCA about – that the majority of lawmakers don’t know about CBT (as evidenced by the fact that we are not taken under consideration when they make these laws).
I tend to think the majority of Congressmen/women think first of donors’ wishes, second of voters’ wishes, and third (maybe) of what they think is in the best interest of their party/state/country.
Policy makers, however, do know about USCs abroad. They just tend to see them as people who ought to be paying more (US) tax. The transition tax, you won’t be surprised to hear, comes from an Obama-administration proposal from 2016 (https://www.treasury.gov/resource-center/tax-policy/Documents/General-Explanations-FY2017.pdf p13). It seems to me it reflects the same “catch-the-cheating-bastards” spirit as FATCA.
I voted for Obama, and wouldn’t change my vote if I could time travel; but the policy-makers of his administration certainly didn’t take a reasonable, fair, or informed view of US citizens living outside America.
As usual, there’s lots of fascinating discussion here about this latest potential act of U.S. tax hegemony but I’m just curious as to how other Brockers are going about spreading this press release. Stephen’s suggestion as to who to contact is very good but are there any other people we could alert about the “transition tax”? What about the media? Would it really be futile to inform some “Glibs”, as badger calls them? By rights, FATCA should have been nipped in the bud but it wasn’t. We don’t want that to happen with this new thorn in our side.
We (Tricia) have been passing the press release on to the media. I will continue to focus on U.S. Congresspeople who have the power or the inclination (Heller? Holding? Any Democrat senator submitted amendment to SFC bill on our behalf?) to help us. We are also communicating now with small business organizations in Canada — they know about CBT but not about possibility of a new “transition tax” in U.S. tax reform bills that could affect their members. Yes, the press release should be sent to all Glibs, asking for protection from more U.S. harm, but suspect that help if any might only come from opposition politicians who have duty to oppose Government.
— Still, I hope that many readers will send out the press release widely to anyone they think might help or advocate for us…
@ Stephen Kish
Sounds good. We’re so grateful for all the hard work you and the ADCS/ADCT team continue to do. Back in 2012 I never expected this battle would go on for 5 years … and there’s more to go … sigh.
Some simple points that could be made in letters to MPs, etc
1. There are approximately one million Canadian citizens who are resident in Canada and are also U.S. citizens (mostly Canada/U.S. dual citizens – with the U.S. citizenship conferred on them because of a U.S.
2. It’s safe to say that a significant number of these “dual citizens”
are “small business owners”, who carry on business through Canadian Controlled Private Corporations.
3. It is possible and likely that many of these “small business” owners have (since 1986 or the date of incorporation) accumulated earnings.
These accumulated earnings operate as their “retirement pensions” ( a fact that has been widely discussed with Finance Minister Morneau and Prime Minister Trudeau as part of their discussions on Canadian tax reform).
4. The United States imposes taxation on individuals based ONLY on U.S.
citizenship (even if the person lives in Canada). The United States is the only advanced country in the world to impose “citizenship-based taxation”. The United States is the ONLY country in the world that BOTH:
1. Confers citizenship based on birth in the country AND 2. imposes “worldwide taxation” based on citizenship.
5. Many of the Canadian Controlled Private Corporations owned by Canadians with dual citizenship are deemed under the Internal Revenue Code of the United States, to be “U.S. shareholders”, of what are called “controlled foreign corporations”. To repeat, from a U.S. perspective the Canadian shareholders of Canadian Controlled Private Corporations, may be considered to be the “U.S. shareholders” of “Controlled Foreign Corporations”.
6. The United States is in the middle of a process of amending the Internal Revenue Code. It appears that both the House and Senate versions of the bill, include a provision that would require the “U.S.
shareholder” of a “controlled foreign corporation” to include directly in his/her personal income, a percentage of the total amount of the “retained earnings” of the “controlled foreign corporation” (which could well be a Canadian Controlled Private Corporation”). This percentage would be based on the amount of the retained earnings which have accumulated since 1986. See for example Sec. 14103 of:
(See the section starting on page 375 with Sec. 14103 beginning on page
7. Although it is not completely clear that this provision would apply to the Canadian shareholders of Canadian Controlled Private Corporations, the “literal reading of Sec. 14103 suggests that it may.
Certainly there have been (and this is where the danger lies) some tax professionals who are adamant that this would apply.
It is extremely important that this danger be understood by all “stake holders” in Canada. This would include Finance Minister Morneau and members of the small business community in general.
Some discussion of this problem may be found at:
“The United States is the ONLY country in the world that BOTH:
1. Confers citizenship based on birth in the country AND 2. imposes “worldwide taxation” based on citizenship.”
But it is actually worse than that. If you are born outside the US to a US citizen parent (plus various caveats about their former residency duration), then the US considers you a citizen whether you like it or not, and no matter whether you ever set foot in the country. People in that situation can obviously mantain a lower profile than others, but the US/IRS presumably still considers them to be tax cheats if they don’t file.
Re the @Plaxy comment above which includes the “early” speculations of Susan Morse which include:
This is a weird and unrealistic portrayal of the proposed reality of this tax. it must clearly would involve double taxation whether viewed from the perspective of taxation of the Canadian Controlled Private Corporation or the Canadian shareholder.
The USA wants to tax/confiscate a percentage of the retained earnings of the corporation. This is being done by attributing income to the “U.S. Person” that has already been taxed inside the corporation.
Let’s view this from the perspective of the corporation:
This income has already been taxed by the corporation. No, it is apparently subject to tax by the USA. How is this NOT double taxation?
Let’s view this from the perspective of the individual:
The USA attributes this income to the individual and imposes tax. When this income is paid out it would be taxed a second time in Canada.
If you believe that this is double taxation then, one might ask how might this be interpreted under the Canada U.S. tax treaty?
Article XXIV is the part that deals with “double taxation” which is an exception to the Savings Clause. There is no doubt that this would violate the “spirit” if not the “letter” of the treaty.
Look at this way;
What the USA is proposing to do is to:
1. Create an imaginary taxable event (deem the retained earnings to be subpart F income); and
2. Swoop in and impose taxation on it before at would be paid to the Canadian shareholder and then be taxable in Canada.
I don’t believe that this situation was envisaged by the drafters of the treaty. But, who could ever have imagined what the USA would become?
My first reaction was that it would be double taxation under the treaty. But I’ve since realized that as Susan B. Morse suggests – if they give it a different name, they can take the position that it’s not covered by the “Taxes Covered” Article.
Also realized from further reading that this transition tax idea goes back further than the 2016 Obama “General Explanation” document I linked to. The previous W&M Chair Dave Camp proposed it in 2011 (https://waysandmeans.house.gov/UploadedFiles/Discussion_Draft.pdf) and again in 2014. It does seem to be a longstanding element in schemes to get hold of the corporate “offshore” trillions. One of the few things they all agree on – or used to.
Along the way we have learned about standing and harm. There is no harm yet to unpassed U.S. legislation that has not had U.S. Treasury determine the regulations stemming from the unpassed U.S. legislation.
The above is perhaps a view from the courts. Of course politicians have more freedom to speak out, such as in reopened NAFTA negotiation, under the section of how the relationship is unfair for Canada and Canadians. Yet the point should not be one bargained away but a point insisted on.
IMO, there is existing harm to be attributed to a flawed tax treaty, through which state sponsored financial terrorism and double taxation may flow through, aided by the compliance industry, notwithstanding provisions in the treaty saying that the Canadian Government will not assist in collections (which they already broke with passage of the FATCA IGA, IMO).
Again and again, the tax treaty has proven porous to changes in tax laws by either country by not preventing double taxation and compliance, but by letting it flow though.
Quoting @Alby on tax treaties: they should provide the utmost clarity as to one’s obligations. IMO, this may be achieved through blanket exemptions in a revised tax treaty for residents from double taxation, as an exercise of The Master Nationality Rule (which I learned about here from @Petros). If the U.S. Treasury shall not be agreeable to suitable amendment of the tax treaty, then there is nothing stopping Canada from side legislation providing blanket exemptions (to help shut down the compliance industry) and the reasons why the treaty is flawed and should be changed (kind of a Declarations of Grievances and Resolves, backed by Canadian law).
Of course we know that governments around the world have been spineless in seeking protection for their own residents from unjust U.S. extraterritorial law. Thus then the option of legal action is elevated.
Thanks to the ADCS four for this excellent work.
I will email the requested MP’s, including Nathan Cullen and Bill Morneau. It is worth remembering that Pierre Poilievre, in spite of his recent effectiveness in attacking Morneau over his current conflict of interest and financial disclosure/ethics troubles, was, like all the other Conservative MP’s – completely insensitive to the FATCA-IGA Charter and financial privacy violations of Canadian citizen/resident “US Persons”.
Plaxy said “if they give it a different name, they can take the position that it’s not covered by the “Taxes Covered” Article.”
In this case, they aren’t giving the transition tax a different name. The tax works by including extra “income” into taxable income which is then taxed under section 1 (for individuals) just like any other income. So, if passed, the transition tax is clearly an income tax. However, the transition tax works by imputing to the individual income earned by a separate taxable entity, which means that the tax paid by the corporation is not available as a credit on the individual’s tax return. My understanding is that the provisions that allow credit of tax paid by the controlled “foreign” corporation are limited to corporate shareholders – so if individual shareholders are subjected to the transition tax they cannot claim FTC based on taxes paid by the corporation (someone let me know if this is not how it works).
In the article you linked and quoted, the author is talking about a well-designed transition tax, which this clearly is NOT.
USCA – all taxation of dividends is double taxation of corporate income. Some countries have schemes to mitigate this double taxation (such as franking credits in Australia). I’m not arguing that the transition tax isn’t double taxation when applied to individual shareholders, just that arguments based on the individual perspective have more merit.
I’ve been thinking about how the treaties could be used to mitigate the impact of this tax on individual shareholders, if it is passed without amendment.
Under the treaty the US is required to notify treaty partners of changes made. For example, in article 2 of the Australian treaty:
When Australia receives notification of such a change, would it be possible for the competent authority to request clarification as to how the changes (and specifically the transition tax) apply to individuals resident in Australia?
I’ve also been trying to figure out how Article 23, Non-discrimination might apply. The US is discriminating against residents of Australia (who happen to also be US tax-residents) with local businesses relative to residents of the US with local businesses. Is there any way to argue that a US resident with an incorporated US business is “similarly situated” to an Australian resident with an incorporated Australian business? Or does the fact that the businesses are incorporated in different jurisdictions mean that the two taxpayers can never be considered “similarly situated”?
My understanding is that the United States does not, as required, notify its treaty partners (at least in a case with Canada and UK) when Congress passes a law that contradicts the treaty. Canada does not seem to be too upset about this.