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.)
________________________________________________________________________________
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.
At least it doesn’t start with “Greetings.”
Shudder.
@ Plaxy,
Ha! “Greetings” is how they started the “you have been drafted,” letter when they had the draft, right?
When the Immigration Canada officer told me in 1978 that Canada sends a list to DoS, I figured I’d get some form letter from DoS, in bureaucratese, to the effect of “This is to inform you that we are aware you are no longer a US citizen. Do not attempt to live in the United States and don’t even think of trying to work here without a permit. Have a nice life. Goodbye.”
Never heard anything from DoS and never thought about it ’til 2011 (when citizenship status of US-born Canadians made the news here), I just assumed I was not a US citizen and lived accordingly for 34 years. I wish they had sent me a letter, such as Mr. Ladybug received, back at the time and I would have got a CLN then instead of in 2012 (though effective 1978). I don’t like loose ends and I like seeing things spelled out on paper.
@ Plaxy,
You’re welcome.
I wondered that in 1978 too, if sending a list to DoS was a US-Canada thing. Fast forward to now, I don’t recall anyone who naturalised in other countries mentioning this, although other people have mentioned being told this by Immigration Canada.
If anyone who naturalised in another country was told this, please let us know.
Since posting my last comment, I’ve found the letter itself. Ladybug sent in a copy and Petros made post/thread for it in February 2012.
http://isaacbrocksociety.ca/2012/02/23/letter-from-consulate-general-july-25-1980/
It was a long time ago.
Anyway. Coming back to the present, I think I’m done here. No questions left – except the outcomes of the legal actions.
Good luck to the Canadian plaintiffs.
Yes, I think I’ve spent several comments delving into the past getting us further off topic. Good exchange of ideas and information . . . but back to original programming . . .
I found a 1984 DOS Board of Appellate review of a reinstatement request by someone who lost his citzenship due to his 1973 naturalization. It is mentionned in the review that upon being notifed by the Australian Dept of Immigation the US consulate in Melburne sent out a unform letter of loss of citzenship.
The gentleman did not respond to neither letter .The contents and the procedure described ,pretty much fits Ladybird’s and Pacific’s description.
Thank you @USCitizenAbroad for this post.
I know I have had this conversation before with Karen, yet my view is that the Savings Clause is redundant to what already is in the IRS tax code (I believe there is an example where it was not redundant, perhaps in the conviction of the compliance industry in applying certain interpretations). If the savings clause is redundant then it would be a diversion from proper treaty remedy from double taxation. A remedy suggested above is to explicitly state that there may only be one country of tax residence, and to agree those rules.
I see as part of a solution: explicit exemptions to eliminate the double taxation today and to future proof those potentially impacted by changes in Australian and U.S. law. A number of U.S. double taxes got through that were not in place when the treaty was signed AMT(?),NIIT,GILTI, Transition Tax, others? Such exemptions should act as a shield against U.S. extraterritorial law. If the single country of tax residency gets in the agreement, then such extra exemption (maybe an anti savings clause) would treat U.S. law under warranted suspicion of tending to try to circumvent the treaty.
The double taxation is unfathomable to most, even those in government. One reads a tax treaty and there is lots of language of preventing double taxation, so one may think that it is meeting its aim of preventing double taxation. One problem is that the definition of double taxation is the U.S. Treasury department definition. The IRS splits up many types of income and does not allow tax credits to flow among the different types; such as excessive tax paid on earnings can’t be applied against taxes the U.S. has but not your country of residence. The definition of double taxation needs to be restated in our interest: If one is tax resident in a nonUS country and they have no earnings, pension, income in the U.S. then they should not have any U.S. compliance or tax to pay. Any additional tax and compliance shall be considered double taxation.
We need to tidy this up: For anyone paying U.S. double tax it may seem that they volunteered to do so. One may say the volunteering is coerced under threat of bankrupting fines allowed by Canada under the Canadian-U.S. tax treaty (as there were incomplete exemptions (is that enough to fix the volunteering position?) In contrast, according to the FATCA IGA people are not volunteering if they are U.S. persons and volunteering to send their bank information to the U.S. IRS. It is required under Canadian law on Canadian financial institutions under threat for account holders of closing one’s account and under threat of perjury charges if one does not answer truthfully.
Here is where I see one problem in Australia. When the government here received my letter asking for proper due diligence into tax treaty gaps as a basis for pursuit of remedy with the U.S.: from the letter I got back from the then Treasurer (now PM), it sounded like he put the question to Legal. Legal, I imagine, then checked and came back and said that yes it is all true and backed by the law of Australia (as the Australian-US Tax Treaty is Australian law too). Well then, I imagine they informed: “the law is the law.” [This is perhaps too easy an out for them]. I was encouraged to bring up my issues with the U.S. in the first instance. That is part of a failure of a duty of a government to protect its resident citizens from the intervention into the internal affairs of Australia by an outside country [U.S.].
Another problem here is we have no Charter of Rights or Bill of Rights to hang a lawsuit on. There is a body to take in complaints of discrimination yet the discrimination we face does not fit into the categories of commonly accepted discrimination (such as on the colour of one’s skin) – so then a discrimination claim would slip.. Then I get the real impression (and also from e-mail exchange with Richard Pound (President of Canadian Civil Liberties Association), that Human Rights and Civil Liberties have IMO narrow areas that they would consider with persons such as terrorists under police custody getting the highest attention. Anyone paying tax is in a different league and above those who have nothing and attracting the extra help. And we as a group are too diverse across all spectrum of society rather than an easily identifiable group that may more easily fit a discrimination argument.
If anyone has an idea where to hang a lawsuit in Australia against the tax treaty/FATCA IGA, please tell.
Another problem here in Australia is that the Australian Government has seemed to put their head in the sand on tax treaty gaps. The ATO, our CRA, says on their website that tax treaties “reduce or eliminate double taxation” , with no footnote or explanation that there are numerous tax treaty gaps with the Australian-US tax treaty where double taxation is guaranteed. This is a good angle as the ATO website is referenced by many for the tax laws and they strive for utmost accuracy. At least with the CRA website (portions I have seen) they admit to the double taxation.
Yes, there should be a Charter lawsuit against the Canadian-US tax treaty. Let’s see how the ADCS suit goes. When that is successful that will help pave the way for a suit in regards to the tax treaty.
As Allison Christians says: it is up to the courts to decide.
We can and should change common names to better suit our purposes.
Citizenship-Based Double Taxation NOT Citizenship-Based Taxation
Canadian-U.S.Tax Treaty NOT the U.S.-Canadian Tax Treaty.
Redefine what Double Taxation means in the tax treaty context, as suggested in my post above.
@ plaxy, et al.
The U.S. has the obligation to send out CLNs unsolicited.
Since at least 1940, U.S. Diplomatic and Consular Officers have had the legal obligation to proactively start the process to issue CLNs to anyone they suspect of having lost U.S. nationality.
A few people have gotten unsolicited CLNs as the law requires. But not many, because the U.S. officers generally are derelict in their legal duty. This duty, as follows, is excerpted from:
“The U.S. IMMIGRATION AND NATIONALITY ACT of 1952
“CHAPTER 4—MISCELLANEOUS
“CERTIFICATE OF DIPLOMATIC OR CONSULAR OFFICER OF THE UNITED STATES
AS TO LOSS OF AMERICAN NATIONALITY UNDER CHAPTER IV, NATIONALITY
ACT OF 1940 , OR UNDER CHAPTER 3 OF THIS TITLE
“SEC 358. Whenever a diplomatic or consular officer of the United States has reason to believe that a person while in a foreign state has lost his United States nationality under any provision of chapter 3 of this title [the INA of 1952], or under any provision of chapter IV of the Nationality Act of 1940, as amended, he shall certify the facts upon which such belief is based to the Department of State, in writing, under regulations prescribed by the Secretary of State. If the report of the diplomatic or consular officer is approved by the Secretary of State, a copy of the certificate [i.e., the Certificate of Loss of Nationality] shall be forwarded to the Attorney General, for his information, and the diplomatic or consular office in which the report was made shall be directed to forward a copy of the certificate to the person to whom it relates.”
http://library.uwb.edu/Static/USimmigration/66%20stat%20163.pdf
@ Shovel,
Please provide specific details (names can be anonymous) and the circumstances. It is odd for a DoS officer to write a loss of nationality report without investigating it. But if they are doing/have done it, I’d like to know and add it to our database. Thanks.
I won’t pretend to know anything about tax treaties, but I found it interesting that where there are clauses, there are exceptions to them, including the Savings Clause:
https://hr.vanderbilt.edu/international-tax/tax_treaty_savings_clause.php
@ pacifica777
“After immigrating to the United States from Poland in 1912, Beys Afroyim became a naturalized American citizen in 1926. In 1950, Afroyim went to Israel where he voted in that country’s 1951 governmental elections. In 1960, Afroyim applied for renewal a of his American passport. The State Department informed him that he had forfeited his American citizenship by virtue of Section 401(e) of the 1940 Nationality Act which stipulates that citizens of the United States shall “lose” their citizenship upon voting in a foreign state’s political elections.”
https://www.oyez.org/cases/1966/456
My point isn’t that a few people before Afroyim were stripped of citizenship, and some were issued CLNs.
So what is my point? Pacifica, where does Section 358 say the DoS officer should not investigate? My point is that Section 358 legally obliges officers to investigate… and they have failed in that obligation.
I am thinking of the untold many (as repeatedly related on the pages of Brock, and elsewhere) who were told by DoS officers back when that in taking certain actions (like getting Canadian citizenship) that they were irrevocably losing their American. Surely you know of their stories too.
Those officers were stating that they had, in the words of Section 358, “reason to believe that a person while in a foreign state ha[d] lost [their] United States nationality”. The officers issuing the warnings had a legal obligation to pursue an investigation on their reasonable belief. And they utterly failed in that obligation. Their failure has left many, many people to be told today by condors (think Roy Berg & Co.) that they are still U.S. citizens and can only escape through the renunciation & compliance mill (as I’ve heard Berg say firsthand).
I would say those people are more that owed CLNs today, free of charge, with an apology from DoS for its failure to carry out the law.
““Though not enough to bother to ever mention the existence of CBT, lol.””
Can’t trap antone if they knew about it.
“Actually, for non-US-citizens, worrying about US tax law is an entirely voluntary hobby.”
I think ND’s wife may disagree.
“Actually, for non-US-citizens, worrying about US tax law is an entirely voluntary hobby.”
‘I think ND’s wife may disagree.’
If we had known what was going to happen, surely she wouldn’t have agreed to let me submit joint returns. Though if we had known what was going to happen, I would have renounced in 1984.
And why didn’t we know what was going to happen. In 1982 my employer sent me to a customer’s site in the US for a few weeks. In 1983 my employer’s US subsidiary issued a falsified W-2. I crossed out the jurat at the bottom of Form 1040 and wrote an honest declaration. The IRS should have penalized me in 1983 for illegal honesty on my 1982 return, and I would have renounced in 1984. Funny that the IRS didn’t penalize me until IRS employees started embezzling for me. Honesty was already illegal long ago.
Sorry I went off topic. My wife got suckered into volunteering, almost as much as I did.
@Shovel
You include:
“The U.S. IMMIGRATION AND NATIONALITY ACT of 1952
“CHAPTER 4—MISCELLANEOUS
“CERTIFICATE OF DIPLOMATIC OR CONSULAR OFFICER OF THE UNITED STATES
AS TO LOSS OF AMERICAN NATIONALITY UNDER CHAPTER IV, NATIONALITY
This appears to apply only in the case where there is “reason to believe” that one has/had lost U.S. citizenship. By their nature, most relinquishing acts are such that the State Department will never know about them. This is the reason why the United States created the concept of the “tax citizen” in 2004.
I would point out also that there is NOT and has NEVER been any requirement in the Immigration and Nationality Act that loss of U.S. citizenship for nationality purposes is dependent on having a CLN. That is the law period.
You also comment that:
First, any tax lawyer who makes the claim that renunciation and compliance is ALWAYS required to escape clearly has no understanding of U.S. nationality law.
Second, any tax lawyer who makes the claim that renunciation and compliance is ALWAYS required to escape likely does not understand the interaction between S. 7701(a)(50) and S. 877A of the Internal Revenue Code either. Although there are some tax lawyers who believe that formal renunciation and tax compliance is always required, fewer and fewer tax lawyers are taking that position. More and more are understanding that one must consider the date and manner of relinquishment. Basically, the “comply and renounce” people are saying that the application of S. 877A is retroactive …
Third, it is possible to renounce U.S. citizenship without being tax compliant. But, there are tax consequences to renouncing without being tax compliant. The question is whether a person wants to risk the tax consequences of renouncing without being compliant. This should be determined on a “case by case” basis and should be determined based on a combination of objective and subjective factors.
Although there may (in certain circumstances) be strategic reasons for somebody who relinquished citizenship years ago to go the compliance route, for most this is not a good idea.
There have been at least a couple of good Brock posts on this issue. One was a discussion of a Michael Miller article. Another was a post that featured Virginia La Torre Jeker, Michael Miller and I think Roy Berg.
@ Shovel,
Sorry, I misunderstood what you said. For some reason, “unsolicited CLN” struck me as meaning the CLN just showing up in the mail out of the blue without any prior contact, which would imply no investigation (or at best an incomplete one) contrary to procedure.
It got me thinking of a possible scenario where a 7 FAM 1224 letter went astray and they got no reply. In that case, though, seems DoS wouldn’t receive the information regarding intent with which to rebut the presumption, so they shouldn’t issue a CLN. But they have been known to do weird things. So, it definitely got me curious for details.
But now I get what you meant by “unsolicited CLN” – of course, a CLN resulting from a loss of nationality case initiated by DoS is “unsolicited” by the person – and you weren’t saying they’ve been just sending them out without an investigation.
But of course section 401e was found to be unconstitutional and Afroyim regained his citizenship. https://en.m.wikipedia.org/wiki/Afroyim_v._Rusk
This is considered a landmark case.
The unintended consequence is that dual citizenship became permissible and relatively common.
@ pacifica
Thank you.
@USCA
In the restricted relinquishment cases to which I refer, all I am pointing out is that INA 1952 Section 358 proves the DoS officers were lawbreakers. It is they who should be facing an OMG moment before INA law, not those they failed.
@ Portland
That other sections of the INA were found unconstitutional because of Afroyim does not relieve DoS officers of the legal obligation to abide by the provisions of INA 1952 Section 358.
“but so far IRS has not bothered any of us old relinquishers whether we had a CLN or not.”
“To the best of my knowledge, we have only heard this from condors, not from the U.S. government itself.”
Why would they, they have outsourced that to our FIs.
…who are doing a bang-up job of ferreting out US citizens in this country.
https://www.rte.ie/news/presidential-election/2018/1024/1006253-six-moments-from-the-prime-time-debate/
Peter Casey, who is running to be President of Ireland, comments on his effort to hand in his Green Card during the Presidential Debate.
Huh. Even Australia, which famously prohibits dual citizens from sitting in Parliament, doesn’t do it to green card holders.