Introduction …
This post is largely motivated by two recent Facebook discussions.
First discussion:
A recent discussion in the American Expatriates group explored the question of whether a U.S. citizen who was a “tax resident” of another country could use a “tax treaty tie breaker” to avoid U.S. taxation. The discussion began with:
Good Morning, does anyone know something about Tax treaty tiebreakers, Would that be a possible solution for Americans Abroad, Dual Citizens, Accidental Americans ?
Tax treaty tiebreakers are rules that are used to assign a person’s tax residency to one country when an individual is a tax resident of both countries. In the context of U.S. tax treaties, treaty tie breaker rules are used when an individual is both:
1. A U.S. person for tax purposes (U.S. citizen or U.S. resident); and
2. A tax resident of another country.
It is very common to use tax treaties to assign tax residency to a country when an individual is a tax resident of more than one country
Questions:
1. Does this mean that without the “savings clause” that that U.S. citizens living permanently in Canada would no longer be (in a practical sense) subject to “citizenship-based taxation”?
2. If the answer is that: the “savings clause” (by not allowing a “tax treaty tiebreaker”) is responsible for “citizenship-based taxation” in Canada – then is Canada by agreeing to the “savings clause” responsible for imposing U.S. “citizenship-based taxation” in Canada?
Second discussion:
A second discussion raised the question of whether Canadian residents could sue the Government of Canada for entering into a treaty which would subject them to U.S. worldwide taxation. (Although the ADCS FATCA lawsuit argues that the amendments to Canada’s Income Tax Act violate the Charter, one wonders whether one could argue that the IGA itself violates the Charter.)
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Thinking about the first discussion – the “savings clause” and “tax treaty tiebreakers”
To what extent is the “savings clause” responsible for the problems faced by U.S. citizens in Canada?
The answer to this question may be very simple. It may be very complex. It may depend on the circumstances. The purpose of this post is (through your comments) to explore the extent to which removing the “savings clause” from the Canada U.S. tax treaty would diminish the ability of the United States to impose worldwide taxation on “tax residents” of other countries. Is Canada, by agreeing to the “savings clause”, actually imposing U.S. taxation on its citizens and residents? Is the problem Canada and NOT the United States?
The impact of the “savings clause” on “tax treaty tiebreaker”
You will find the Canada U.S. Tax Treaty here.
Note that Article IV paragraph 2 contains the “tax treaty tie breaker” provision. Specifically it reads:
2. Where by reason of the provisions of paragraph 1 an individual is a resident of both Contracting States, then his status shall be determined as follows:
(a) he shall be deemed to be a resident of the Contracting State in which he has a permanent home available to him; if he has a permanent home available to him in both States or in neither State, he shall be deemed to be a resident of the Contracting State with which his personal and economic relations are closer (centre of vital interests);
(b) if the Contracting State in which he has his centre of vital interests cannot be determined, he shall be deemed to be a resident of the Contracting State in which he has an habitual abode;
(c) if he has an habitual abode in both States or in neither State, he shall be deemed to be a resident of the Contracting State of which he is a citizen; and
(d) if he is a citizen of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement.
Therefore, if we read ONLY Article IV paragraph 2 we understand that:
1. If a person is a “tax resident” of both Canada and the United States; and
2. He has a permanent home available to him ONLY in Canada
then he would be a “tax resident” ONLY of Canada.
This would mean that the U.S. citizen resident in Canada would pay (just like a nonresident alien) U.S. tax ONLY on U.S. source income.
Green Card holders living in Canada can (but it may not be advisable) take advantage of this treaty provision. U.S. citizens CANNOT take advantage of this treaty provision. Why not? The answer is that the “savings clause” (found in Article XXIX) which reads as follows:
2. Except as provided in paragraph 3, nothing in the Convention shall be construed as preventing a Contracting State from taxing its residents (as determined under Article IV (Residence)) and, in the case of the United States, its citizens (including a former citizen whose loss of citizenship had as one of its principal purposes the avoidance of tax, but only for a period of ten years following such loss) and companies electing to be treated as domestic corporations, as if there were no convention between the United States and Canada with respect to taxes on income and
on capital.
Note that paragraph 3 of Article XXIX contains some exemptions to the “Savings Clause” – meaning that U.S. citizens can take advantage of paragraph 3 exemptions.
3. The provisions of paragraph 2 shall not affect the obligations undertaken by a Contracting State:
(a) under paragraphs 3 and 4 of Article IX (Related Persons), paragraphs 6 and 7 of Article XIII (Gains), paragraphs 1, 3, 4, 5, 6(b) and 7 of Article XVIII (Pensions and Annuities), paragraph 5 of Article XXIX (Miscellaneous Rules), paragraphs 1, 5 and 6 of Article XXIX B (Taxes Imposed by Reason of Death), paragraphs 2, 3, 4 and 7 of Article XXIX B (Taxes Imposed by Reason of Death) as applied to the estates of persons other than former citizens referred to in paragraph 2 of this Article, paragraphs 3 and 5 of Article XXX (Entry into Force), and Articles XIX (Government Service), XXI (Exempt Organizations), XXIV (Elimination of Double Taxation), XXV (Non-Discrimination) and XXVI (Mutual Agreement Procedure);
Thinking about the discussion
Can Canada really agree to a treaty that subjects Canadian citizens living in Canada to the full force of the Internal Revenue Code? Could this give rise to a separate lawsuit against the Government of Canada based on the same Charter breaches that are the subject of the current ADCS lawsuit?
Questions – thinking about the interaction between the first discussion and the second discussion
1. What are some other ways that the removal of the “savings clause” would change the taxation of U.S. citizens resident in Canada?
2. What are some ways to rewrite the “savings clause” so that it did NOT subject Canadian “tax residents” to the full force of the Internal Revenue Code?
3. Would it make sense for citizens in every country that has a “savings clause” in a U.S. tax treaty (basically all of them) to launch a lawsuit against their own government for “offering them as tribute to the United States”?
4. In other words,a possible solution may be to stop blaming U.S. tax policy and start blaming governments that agree to the “savings clause”.
I look forward to your comments.
Robert Ross:
“Are you saying that years ago when one lost their citzenship through clearly defined statutes and without any CLN requirement instituted at that time , you could have reestablished your citzenship just by simply reapplying for a passport.”
How would the passport-issuing people know your application should be refused, if your loss of citizenship was never documented?
The documentation process checks you against the various watchlists, generated a CLN for you, and, of major importance, puts it in the US system that you are not a US citizen. Now you can apply for a US visa, claim treaty benefits, etc. Because you and the US have both agreed that you’re no longer a US citizen.
“As for the other citzenship rights ,you must be joking. The obligations outweigh any such rights. ”
The right to claim US tax breaks may not be a right that you value – me neither – but it’s a right, nonetheless, and valued by some.
@plaxy
” How would the passport-issuing people know your application should be refused, if your loss of citizenship was never documented?”
I reiterate ,governments do exchange such information, I would suppose, and that to me means documented,listed ,registered accordingly. I find it hard to believe that all those Canadians,thousands or God knows how many, without their CLNs could have simply reapplied and and had their passports reissued and citzenships reinstated.
@Robert Ross
There is, as far as I’m aware, no global master list of citizens. If a US citizen were to naturalize as a Canadian, or a US-born dual were to join the Canadian military and swear an oath (or commit some other expatriating act) the US government is not informed. So they could certainly apply to renew a US passport 20 years later. As far as the US is concerned, they are still citizens and tax residents until they’ve either renounced or documented the relinquishment for the low, low cost of US$2350.
(Could one fill out the application, appear at the consulate, swear the necessary oaths unbidden, refuse to the pay the fee, then show a copy of the application to one’s bank, I wonder?)
The CRA guidance really is a get-out-of-jail-free card for deceitful Canadians. In the unlikely event that a dual who declined to self-certify as a US person was actually challenged on the basis of US birthplace, they simply need concoct a suitable story to appease the bank. If not naturalization then “swore an oath to the Queen when I worked for the government” or military service or “my father was a diplomat” or who knows what. As long as it sounds “reasonable” to the bank, all good.
Addendum to the above.
For someone who performed a relinquishing act long in the past, even if the US considers you a citizen until you procure a CLN, backdated or otherwise, that does NOT mean the US “lays claim to you” in any active meaningful way – it does not hunt you down and try to make you pay taxes. (It doesn’t hunt anyone down outside the US, actually.)
@Nononymous
You might be right but during the Vietnam period and subsequently such information was clearly exchanged and went so far as unsolicited CLNs being sent out. All I am saying is, in this day and age ,I find it hard to believe that the US wouldn’t know that you have become a citzen of another country , irrespective of any master list or oath that you may have sworn.
@Robert Ross
I guess the only way you’d find out is by trying. Not sure I’d be willing to test the proposition though, because the act of applying would render your back-dated no-tax-obligations pre-2004 relinquishment null and void (I think there’s a quantum physics metaphor here somewhere).
Anyone out there who naturalized in the 1970s and did nothing further – would you be willing to put your neck on the chopping block and apply for a new US passport?
“…unsolicited CLNs being sent out. ”
Really? Was there even such a thing as a CLN back then? Do you have a link to a source? It sounds a bit Snopesy to me.
The US certainly never took any interest in my naturalisation, nor any of the other numerous relinquishing acts I performed over the years.
“I find it hard to believe that the US wouldn’t know that you have become a citzen of another country , irrespective of any master list or oath that you may have sworn.”
I don’t get it. Why do you think the US would care whether you became a citizen of another country?
This is a very complex question with many parts so I will just address a small aspect of it. If there must be a so-called “savings clause” I think it should exempt citizens of the nation in which a person holds his/her principal residence. And frankly, permanent residents who are not yet citizens should be exempted too. And, hey, that kind of sounds like the RBT we all want!
Do I think Canada should take the blame for US CBT being exercised in Canada? Certainly it should shoulder a portion of it, which is one of the reasons we’re taking the Canadian government to court. But this in no way absolves the United States from its intransigent clinging to Civil War law in the 21st century and applying it outside *its* borders.
Muzzlednomore:
“If there must be a so-called “savings clause” I think it should exempt citizens of the nation in which a person holds his/her principal residence. ”
Exempt them from what?
All the saving clause does is “save” the US from having to allow US citizens to claim treaty benefits which are intended only for non-USCs. If you don’t have any cross-border income you never need to know the tax treaty (or the saving clause) exists.
Example:
USC lives and works for most of his life in the UK, retires, and receives various pensions, all UK-source. Said pensioner has no other income. Pensioner pays UK tax. Saving clause totally irrelevant.
Pensioner’s wife, also USC, receives a small SSA pension, reports it to HMRC, pays UK tax. Saving clause totally irrelevant,
I was about to chime in that CBT is not exercised in Canada, only FATCA. Then I remembered Dewees. So CBT can be exercised in Canada, but not against Canadian citizens. In other words, the problem isn’t the savings clause, it’s the collection agreements.
Dewees chose to enter OVDP, agreeing to report all information and pay the miscellaneous offshore penalty; then he refused to pay, was reassessed, and again refused to pay.
CBT was not imposed. Dewees had a US tax debt as a result of his own actions.
The collection and information articles are a problem (IMO) because the taxpayer has no rights. Canada forced Dewees to pay, yet Dewees had no route to challenge Canada’s confiscation of his Canadian tax refund in a Canadian court.
‘2. If the answer is that: the “savings clause” (by not allowing a “tax treaty tiebreaker”) is responsible for “citizenship-based taxation” in Canada – then is Canada by agreeing to the “savings clause” responsible for imposing U.S. “citizenship-based taxation” in Canada?’
The answer to that has always been yes. The US by its own law makes the US responsible, and Canada by agreeing to the “savings clause” makes Canada responsible.
‘A second discussion raised the question of whether Canadian residents could sue the Government of Canada for entering into a treaty which would subject them to U.S. worldwide taxation.’
I think Canada’s agreement to the “savings clause” violates Charter protections on equality. To comply with the Charter, Canada would have to impose US worldwide taxation on all residents of Canada including those who have no connection at all to the US.
The Japanese government announced that Japanese citizens in Canada had better obey Japanese law on marijuana. If a Japanese citizen in Canada obeys Canadian law, will Canada jail the person under Japanese law, or will Canada simply give the person’s name and My Number number to Japan so Japan can jail the person when they go to Japan? And what about a dual Japanese and US citizen who resides in Canada (I think her mother came from Washington State).
‘As Karen points out, these “savings clauses” were signed in a pre-FATCA era’
Yes.
‘when the treaty negotiators had little or no appreciation that the “savings clause” would be interpreted to impose direct taxation on their own tax residents.’
That is unbelievable. What other meaning could the “savings clause” possibly have, regardless of FATCA?
‘US tax law doesn’t apply to a person who is no longer a US citizen.’
The “savings clause” doesn’t apply to a person who is no longer a US citizen, but the US’s own tax law makes itself apply to all persons including those who have no connection at all to the US. Some sections of US tax law exempt some kinds of persons from some sections of US tax law but do not exempt any person entirely. I don’t think other countries feel any obligation to help the US in such cases though. The person’s assets might be at risk if they use payment systems like SWIFT or PayPal.
‘Are you saying that years ago when one lost their citzenship through clearly defined statutes and without any CLN requirement instituted at that time , you could have reestablished your citzenship just by simply reapplying for a passport .’
US Supreme Court reinstated the person’s citizenship even without their knowledge, unless the person proves that they had intent to relinquish US citizenship at the time that a formerly-applicable-but-overturned law temporarily made them lose it.
Reapplying for a passport is optional but might prove that they didn’t have intent to relinquish — except that if the person declares in their passport application that they did have intent to relinquish then I think they should get a CLN for the price of a passport application.
@ Plaxy,
Re:
Yes, there were CLNs back then. I know a couple of people who got them in the 1970s (Schubert and TomOn come to mind). Schubert wrote what what he calls a “screed” about US foreign policy to the Secretary of State in 1976 (US bicentennial) and mentioned he was glad he had renounced his citizenship (he got the word wrong, hadn’t heard of “relinquishment” then) when he became a Canadian citizen. To his complete surprise, he got a reply — a DS-4079 (two pages in those days) with a cover letter, saying if you fill out this DS-4079, we’ll send you a certificate of loss of nationality (which he’d never heard of before). So he did. BTW, it not only was free then, you just sent in the 4079 through the mail.
As for DoS just sending out CLNs unsolicited, I’ve never heard of that happening.
Immigration Canada told me in 1978 that by naturalising, I would lose my US citizenship, and that Immigration Canada sends DoS a list of USCs naturalising here.
I never heard anything from the US govt, but always assumed the citizenship was terminated.
However, around 2012, a couple of people who relinquished in the late ‘70s wrote on Brock that
some months[ edit – turns out it was 1 year for one person and around 3 years for the other] after naturalising here, they had received a form letter from DoS, requesting they clarify their citizenship status. I don’t recall clearly, I recall it as something to the effect of “We will assume you intended to relinquish your US citizenship, unless you write us within3060 days stating otherwise.” I am going to take a look and see if I can find the letter posted on the site. I think it may have been.So, from what these two people wrote about having received these letters from DoS, I get the feeling that in the late 70s, Immigration Canada probably was sending a list to DoS, as the Immigration Canada officer had told me, but for the most part DoS had no interest in actually following up on it, except *very* sporadically because in Brock’s seven years of operation, only two people have mentioned receiving such a letter. I don’t know for sure, but the letters being sent implies it to me.
[Edit — I found the comments I was referring to. I posted excerpts from them with links four comments down this thread.]
@plaxy
““…unsolicited CLNs being sent out. ”
Really? Was there even such a thing as a CLN back then? Do you have a link to a source? It sounds a bit Snopesy to me.”
Since renunciation has been around longer than me and you, I would assume the same for CLNs in one form or another.
I can’t quote where at this point but John Richardson has written about these CLNs on his website . I think his article might have been posted here as well.
“I don’t get it. Why do you think the US would care whether you became a citizen of another country?”
Of course, they care enough to want know whether you are still a citzen , as a potential source of future revenue. They probably know more about you than you do. Once I asked my bank about raising my credit limit, and was surprised to find out how much they knew about my financial situation and not just with the banks.After all ,this is the US government we are talking about ,the world leading expert in electronic eavesdropping and private data collection.
That’s interesting, Pacifica, thanks.
Robert Ross:
“they care enough to want know whether you are still a citzen , as a potential source of future revenue. ”
Though not enough to bother to ever mention the existence of CBT, lol.
Norman Diamond:
“the US’s own tax law makes itself apply to all persons including those who have no connection at all to the US. ”
Actually, for non-US-citizens, worrying about US tax law is an entirely voluntary hobby.
I found the comments I referred to in my above comment, about people receiving a letter from DoS after naturalising in Canada.
Ladybug is writing about her husband who relinquished in 1979 (she renounced in 2012)
Ladybug says
February 22, 2012 at 11:00 pm
TomOn commented in reply to Ladybug
TomOn says
February 23, 2012 at 10:31 am
Pacifica – thanks for looking up the letters. That is indeed interesting.
I wonder if it was a US-Canada thing, a by-product of the draft-resistance movement.