According to MP @ChandraNepean, following the teaching of Michael Kirsch, It's time for Canada to adopt @citizenshiptax (CBT) presumably based on a US model. He writes: "Canada needs to start taxing Canadians who live abroad". He doesn't understand CBT! https://t.co/VGmPLIhEmU
— U.S. Citizen Abroad (@USCitizenAbroad) April 20, 2020
Yes. It’s true. While Americans abroad (the world over) contemplate how to get their $1200 Corona Virus related payment from the U.S. Government, Nepean MP Chandra Arya has publicly made the case for citizenship-based taxation in Canada. His article reflects an admiration for the “1924 US Supreme Court decision in the case of Cook v. Tait“. His proposal is bolstered by his reliance on the thinking of Notre Dame Law Professor Michael Kirsch. Generally Professor Kirsch’s arguments for CBT are based on the assumption that there is really no such as an Accidental American and that all Americans are members of the polity (as he calls it). (You may be able to take a Homelander out of America, but you can’t the Homeland out of an American.) These arguments were on full display in May of 2014, when ACA hosted a “Citizenship-Based Taxation Debate” between Professor Kirsch and Queen Mary Law Professor Bernard Schneider.
Professors Michael Kirsch and Bernard Schneider – May 2, 2014: "21st Century Taxation of Americans Abroad: Citizenship-based taxation vs residence-based taxation" https://t.co/YhZz2sQPWg via @YouTube
— U.S. Citizen Abroad (@USCitizenAbroad) April 20, 2020
MP Arya begins his discussion with:
While we don’t have complete information on where Canadians have taken up long-term residence abroad, there are reports of about 300,000 Canadian citizens in Hong Kong and tens of thousands in each of several countries in the Middle East. From Asia to Africa, from Europe to the Caribbean and South America and, of course, the US, significant numbers of Canadians have made their permanent home away from Canada. There were about 3 million Canadians abroad, including tourists, at the start of the COVID-19 crisis, according to the Prime Minister.
Currently, Canadian income tax obligations are based on residency status and not on citizenship or immigration status, so non-resident Canadians do not pay taxes. However, expatriate Canadians enjoy the same rights as Canadians who are resident here. They should face the same obligations as resident Canadians, including paying taxes, so that they share the responsibility of contributing, at least financially, to our country.
The United States is the only developed country that taxes its citizens on their global income irrespective of where they live or how long they have lived outside of the US. The constitutional validity of CBT has not been tested in Canada, but the 1924 US Supreme Court decision in the case of Cook v. Tait offers cogent reasoning about CBT that shows its validity under the US constitution. The decision relied on the inherent benefits received by US citizens and their property from the US government, regardless of where the citizens made their home or where their property was located.
Michael S. Kirsch of the University of Notre Dame, in his seminal 2007 article “Taxing Citizens in a Global Economy,” argues for the same principle. Kirsch suggests that recent globalization trends strengthen, rather than weaken, the case for taxing US citizens living abroad. He concludes that modern advances in transportation and communication weaken the case for giving preferential treatment to income earned by citizens working abroad, in that these developments afford the expatriate US citizen virtually the same rights as that of a resident US citizen, such as personal protection, property protection, the right to vote and the right to enter.
The same can be said of expatriate Canadians. They are assured of guaranteed access to a safe, secure and stable society, virtually free world-class health care and education systems and, depending on income levels, affordable housing, irrespective of their length of stay (or lack thereof) in Canada. In addition, depending on the time spent in Canada, financial supports like Old Age Security and the Guaranteed Income Supplement are available to them. Anecdotal evidence suggests citizens are returning to Canada to enjoy these benefits after spending their productive lives elsewhere. This is a significant contingent liability for Canada, because citizenship — not contribution (or lack thereof) to our society — is the criterion for benefits and support.
Kirsch also discusses the need to maintain the cohesion of a society. In the absence of citizenship-based taxation, there is a strong tax-driven incentive for a not insignificant number of high-income and high-net-worth individuals to establish tax residence abroad in order to avoid income taxes. The creation of a separate class of citizens could have corrosive effects on broader society, just as it has done in other countries that rely only on residence-based taxation.
Note that MP Arya’s analysis reflects a misunderstanding Cook v. Tait.
Concerned Canadians should address MP Arya’s in a public way!
Popcorn time!
Every few years someone comes up with this idea in Canada or France seeming to forget the US-Canada and US-France Tax Convention have “one way” savings clauses that allow the US to tax citizens residing in Canada or France but prohibit France or Canada from taxing their citizens residing in the US. The only way these provisions can be changed is with approval of the US and in particular approval of the two thirds of the US Senate(say hello to Rand Paul and Mike Lee). In my particular I would take pleasure to lobby Paul and Lee personally against MP Chandra proposal and to tell MP Chandra directly to his face I will take pleasure in directly frustrating his advocacy and denying his constituents in Ottawa Nepean of democracy.
Ridiculous. How about a much more simplified system whereby, as much as is possible, you “get what you paid for?” And yes, things like OAS can be scaled down if you haven’t worked at least 25 years (arbitrary) in Canada, or even a partial “insurance premium” for our “free” healthcare if you have reached a certain age and haven’t contributed enough years to Canada. Fair is fair. Else we’ll just end up in the same boat as the USA quagmire.
Anyways whenever I hear some Canadian or French politician suggest this, omitting the necessity of the US Senate to approve the necessary modifications to the relevant tax treaty a part of my thinks I might get a chance to live out my fantasy of playing Richard Gere in Pretty Woman telling MP Chandra that his “treaty” amendments are “stuck” in committee in Washington, DC through Paul and Lee. https://youtu.be/Tm80K0JuQds?t=214
I am going to make another prediction no matter what happens in the next US election and/or with Covid-19 there will not be significant tax increases in the US in part due to the ability of the US to issue massive amounts of debt because of the reserve state of the US dollar. I can’t predict that won’t be big tax increases in Canada or other countries however, I will not if this seems unfair to people like MP Chandra perhaps they need to look at Canada and other countries support of the US dollar’s reserve status.
Oh Gawd, not another one. Someone must have slipped him some US flavored Kool-aid. The guy could pass for a US homelander, complete with the same lame arguments for CBT. Just what we need here in Canada; another unenforceable law. These goofs all make the same erroneous assumption; that people move from wherever it is that they live to somewhere else where they pay no tax.
In view of the fact that more expat Canadians live in the US than any other country, someone needs to explain to him how likely it is for the US to pass info about US resident Canadians to the CRA. (The USG has clearly demonstrated what it thinks about reciprocity.)
Canadian CBT would be even less effective than US CBT (which is a failure) because there is absolutely no way of enforcing it. The career bureaucrats will straighten him out.
There is sadly some wisdom behind this MP’s thinking. He refers to 300,000 Canadian citizens in Hong Kong. This is likely pretty accurate. Probably just as many or more in mainland China. I can’t tell you how many times I’ve had to bite my tongue and refrain from violence every time I’ve been to dinner with a Hong Kong Chinese who first tells the story of “serving time” in “passport prison” (yes, that’s exactly what they call it) by enduring a residence in Toronto or Vancouver just long enough to get a Canadian passport (or who found ways to cheat the process by pretending to be there), and who now gleefully show off that whenever they need major medical treatment, they fly off to Canada to get it for free. And of course send their kids to Canadian schools and universities on your Canadian tax dollars. All without ever having paid a bent nickel into the Canadian tax system. And, being Hong Kong Chinese, they’ll shout like foghorns so the entire restaurant can hear their stories, boasting of how clever they’ve been!
If stories like these gain widespread exposure–and they’d be super-easy to dig up, considering how proud the culprits are–I think a huge number of Canadians can be whipped up to rally behind the cause of taxing these possible millions of ungrateful Canadians-by-convenience. Heck, even I almost sympathize with the idea.
Haven’t posted here in awhile but as a Canadian expat I’ll comment on a few things here–these are assertions made in Chandra Arya’s full article:
However, expatriate Canadians enjoy the same rights as Canadians who are resident here.
Well, no we don’t. An expat Canadian does enjoy more rights vis-a-vis a random world citizen living outside Canada and with no connection to Canada. But those rights are significantly less than they would be for someone living in Canada. We have the ability to vote in Canadian federal elections (that was a hard fought right) but not in Canadian provincial or municipal elections. We also are not eligible for Canadian provincial health plans.
But without CBT, they don’t help to finance the society they are counting on as a safe harbour.
Many of us make significant financial contributions to Canadian charitable organizations from outside Canada, so we are in fact helping to finance the society. Also we visit Canada regularly, bringing money into the country and paying various kinds of taxes as a visitor. Is that taxation at the level that it would be at for a resident Canadian? No, but the level of service provided isn’t either.
Couple of minor points, while the shit is hitting the fan:
Depending on the province (pre-COVID at least) there can be a qualifying period for health care. We had the misfortune of returning to BC for two months before moving on to Ontario, and consequently paid for five months of private health insurance before we could sign up for OHIP.
Canadians who leave do pay an exit tax when they expatriate. Deemed disposition of all assets. Not necessarily cheap.
Canadian expats no longer automatically pass on citizenship to their children in all cases. Won’t get into the confusing details, but basically if two Canadians born abroad meet and reproduce in a country without birthright citizenship, their child is stateless. This, for which we may thank one Stephen Harper, is very poorly conceived (no pun intended). US law with it’s 3 + 2 residency requirement makes much more sense.
Below is what I was referring to in that Canada and the US have a “one way” savings clause. As I have suggested Canada by means of omission does NOT have the right to tax it citizens residing the US and can only regain that right by treaty renegotiation with the US Senate approving or by denouncing the convention altogether and thus completely undermining the legal basis of FATCA et all. Again for a long time I have had a fantasy of playing Richard Gere in Pretty Woman telling people like MP Chandra that their treaty amendments required to impose citizenship based taxation on Canadians living in the US are “stuck” in committee.
https://www.youtube.com/watch?v=Tm80K0JuQds&feature=youtu.be&t=214&fbclid=IwAR1CW7MKP3EKC4Q6rIS8_AGpkNeA0USBxcPOsyuE50KT1XvAvhIqqPXlTHQ
https://www.treasury.gov/resource-center/tax-policy/treaties/Documents/Treaty-Protocol-Canada-9-21-2007.pdf
2. (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).
And below is the technical explanation of the US Treasury Department approved by the Canadian Department of Finance.
https://www.treasury.gov/resource-center/tax-policy/treaties/Documents/tecanada08.pdf
Paragraph 1 replaces paragraph 2 of Article XXIX of the existing Convention. New paragraph 2 is divided into two subparagraphs. In general, subparagraph 2(a) provides a “saving clause” pursuant to which the United States and Canada may each tax its residents, as determined under Article IV (Residence), and the United States may tax its citizens and companies, including those electing to be treated as domestic corporations (e.g. under Code section 1504(d)), as if there were no convention between the United States and Canada with respect to taxes on income and capital. Subparagraph 2(a) contains language that generally corresponds to former paragraph 2, but omits certain language pertaining to former citizens, which are addressed in new subparagraph 2(b). New subparagraph 2(b) generally corresponds to the provisions of former paragraph 2 addressing former citizens of the United States. However, new subparagraph 2(b) also includes a reference to former long-term residents of the United States. This addition, as well as other changes in subparagraph 2(b), brings the Convention in conformity with the U.S. taxation of former citizens and long-term residents under Code section 877. Similar to subparagraph 2(a), new subparagraph 2(b) operates as a “saving clause” and provides that notwithstanding the other provisions of the Convention, a former citizen or former long-term resident of the United States, may, for a 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).
Arya was born in India and has enduring ties to the country. I wonder how he’d feel about India going to CBT? I don’t know if it has in fact made it to law, but India may already be taking on a form of CBT although only for those who have Indian citizenship and no tax residency. The law also proposes to tax citizens who live where there is no income tax.
https://www.business-standard.com/article/beyond-business/playing-on-home-turf-116052701380_1.html
https://www.mondaq.com/india/tax-authorities/898066/shocker-for-india-citizen-overseas-major-changes-on-tax-residency-laws-may-adversely-impact-indian-citizens-working-overseas-
I don’t know much about the Indian proposal but what they might be able to do is to impose tax on a CBT basis on those citizens who do NOT reside in a country India has a tax treaty with. Which brings up a broader point I haven’t mention there are literally thousands of tax treaties that don’t involve the US say between India and Canada that also defacto prohibit CBT. Now in theory if Canada AND India both wanted CBT they could amend the treaty linked below to allow each side to do so and unlike in the US case you could imagine the political will to do so however, the legal logistics of amending every tax convention in the world or even lets say every tax treaty Canada is a party to(over 100) are daunting and should not be underestimated.
Canada India Tax Treaty link:
https://www.treaty-accord.gc.ca/text-texte.aspx?lang=eng&id=102409
Tim Smyth: THANK YOU so much for posting the information about the non-reciprocal nature of the Savings Clause between Canada/France and the United States. This is incredibly important information; I had no idea. In my opinion, this gives us even more ammunition.
As for the latest iteration of the idea that Canada (and others) should adopt CBT, I wish it a swift and ignominious demise.
@RH
” Won’t get into the confusing details, but basically if two Canadians born abroad meet and reproduce in a country without birthright citizenship, their child is stateless. This, for which we may thank one Stephen Harper, is very poorly conceived (no pun intended). US law with it’s 3 + 2 residency requirement makes much more sense.”
The fact that if these two born abroad Canadians would come back to Canada and gave birth to a child ,that child would not be Canadian is more of a shock. I may be wrong , but in your case, the country where that child is born might consider the said child’s citzenship as that of the parents, irrespective of the Canadian rules.
@RR
You misunderstood. After 2009, if two Canadians who were both born outside Canada (e.g. the children of expats or diplomats) had a child together *outside* Canada, that child would have no claim to Canadian citizenship. (If the child were born in Canada, no problem.) This lead to a small number of children being born stateless in countries with no birthright citizenship, so the law was amended in 2017 to provide Canadian citizenship in those cases only, I believe.
This isn’t super relevant – the main point is simply that Canadian non-residents do not actually enjoy all the rights and privileges of Canadian residents.
@Robert Ross
To the best of my knowledge, anyone born in Canada (except if they are born to foreign diplomats) is automatically a Canadian citizen. Parentage isn’t a factor. A few years ago the Cons tried to change that but the proposal went nowhere.
@barbara
“There is sadly some wisdom behind this MP’s thinking. He refers to 300,000 Canadian citizens in Hong Kong. This is likely pretty accurate. Probably just as many or more in mainland China. I can’t tell you how many times I’ve had to bite my tongue and refrain from violence every time I’ve been to dinner with a Hong Kong Chinese who first tells the story of “serving …”
I believe you are talking about the backdoor Quebec Investment Program ,and widely supported federally . You may bite your tongue but consider the fact that Hongkongers did not open that particular door. While at it, look up Mulroney and Wafic Said ‘s questionable Canadian citzenship
CBT makes absolutely no sense for all the above reasons . The gentleman deserves to be enlightened .
More on topic, I did a little research and discovered that in addition to renouncing Canadian citizenship, there is a provision to resume citizenship that is streamlined compared to a standard scratch application for Canadian citizenship. So if Canadian CBT ever comes to pass (it won’t) people will simply renounce ($100, quite affordable) and resume if or when they return to Canada. Problem solved.
Personally, I think Canada’s departure tax regime is a good solution. If someone is leaving Canada, they have the choice of continuing to be a Canadian taxpayer, (gone for a relatively short term) or paying the departure tax (leaving permanently) and exiting the Canadian tax system. Also, I believe there is a third option whereby the individual effectively gives the government a lien on their Canadian assets and everything is put on hold until the person either returns or decides they want to exit permanently.
@maz57
https://www.google.com/url?sa=t&source=web&rct=j&url=https://www.theglobeandmail.com/news/politics/children-born-abroad-to-canadian-parents-may-end-up-as-lost-canadians/article30938653/&ved=2ahUKEwjD5ZyxsvroAhWFZ80KHZBTC6oQFjAOegQIBhAB&usg=AOvVaw2ZtjRZpVlOxvwvinPGehKl
The above link should explain. If I’m wrong,pls let me know.
@Suzanne Herman
Arya was born in India and has enduring ties to the country.
India does not permit dual citizenship. Arya would surely at some point have naturalized as a Canadian citizen as he is a Canadian MP. At that he would have automatically lost Indian citizenship.
Someone losing Indian citizenship in this way can apply for Overseas Citizenship of India (OCI). I believe that most former Indian citizens do apply in this way, and probably Arya has OCI. However despite the fact that the ‘C’ in OCI stands for citizenship, OCI isn’t quite the same thing as dual citizenship. It is more of a lifelong visa giving a lifetime invitation to return to India to live and work. AFAIK it carries no privileges beyond that lifelong opportunity to return to India and no responsibilities (like tax).
However India doesn’t tax its non resident citizens (those with NRI–non resident of India). So to get to the point where Arya would be taxed in India, the Indian government would need to take two steps beyond its current position–first taxing those with NRI and then those with OCI.
I suspect that the Indian diaspora has more influence with the Indian government than the American diaspora has with the US government–and so I don’t see this happening.
The two drivers of proposals like this one seem to be:
First, lingering resentment over the 2006 evacuation of Canadian “citizens of convenience” from Lebanon. This was behind the ill-conceived 2009 changes to nationality law that left a few expats with stateless children (subsequently corrected in 2017). You still see references to this incident on public comment boards, so clearly it has buried itself in the national psyche.
Second, as per Barbara’s comment, wealthy immigrants doing the bare minimum to obtain a Canadian passport as an insurance policy, then returning to their countries of origin. Presumably anyone doing this has carefully arranged their affairs (i.e. not declared income and assets outside of Canada, legally or otherwise) to minimize their Canadian tax bill while resident, and their expatriation tax bill if and when they become non-resident. The fact that it’s possible to do this suggests that enforcement of Canadian CBT would be very difficult.
So to give a bit of historical context on some of the points mentioned.
1. The high number of Canadians living in Hong Kong is a function of the fact that many of these people are the children of people who moved from Hong Kong to Canada in the 1970s and 1980s. Anyone born to Hong Kong parents outside of Hong Kong prior to 1997 retains residence rights in Hong Kong(not necessarily the same thing as citizenship).
2. The Quebec Investor Program is really more a function of Quebec being allowed to have it’s own immigration system since 1990 a political decision made after the failure of the Meech Lake Accord which itself was widely opposed in rest of Canada especially BC. Their “used” to be a Federal investor immigration program but this was eliminated under Stephen Harper. The current Quebec program creates problems as their has never really been an enforceable mechanism to stop people from moving to other parts of Canada after arriving in Quebec.
3. The “richest” Canadians living outside of Canada are still pretty overwhelmingly located in the US. Think Elon Musk(of SpaceX and Tesla), a lot of the Bronfman family(in NYC), all the Canadian actors/singers/entertainers in Hollywood. I am not sure MP Chandra realizes the degree to which his proposal is directly aimed in practical terms at Canadians living in the US.
Thanks for the info about Indian citizenship.
Interesting that the Indian government allows former citizens to reenter India, presumably because they appreciate the enduring ties those former citizens have with India.
The United States lets the door hit you on the way out.
Thinking about this Canadian MP’s proposal, it dawned on me that Citizenship Based Taxation is the means by which a country expresses its hatred for its expats. Actually, its more than just an expression because adopting CBT enshrines that hatred in law and institutionalizes it. Fortunately, Canada is a country more inclined to favor diversity and inclusiveness than hate. The US, with its exceptionalism and by its very language (aliens), portrays non-US citizens as somehow sub-standard or inferior to US citizens. Canada doesn’t have that mindset.
That’s why I think there is little chance Canada would ever adopt CBT. Most Canadians like to see fellow Canadians venturing out into the larger world and finding success. We still claim them as “ours” (in a good way) even though they often take on other citizenships and some may never return permanently.
You would think that someone like Arya, who was not born in Canada, would realize that CBT is an instrument of hate. Sure, some people find a way to game the system but its not the system that is bad, its the gamers that are bad. Inflicting a hateful system on a million Canadian expats spread out over the world won’t eliminate the gamers.