The purpose of the tax treaty between the United States and Canada is laudable: to avoid the double taxation of residents. But the problem is that the United States imposes an unconstitutional extra-territorial taxation of “United States persons” no matter where they live in the world, even in the high tax region of Canada. But one huge problem with the treaty is that it does not count HST/GST as tax. It is of course a big reason why Canadians are marred by taxes (as Gary Marr of the Financial Post says).
An example of why this is a huge issue is that last year we bought a RAV4. The HST was about $5600. Now you would think that since these taxes go straight to our provincial and federal governments to pay for education, health care, defense, etc. that this HST could create a legitimate foreign tax credit that could offset the double taxation that could occur with US imposing taxes on US persons resident in Canada. But the foreign tax credit only includes “income taxes”:
Four tests must be met to qualify for the credit:
- The tax must be imposed on you
- You must have paid or accrued the tax
- The tax must be a legal and actual foreign tax liability, and
- The tax must be an income tax.
So this means that if you live in Britain, Canada or any other country with VAT or GST, (1) you are getting the shaft if you owe taxes to the United States (e.g., because of gains in a TFSA, or alternate minimum tax); (2) since the USA does not have a comparable sales tax, it means that many people in the United States pay no federal whatsoever–but they are coming to us to pay taxes when we’ve already paid our fair share of taxes here in Canada, Great Britain, Europe etc.
This sort of thing makes renunciation of citizenship ever more attractive. I wish Canada would renegotiate the tax treaty with the United States to reflect this reality (and RESPs, TFSAs, and RDSP), and get the United States off our back about FBAR and FATCA.
If only the next we hear from the US and Canadian governments would be that they have in the background accomplished the needed re-negotiation of the US / Canada Tax Treaty to address important omissions. It would explain their deafening silence.
The Canadian government has not been totally silent, and I appreciate very much the statements that they have already made–though it is too small, and one could hope for more. But they have said they will not collect from US persons who are Canadian citizens and that they will not collect FBAR penalties. It was these promises that made it possible for me to come out of the closet.
Ha! In Canada, you pay little compared to Brazil. There’s a high degree of tax dodging in Brazil so the government put “consumption” taxes on everything. So most of these are inescapable taxes. The way to never pay is to never live here.
IPVA – car tax. An old beater Fiat from 2001 will cost around R$ 500 (US $350) per year. There’s a few more mandatory “contributions” that have to be paid, like to the life insurance fund, but those aren’t THAT much money.
ICMS – avg. 18% (similar to a VAT) sales tax, depends on the state. Everytime a product *CHANGES HANDS*, the tax is payable. So from manufacturer -> retailer -> client – that’s 48%. An accountant told me this can be offet to a degree, but in this scenario, it will still be 30%+.
Import taxes – 100%+. Buy something from eBay that carries a cost (shipping included in this number) more than $50 USD, get ready. I have been hit with this many times.
“Foreign Purchase Tax” – Buy something from eBay with your credit card or use your Brazilian credit card outside of the country – pay an additional 7%. I have been hit with this many times.
Payroll taxes [as an employer] – 120%+ of wages paid to employees. Salaries went up 15% for 2012. A boss in Brazil has to compensate an employee for Sundays while the employee sits at home watching TV. The employer also has to pay a mandatory Christmas bonus and vacation, even if the employee is worthless. When the employee leaves, these accrued amounts have to be paid, otherwise, the employee will sue in the Labor Court and is 100% guranteed to win.
Payroll taxes [employee] – Half the standard deduction of the US. The highest bracket is 27%.
Small Business Tax – calculated on the GROSS revenue, and not the logical NET amount. They only care what you made, not if you actually kept R$1 after paying bills.
“Tax on products and services of ANY nature” (translation) – depends, but charged by the municipality. I think it’s around 5%. The mnimum is 2%, but nobody ever gets it that low.
Property Tax – Depends on the assessed value. It’s not that much though — I think around 1% where I live.
Electric Bill – There is 40% tax on that so they will never invest in solar power here.
Capital Gains – 15% (flat)
Interest Income – 15% lowest – 22%+ highest. The banks collect this. So whatever money you get, it will be NET of the tax. The only tax-free interest comes from poupanças (savings accounts) that the government uses to “subsidize” mortgages, but those aren’t really subsidized because the interest rates are 15%+ per year + monetary “corrections” meaning they can increase your mortgage due to monetary fluctuations.
A few years back, they abolished the ICMS that put a 1% tax on ALL bank account transactions – meaning, everytime you did ANYTHING in your bank account, you paid 1% over the amount. I just hope this tax never comes back!
There’s really a whole lot more taxes than this, but these are the main ones that I see. A whole list can be found here:
*** So to think that I live here to avoid taxes is just unthinkable. *** I pay MUCH more percentage-wise than the average American. One day I really thought about it and on average, there is about 60-70%+ tax in everything we buy or use here. In fact, the only reason I stay is because my wife is from here, likes it here, and all her family is here. Otherwise, I’d be in Europe somewhere.
Next time a Canadian complains about taxes, tell them to move to Brasil.
Whatever you do, DON’T believe in these English-only links. This information is not correct here:
Thanks, that’s a great list of particulars about how you are not living in Brazil to dodge US taxes, but since few of these taxes are “income taxes” they would not be available for the Foreign Tax Credit. You prove my point.
By the way, my point about taxes in Canada is not to say that it can’t be worse elsewhere. It’s just to say it is much worse than in the United States, so Geithner and Shulman can get off our backs!!!
I agree totally that the U.S. is violating the tax treaty and that it needs to renegoitiated. I have written to Finance Minister Flaherty and said the same thing.
I believe though that the point of the tax treaties can never be to attempt at “harmonization” of the tax regimes of various countries. The point of the tax treaty should be a simple one which is that nations retain the sovereign right to tax the incomes of their residents. It is just that simple.
Taxation should be based purely on the jurisdiction of residence. It is totally immaterial the method of taxation. All nations are free to decide on their method of taxation and their rates. It is not the perogative of one nation to tell another that they don’t believe a given method of fair.
The U.S. incurs absolutely no expenditures with relation to providing services to its expat citizens so there is no justification for them to collect tax revenues. This is because the act of collecting revenues rest on the assumption that expenditures are being made on behalf of the one from whom the revenues are collected.
The U.S. has not spent any of its tax revenues on my behalf in over 26 years.
yes, I wrote about something along these lines on another site.
I think that the US policy is actually somewhat subversive to foreign governments in this respect. Let’s say I live in Brazil, but I have a brokerage account in America with “undeclared” money in America. I make a gain of 10k and pay 15% cap. gains to America since it was an American brokerage account. The country where I actually live goes without. I think there’s something fundamentally wrong with that.
Petros, I mentioned small business taxes for 2 reasons:
1- Since taxes are added into the cost of the product, it reflects how products will inevitably cost more, all caused by taxes.
2- If anyone is thinking about doing business here, it is difficult, expensive, and a real bureaucratic nightmare.
When I first told my parents about “consumption taxes” they had no clue as to what they are. Due to these consumption taxes, VATs, and other taxes that Americans in foreign countries end up paying A LOT more than their American counterparts. So for someone to tell me that I owe taxes, they have to be out of their mind. That’s why I think “earned income exclusion” doesn’t accurately take into consideration what Americans abroad are already paying.
I was thinking about it this afternoon. I forgot to mention the ridiculous taxes on cars here. They say that a Toyota Corolla in Argentina costs half the price due to lack of taxes, even though the cars are made in the same factory in Brazil. When the car is rolled out, Brazil instanty puts a mountain of tax on top of it.
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