Canadian citizens still protected from IRS tax collection and penalties, in Canada

Schubert receives an important clarification from Finance Minister Jim Flaherty regarding the affect that the recently-signed OECD treaty will have on the Canada-United States tax treaty, specifically regarding the protections afforded to Canadian citizens.

In early November, Finance Minister Jim Flaherty signed on behalf of Canada an OECD treaty called “Convention on Mutual Administrative Assistance in Tax Matters.” I had noticed at that time that Article 11 and a couple of other articles seemed to contradict Article XXVI A of the Canada-US Tax Convention.

Article XXVI A (section 8) states that neither party can be required to collect tax liabilities claimed against a resident by the other party, if those liabilities were incurred while that resident was a citizen of the other party. Article XXVI A is the basis for repeated statements by Canada Revenue Agency and by Minister Flaherty in September and October 2011 that no tax liabilities (and that means both taxes and penalties, including anything arising from forms 1040 and FBAR and all the rest of it) claimed by the US against a Canadian citizen (citizen at the time of the liabilities) would be collected in Canada.

I wrote to Minister Flaherty on November 28 and again on December 27, 2011, asking for clarification of whether the OECD treaty was inconsistent with the protections provided Canadian citizens under the Tax Treaty.

I received in this afternoon’s post a personally-signed reply from Minister Flaherty, dated February 10, 2012. He says point-blank, the apparent inconsistency “is not the case.” He continues, “It is intended that, at the time of the deposit of Canada’s instrument of ratification of the Convention with the Secretary General of the (OECD), Canada will reserve against Articles 11 to 16 of the Convention and consequently, will not be bound by the Convention’s provisions in respect of the assistance in the recovery of tax claims. The Convention therefore does not alter the current application of Article XXVI A of the Tax Convention, which provides for assistance for the collection of taxes between the tax authorities of Canada and the US.” The full text of my November 28 email to Minister Flaherty, and a photograph of the letter I received in reply to my email, appear in the attached PDF file at the bottom of this post.

The “current application” is, as Flaherty has said in writing to at least one MP and to several persons who have posted on this website, that Canada will NOT collect any taxes or penalties claimed by the IRS against anyone in Canada who was a Canadian citizen at the time these alleged liabilities were incurred. FLAHERTY HAS SPECIFICALLY STATED THIS APPLIES REGARDLESS OF WHETHER THE CANADIAN CITIZEN HOLDS DUAL US CITIZENSHIP. (For now, I’ll leave aside the issue of the US claiming you’re a dual citizen when you are certain in your own mind that you are NOT and that any such claim by the US is absurd.)

Depending on whether one speaks of the December IRS announcement of a requirement for filing back six years, or the OVDI standard of eight years, any Canadian resident who was or became a Canadian citizen prior to 2006 or 2004, respectively, has the option of telling the IRS to jump off a very tall cliff, with respect to tax filing (including FBARs, and Form 8854 with respect to expatriated Americans), as long as that resident is prepared never to cross the US border again. The IRS has no jurisdiction on Canadian soil, it can only apply to Canada to collect tax claims on its behalf, under the provisions and limitations of the Canada-US Tax Treaty. That includes Article XXVI A mentioned above and in Flaherty’s letter to me.

I appreciate that some people feel they have to be able to cross the US border, either for family or business reasons. However, I strongly suggest anyone who is concerned about the costs, both financial and moral, of complying with IRS extortion, seriously consider the option of refusing to comply with IRS demands and not crossing the border again. Yes this may have a down-side for you, but what is the trade-off in terms of costs to you, your family, and your retirement if you comply with the IRS?

There is also a very strong moral and political issue for those who firmly believe in good faith they haven’t been US citizens for decades, have made no claims to nor exercised any rights of US citizenship since committing their expatriating acts, and therefore have no logical or even legal reason to pay taxes to a foreign country which has provided them NOTHING by way of protections, goods, services, benefits or rights. Particularly when they have for decades fully, freely and honestly paid taxes (at higher rates than Americans) to Canada and its provinces for protections, goods, services, benefits and rights they HAVE received from their adopted country.

I don’t know what effect the Tax Treaty has with respect to the application of FATCA on Canadian soil. No doubt that is something being raised by Flaherty and his officials even now. Bear in mind, however, that the only real financial cost that can be imposed on you for failure to comply with FATCA, as far as I can tell, is a 30% withholding of certain transactions ARISING FROM US-SOURCE INVESTMENTS. Do you have US source investments?  How important are they to you?  Can you unload them and re-invest the funds in Canada instead, before FATCA comes into play?  Think about it.

If you are not a Canadian citizen, or became one after 2004 and certainly after 2006, this may not help you. If you reside in and are a citizen of a country other than Canada that has a bilateral tax treaty with the US, you need to consult with your government or a tax lawyer in your country about whether your country has similar protections available to you under a  dual tax treaty with the US, whether your country has signed the OECD treaty, and whether your country is or isn’t going to “reserve against” Articles 11 to 16 of the OECD treaty.  Residents in countries other than Canada, who read this post and investigate what protections they do or don’t have, are encouraged to post the results of their investigations in their own country, as a reply to this thread.  Or perhaps someone can start a separate thread for countries other than Canada …

The fact that it has taken two and a half months to get a reply (signed by Flaherty himself, on Minister of Finance stationery), suggests to me the wording of the letter has been vetted very thoroughly by Departmental lawyers. However, I am neither a lawyer nor an accountant, and I am not offering professional advice. If you are in any doubt about the foregoing as it may apply to your own case, I urge you to consult a tax lawyer who is familiar with Canadian, as well as US, tax law. Preferably one based in Canada. I for one have more faith in the motivation, and ultimate loyalty to my concerns, of a fellow Canadian than I would have in any American lawyer. (For anyone residing in and a citizen of a country other than Canada, replace “Canada” with “your country” in this paragraph.)

And, speaking in spite of being a life-long supporter and member of the NDP who has never voted Conservative in his life, God Bless Jim Flaherty. Our government is in fact standing on guard for its citizens. As is the NDP. Who knows what the Liberals stand for?

reply from Minister Flaherty