In my previous post about the June 15, 2018 “transition tax deadline” I referenced the letter received from Minister Morneau’s office which included:
… Canada recognizes the sovereign right and policy choice, of the U.S. to tax its citizens, including citizens who are resident abroad. The Canada-United States Tax Convention (the Convention), preserves this right.
This is an interesting statement. The writer appears to believe that the treaty “savings clause” is what gives the United States the right to impose U.S. taxation on Canadian residents. In any case, it is very clear that by agreeing to the “Savings Clause”, Canada has agreed that the United States has the right to impose taxation on Canadian resident/citizens who are also U.S. citizens.
Relevant provisions of the Canada U.S. Tax Treaty – to which both countries agree – include:
1. For the purposes of this Convention, the term “resident” of a Contracting State means any person that, under the laws of that State, is liable to tax therein by reason of that person’s domicile, residence, citizenship, …
This defines “resident” in a way that references the domestic law of the country. In the case of the United States, domestic law, defines U.S. citizens as “tax residents” of the United States.
This Convention is generally applicable to persons who are residents of one or both of the Contracting States.
The treaty applies to people who are U.S. citizens or “permanent residents” Green Card Holders AND/OR Canadian residents. Therefore, the treaty applies to dual Canada/U.S. citizens living in Canada as per Article IV.
(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).
This is the “savings clause”, pursuant to which Canada agrees to allow the United States to impose direct taxation on Canadian residents who are U.S. citizens.
Some thoughts …
1. Obviously the U.S. has the right to impose U.S. taxation on U.S. citizens regardless of what the Treaty says.
2. The “savings clause” assists the United States because Canada agrees that the U.S. can impose taxation on residents of Canada.
3. But, could Canada have ever imagined that, the the United States would argue I presume) that the “savings clause”, allows the U.S. to: create a fictitious taxable event, which would allow the U.S. to impose tax on Canadian source capital, prior to there being a “taxable event” in Canada?
The letter from Mr. Morneau’s office also includes:
Although a purpose of a tax treaty is to alleviate double taxation, it does not align tax policies, nor harmonize the Canadian and U.S. tax treatment of certain types of income.
Does this mean that the tax treaty allows the United States to write any piece of legislation, call it a “tax”, and use the “savings clause” to extract capital from Canada? I think not. A tax treaty is NOT for the purpose of one country effectively “colonizing” another country. Yet, that is what the Government of Canada appears to believe the treaty is about.
The problem is NOT just the United States. The problem is Canada agreeing to U.S. taxation of it’s residents. Would the elimination of the “savings clause” eliminate the problem?
So far, the response from the Government of Canada has been:
Take this up with the United States. Your problem is with the United States and not with Canada.
No. Because Canada has agreed to the “savings clause”, the problem (with respect to Canadian residents) is with the Government of Canada. One purpose (and the primary effect) of the “savings clause” is to allow the U.S. to impose direct taxation on Canadian residents. Of course nobody knows this is going on. In addition, I suspect that Canada’s treaty negotiators have NOT fully understood the implications of the “savings clause”. Well, the “transition tax” certainly demonstrates how the “savings clause” has effectively “weaponized citizenship”. The “savings clause” is NOT just a tax on certain Canadian residents. By draining Canadian capital from Canada, it is an assault on all of Canada. To be clear, this state of affairs has been facilitated by the Government of Canada!
Australia’s Fix The Tax Treaty site
Australians, led by Karen Alpert, are focusing on the Australia U.S. Tax Treaty. By doing this, they have effectively converted the “it has nothing to do with Australia, talk to the United States” problem to:
No. This is a problem that has been caused by the Government of Australia (which it has).
The Australian movement should be a model for movements in all other countries (especially Canada).
Bottom line: The treaty must be amended to remove the “savings clause”. To do so, may effectively end U.S. citizenship-based taxation (in practice but not in theory).
It’s very clear that “tax treaties” are too important to be negotiated in secret. The negotiation of “tax treaties” needs to be carried out under public view. The “savings clause” is an example of a tax treaty provision that is extremely harmful to Canada. There is NO reason for this! It allows the United States to effectively “colonize countries through taxation”. Much has been written about the amount of Canadian capital which is subject to extraction through “citizenship-based taxation” – which is (apparently) facilitated by the “Savings Clause”.
But, it’s not just the “savings clause”
Lee A. Sheppard describes how “tax treaties” are used to “extract capital in a general sense
I came across the following post from the “Tax Justice Network” blog.
From @TaxJusticeNet which underscores how the tax treaties aid multinationals in stealing from smaller countries. Reminds me of the "savings clause" and the @USTransitionTax: "Tax Justice Network: Lee Sheppard: Don't sign OECD model tax treaties!" https://t.co/EGigub5j6W
— U.S. Citizen Abroad (@USCitizenAbroad) May 31, 2018
Here is the video to which the post refers (you will see Allison Christians at this conference as well).
This is a fascinating lecture. Note the similarities between the "permanent establishment clause" and the "savings clause" – both work to extract capital from other countries. Lee A. Sheppard: Corporate tax planning and avoidance https://t.co/oRkfyGlxKo via @YouTube
— U.S. Citizen Abroad (@USCitizenAbroad) May 31, 2018
Among other things, Ms. Sheppard explains how tax treaties can be extremely harmful and how they facilitate the extraction of capital.
The “savings clause” is not the only “tax treaty” provision that is harmful to treaty “partners”.
1. What would the world look like without a Canada U.S. Tax treaty?
2. Should this issue be included as part of the NAFTA discussions?
Governments invoke treaties when they want to. Governments renege on treaties when they want to.
Governments negotiate terms and sign. It’s the taxpayer who invokes the protection of the treaty, by claiming exemption.
Or, in the case of USCs, mostly cannot invoke the treaty.
The taxpayer isn’t the one invoking the savings clause.
In today’s news the US finally figured out that Canada is a national security risk to the US. Well no kidding. Any country that harbours US citizens and signs a savings clause with the US is a national security risk to the US, at least when those US citizens learn what the US is doing. Better get that wall built now.
Although sometimes May means shall (why not just say shall?) many tax treaties state that the US ‘may’ tax its citizens etc. etc.
So if anyone had good faith in mind on the US side in exchange for FATCA the US should have promised the IGA/treaty country to refrain from taxing US persons who are tax residents of the treaty country.
Treaties trump domestic law (sort of in the US anyway). So for 90% plus of US persons living abroad the solution is easy and needs no legislation.
To invoke: To appeal to or cite in support or justification.
A taxpayer may cite the tax treaty in support of a treaty-based return position. The IRS may or may not agree.
“Treaties trump domestic law (sort of in the US anyway).”
Only in international law, not in the US. The US uses the “last in time” rule to renege on treaties unilaterally. The savings clause isn’t necessary for that purpose; the savings clause obtains cooperation from the other country.
“The US uses the “last in time” rule to renege on treaties unilaterally. The savings clause isn’t necessary for that purpose;”
Because of the saving clause, there’s no occasion for reneging.
“the savings clause obtains cooperation from the other country.”
The saving clause limits the availability of treaty benefits to those who are legally entitled to the benefit under the laws of each of the two countries.
The problem is not the saving clause. The problem is American tax law.
The upside is that the two countries don’t co-operate to enforce each other’s tax laws on their own citizens. Fortunately.
USC: I like your proposed re-write of the savings clause. I wish there was some way we could get your suggestion to be seriously considered by the Canadian government, and others. Any chance your idea could become part of the upcoming court proceedings? Perhaps that’s not the right venue but it certainly seems to be relevant.
If the world gets mad enough at the US maybe we’ll start to see a shift in attitudes toward this issue.
The problem is very simple. Much as many here may hate it, the US wishes to tax its citizens, and it’s not going to agree in any treaty not to do so. Thinking about how you’d like to rewrite the savings clause, or how pissed off you are at Canada for agreeing to the inclusion of the savings clause in the treaty, is a massive waste of time.