In my previous post about the June 15, 2018 “transition tax deadline” I referenced the letter received from Minister Morneau’s office which included:
… Canada recognizes the sovereign right and policy choice, of the U.S. to tax its citizens, including citizens who are resident abroad. The Canada-United States Tax Convention (the Convention), preserves this right.
This is an interesting statement. The writer appears to believe that the treaty “savings clause” is what gives the United States the right to impose U.S. taxation on Canadian residents. In any case, it is very clear that by agreeing to the “Savings Clause”, Canada has agreed that the United States has the right to impose taxation on Canadian resident/citizens who are also U.S. citizens.
Relevant provisions of the Canada U.S. Tax Treaty – to which both countries agree – include:
Article IV
Residence1. For the purposes of this Convention, the term “resident” of a Contracting State means any person that, under the laws of that State, is liable to tax therein by reason of that person’s domicile, residence, citizenship, …
This defines “resident” in a way that references the domestic law of the country. In the case of the United States, domestic law, defines U.S. citizens as “tax residents” of the United States.
Article I
Personal ScopeThis Convention is generally applicable to persons who are residents of one or both of the Contracting States.
The treaty applies to people who are U.S. citizens or “permanent residents” Green Card Holders AND/OR Canadian residents. Therefore, the treaty applies to dual Canada/U.S. citizens living in Canada as per Article IV.
Article XXIX
Miscellaneous Rules2.
(a) Except to the extent provided in paragraph 3, this Convention shall not affect the taxation by a Contracting State of its residents (as determined under Article IV (Residence)) and, in the case of the United States, its citizens and companies electing to be treated as domestic corporations.
(b) Notwithstanding the other provisions of this Convention, a former citizen or former long-term resident of the United States, may, for the period of ten years following the loss of such status, be taxed in accordance with the laws of the United States with respect to income from sources within the United States (including income deemed under the domestic law of the United States to arise from such sources).
This is the “savings clause”, pursuant to which Canada agrees to allow the United States to impose direct taxation on Canadian residents who are U.S. citizens.
https://www.fin.gc.ca/treaties-conventions/unitedstates-etatunis-eng.asp
Some thoughts …
1. Obviously the U.S. has the right to impose U.S. taxation on U.S. citizens regardless of what the Treaty says.
2. The “savings clause” assists the United States because Canada agrees that the U.S. can impose taxation on residents of Canada.
3. But, could Canada have ever imagined that, the the United States would argue I presume) that the “savings clause”, allows the U.S. to: create a fictitious taxable event, which would allow the U.S. to impose tax on Canadian source capital, prior to there being a “taxable event” in Canada?
The letter from Mr. Morneau’s office also includes:
Although a purpose of a tax treaty is to alleviate double taxation, it does not align tax policies, nor harmonize the Canadian and U.S. tax treatment of certain types of income.
Does this mean that the tax treaty allows the United States to write any piece of legislation, call it a “tax”, and use the “savings clause” to extract capital from Canada? I think not. A tax treaty is NOT for the purpose of one country effectively “colonizing” another country. Yet, that is what the Government of Canada appears to believe the treaty is about.
The problem is NOT just the United States. The problem is Canada agreeing to U.S. taxation of it’s residents. Would the elimination of the “savings clause” eliminate the problem?
So far, the response from the Government of Canada has been:
Take this up with the United States. Your problem is with the United States and not with Canada.
No. Because Canada has agreed to the “savings clause”, the problem (with respect to Canadian residents) is with the Government of Canada. One purpose (and the primary effect) of the “savings clause” is to allow the U.S. to impose direct taxation on Canadian residents. Of course nobody knows this is going on. In addition, I suspect that Canada’s treaty negotiators have NOT fully understood the implications of the “savings clause”. Well, the “transition tax” certainly demonstrates how the “savings clause” has effectively “weaponized citizenship”. The “savings clause” is NOT just a tax on certain Canadian residents. By draining Canadian capital from Canada, it is an assault on all of Canada. To be clear, this state of affairs has been facilitated by the Government of Canada!
Australia’s Fix The Tax Treaty site
Australians, led by Karen Alpert, are focusing on the Australia U.S. Tax Treaty. By doing this, they have effectively converted the “it has nothing to do with Australia, talk to the United States” problem to:
No. This is a problem that has been caused by the Government of Australia (which it has).
The Australian movement should be a model for movements in all other countries (especially Canada).
Bottom line: The treaty must be amended to remove the “savings clause”. To do so, may effectively end U.S. citizenship-based taxation (in practice but not in theory).
It’s very clear that “tax treaties” are too important to be negotiated in secret. The negotiation of “tax treaties” needs to be carried out under public view. The “savings clause” is an example of a tax treaty provision that is extremely harmful to Canada. There is NO reason for this! It allows the United States to effectively “colonize countries through taxation”. Much has been written about the amount of Canadian capital which is subject to extraction through “citizenship-based taxation” – which is (apparently) facilitated by the “Savings Clause”.
But, it’s not just the “savings clause”
Lee A. Sheppard describes how “tax treaties” are used to “extract capital in a general sense
I came across the following post from the “Tax Justice Network” blog.
From @TaxJusticeNet which underscores how the tax treaties aid multinationals in stealing from smaller countries. Reminds me of the "savings clause" and the @USTransitionTax: "Tax Justice Network: Lee Sheppard: Don't sign OECD model tax treaties!" https://t.co/EGigub5j6W
— U.S. Citizen Abroad (@USCitizenAbroad) May 31, 2018
Here is the video to which the post refers (you will see Allison Christians at this conference as well).
This is a fascinating lecture. Note the similarities between the "permanent establishment clause" and the "savings clause" – both work to extract capital from other countries. Lee A. Sheppard: Corporate tax planning and avoidance https://t.co/oRkfyGlxKo via @YouTube
— U.S. Citizen Abroad (@USCitizenAbroad) May 31, 2018
Among other things, Ms. Sheppard explains how tax treaties can be extremely harmful and how they facilitate the extraction of capital.
The “savings clause” is not the only “tax treaty” provision that is harmful to treaty “partners”.
Questions?
1. What would the world look like without a Canada U.S. Tax treaty?
2. Should this issue be included as part of the NAFTA discussions?
Tax treaties permit the new taxes as there is no exemption that may be cited for them. IMO, the ‘savings clause’ is not in play, but may be used to reinforce the double tax claim.
Example: no exemption may be cited for NNIT, AMT, or PFIC (except certain tax treaties exempt retirement savings vehicles).
Lots of exemptions even “blanket” exemptions from U.S. double taxation need to be added into the treaties for: tax residents of those countries for source income/assets in those countries.
Where is the lawsuit against the Canadian Government for the Canadian tax treaty that violates the spirit of prevention of double taxation, Master Nationality Rule (which underpins the sovereignty of nations), and violation of the Canadian Charter of Rights prohibiting discrimination based on national origin.
Also, failing in stated aim of “will not help U.S. collect” except via the FATCA IGA identifying and providing account information to at least identify those Canadians guilty of U.S. formcrime.
USCAbroad: I agree 100% with your assessment of the situation. You’ve presented it very clearly here. As much as I would like this be part of the NAFTA talks there seems to be so much trouble with those already that I doubt throwing this into the mix would help. But in my heart I would LOVE to see our issue raised to the NAFTA level of importance in the eyes of the government.
I do have to say if you took Trudeau’s trade war speech and replace steel tariffs and aluminum tariffs with FATCA and citizenship based taxation it would make a damn fine speech.
To get rid of the treaty, or to keep the treaty but get rid of the saving clause (thus extending treaty benefits to US citizens resident in Canada)?
The treaty while guaranteeing double taxation, also reduces it by allowing tax credits for Canadian tax paid, on the basis of no higher than the highest rate for the two countries for like for like taxes. So no don’t get rid of it.
Here is a change that should be included even in current form: consideration of taxation on a whole of taxation basis, such that certain higher taxes paid on say earnings may extinguish liabilities such as for NIIT and PFIC. The current treaty has different taxes in silos such that the NIIT of the US may only be reduced by the amount of Canadian NIIT paid, but wait Canada does not have an NIIT so the full amount of the U.S. NIIT falls on top.
Speaking with reference to my European country’s US tax treaty, I don’t think the treaty guarantees double taxation. Cross-border income is at risk of double taxation, a problem which double taxation treaties are supposed to mitigate. The trouble is US tax law, which treats USC local-source income as cross-border income and then (to a considerable extent) excludes it from mitigation using the saving clause.
It’s the treating of non-cross-border income as if it were cross-border income that causes the problem; unfortunately that’s a deliberate, intentional US policy, rather than a consequence of the treaty or any particular provisions of the treaty.
@All
The problem is that the United States imposes worldwide taxation on people who are tax residents of other countries who do no live in the United States.
Forget all the other technicalities.
@MuzzledNoMore
Your comment includes:
But in my heart I would LOVE to see our issue raised to the NAFTA level of importance in the eyes of the government.
With respect, this is not “our” issue. This is an issue for all Canadians, the Government of Canada and for the world. The comments to Elizabeth Thompson’s CBC articles demonstrate beyond a shadow of a doubt what the attitude of the Canadian public is toward U.S. citizens and toward the United States in general (on a scale ranging from indifference to pure hatred).
“The problem is that the United States imposes worldwide taxation on people who are tax residents of other countries who do no live in the United States.”
I agree, and therefore it seems to me that the answer to the question asked in the title of this post is “no”.
I do think treaty partner countries could and should intervene to negotiate exemption for owners of non-US corporations for which “repatriation” is not applicable. That would be in line with the treaty’s avowed aim of avoiding double taxation.
USC: Point taken. It certainly is an issue that should be recognized as affecting every single Canadian. It’s just so easy to see this as “our” issue because we’re the only ones paying attention. I hope that changes.
“Bottom line: The treaty must be amended to remove the “savings clause”. To do so, may effectively end U.S. citizenship-based taxation (in practice but not in theory).”
Very interesting piece. I have always been baffled by the US-Belgian treaty which is probably very similar and includes in its title: “CONVENTION BETWEEN
THE GOVERNMENT OF THE UNITED STATES OF AMERICA
AND
THE GOVERNMENT OF THE KINGDOM OF BELGIUM
FOR THE AVOIDANCE OF DOUBLE TAXATION”
Which then proceeds to note that the exception is US citizens residing abroad and does not prevent double taxation. Talk about fake news.
I have great hope, but I’m not holding my breath, that Trump’s antics will help open other countries’ eyes concerning the US’s tendency to make American law universal. Granted, the EU is doing some extra-territoriality but it’s at least leaving individuals alone when they have nothing to do with the EU.
I don’t pretend to understand all of the fine points, but using treaties to end the effects of CBT sounds real good to me!!! Which is why “fix the tax treaty” is a great approach — Kudos to Karen and all of you for the hard work.
Thinking further about the letter-writer’s statement:
The meaning must depend to some extent on the context. If the writer was responding to an enquiry as to the feasibility of relying on the treaty for protection (e.g., by taking a treaty-based return position to exclude the imaginary income), the writer’s reply would seem to confirm that Canada does not consider that the treaty offers such protection.
The fact that Canada will only be “making the US aware of the impact”, rather than raising treaty-based objections, seems consistent with this interpretation.
In the light of the minister’s statement, it might be prudent for anyone considering that option (taking a treaty-based return position in order to exclude the imaginary income) to seek further clarification from Canada’s Competent Authority before proceeding.
It might be safer not to file (and rely on the guarantee that Canada won’t collect) rather than risk taking a treaty-based return position if (in the eyes of both Competent Authorities) the treaty does not offer protection.
IMO, obvs. IANAL.
Fred (B):
Yes, I too reacted with bafflement/rage on first encountering the Saving Clause.
Since then I’ve come round to seeing the tax treaty in a different light: not as a statement of taxpayer rights (America can tax you on this, your home country can tax you on that) but as a negotiation between two States as to which State will concede its claim under its domestic law to tax cross-border income, in which circumstances. The aim being to allocate primary taxation rights between the two States, when the domestic law of both States says that the income under consideration should be taxed.
The Saving Clause excludes USCs from most of these negotiated benefits, with the result that domestic law still applies. But it doesn’t, and can’t, impose US tax on the residence country’s USCs. It’s the US that has to give FTCs, when it applies its top-up taxation to the non-US income of USCs, because the source country has not conceded its primary right to tax.
The US uses its “basket” rules to deny USCs FTCs wherever possible, but that’s the US’s dirty tricks – it’s not the fault of the residence country.
Not defending the Saving Clause, obvs, just saying, the treaty fortunately doesn’t impose US tax law on USCs. (On banks, yes, now that FATCA has been incorporated into local law; which may yet be successfully challenged, let us hope.)
@All
Of course the “savings clause” does not impose taxes on U.S. citizens. But, the “savings clause” clearly gives legitimacy to the U.S. imposition of taxation on Canadian residents who happen to be U.S. citizens. It is Canada’s giving this legitimacy that is the problem.
Imagine that we have a Canadian resident with U.S. citizenship who suddenly learns that the U.S. is imposing taxation on his Canadian income. He says, no way this can’t be possible and in any event U.S. law does not apply in Canada. If there were no “savings clause” I expect that for a lot of people that would be the end of it. The existence of the “savings clause” (as it comes out of the “Mouth Of The Condor” is that it allows them to say:
Put it another way:
The “savings clause” operates to turn a laughable concept into an “international treaty”.
Therefore, I see the “savings clause” as a MAJOR part of the problem.
Probable purpose of the “savings clause”
A “savings clause” is a standard provision of tax treaties (apparently) and has been for some time. The purpose of the “savings clause” (presumably) is to make sure that a “resident” cannot, by getting a treaty benefit designed for “nonresidents”, get a benefit that other residents do not get. (I think)
For example …
Let’s consider Article XI of the Treaty (dealing with “interest”)
https://www.fin.gc.ca/treaties-conventions/usa_-eng.asp
Let’s do a language substitution and image that this read:
So, a United States resident would pay only 10% tax on the Canadian Dividend (or vice versa). The purpose of the “savings clause” would be to ensure that a resident of Canada could not somehow use the treaty to pay a 10% tax on the Canadian dividend. I think that the purpose of the “savings clause” must be to protect against this type of problem. So, there must be some international benefit to a “savings clause” in general. So, I doubt that the “savings clause” will go. But, the “savings clause” seems to contemplate a single “tax residence” and not a situation where U.S. citizens living abroad have multiple tax residences.
How to rewrite the “savings clause”
So, the “savings clause” needs to be rewritten to take account of the fact that U.S. citizens actually (for tax purposes) always reside in the United States. This would make it consistent with what its purpose seems to be.
Again the “savings clause” in the Canada U.S. Tax Treaty reads:
Possible suggestion for revision:
“the “savings clause” clearly gives legitimacy to the U.S. imposition of taxation on Canadian residents who happen to be U.S. citizens. It is Canada’s giving this legitimacy that is the problem.”
If there were no treaty, there would be no saving clause, yet under US law USCs would still be tax-resident in the US. US tax policy is determined by the US, without reference to any other country’s views.
Just as Canada or Spain or France can decide on their tax policy and pass laws to implement their tax policy, without any need to get agreement from another country. And they all support each other’s right to decide their own tax policy, since they all want to protect their own right to do so.
“The “savings clause” operates to turn a laughable concept into an “international treaty”.
I certainly think it’s true that the USG would probably have trouble getting Senate approval for a bilateral double taxation treaty that didn’t include a saving clause. Without the saving clause, the treaty would have the result that expat USCs would be treated more favourably than US-resident voters. That’s probably not going to fly (IMO), unless the US changes its tax laws. Therefore, the saving clause is probably non-negotiable. If the USG wanted to change policy and stop taxing its expat citizens, it would first need to change its laws, and then change its treaties as needed.
All the above IMO, of course. Not a lawyer.
This OECD report discusses saving clauses and possible uses:
“Preventing the Granting of Treaty Benefits in Inappropriate Circumstances, Action 6 – 2015 Final Report”
http://www.oecd.org/tax/preventing-the-granting-of-treaty-benefits-in-inappropriate-circumstances-action-6-2015-final-report-9789264241695-en.htm
‘Of course the “savings clause” does not impose taxes on U.S. citizens.’
Yes it does.
‘It is Canada’s giving this legitimacy that is the problem.’
Yes it is.
Outside of the geographical boundaries, the evil twin of the United States (which is constituted by something other than the Constitution of the United States) is allowed to deprive people of life (Anwar al-Awlaki), liberty (Bobby Fischer), and property (me) without due process of law.
If Canada and other countries didn’t sign the savings clause in treaties, then 16th Amendment of the United States would end at the same geographical boundaries as the 5th Amendment of the United States.
“2. However, such interest may also be taxed in the Contracting State in which it arises, and according to the laws of that State; but if a resident of the other Contracting State is the beneficial owner of such interest, the tax so charged shall not exceed 10 per cent of the gross amount of the interest.”
A former version of the treaty said 15%. The US announced that it would not abide by that 15% limit when the resident of Canada was a citizen of the United States, because of the savings clause.
By the way, don’t confuse interest and dividends. Some treaties assign different tax rates to different categories. Some countries domestically give different tax breaks to different categories but of course tax treaties let each each country cancel out the benefits that the other country tries to provide.
It doesn’t, actually. A lot of us lived happily for many years without even knowing a saving clause existed.
“A lot of us lived happily for many years without even knowing a saving clause existed.”
The savings clause’s imposition of tax doesn’t depend on whether you’re aware of it.
The savings clause’s imposition of a tax doesn’t mean you have to volunteer to pay it when it can’t be collected.
The treaty doesn’t even come into play unless the taxpayer invokes it.
And neither does US tax law, for those living elsewhere.
Until / unless US tax law or a subsection thereof gets written into local law.