This post is largely motivated by two recent Facebook discussions.
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
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?
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
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.
“They probably know more about you than you do. Once I asked my bank about raising my credit limit, and was surprised to find out how much they knew about my financial situation and not just with the banks. After all ,this is the US government we are talking about ,the world leading expert in electronic eavesdropping and private data collection.”
The fact that more people do not instinctively know this by now amazes me.
Up thread, or on another thread, can’t recall, I wrote that I recently Googled my name to see what was out there. Among the info I found was my high school, addresses up until I left the US twenty years ago and all my old phone numbers. Now, when I was in high school, Comadore 64s were the really big PC. Data was stored on the real floppy, floppy discs. The computers in college, 6 years after graduating H.S. were running Netscape.
While I do not know the specifics, I have had enough difficulty moving data from old systems to newer ones to know that it is not nothing to do. Someone had to first enter much of the data on me from this era into an electronic data base and then maintain it for it to exist online today. And then someone had to compile it. Who? Why? Dunno, but I do know that someone did. And for free, any one can find out this info and more about me, to use it in anyway the choose. To think that anyone who has ever posted on this site, meaning that they obviously have an online presence, is somehow safe from being found out is naive in the extreme.
And to add more spice, if I were willing to add my overseas life to this, I’d break the fire wall and purchase a subscription to find my arrest and lien/lawsuit records. Anyone can, if they are will to pay the relatively small fee.
Of course our FIs know a hell of a lot about us that we did not tell them. They have known since before the info age, though not as much and not as curent. That’s their job. That’s how they decide who to risk loaning to etc.. Add the current tech and the NSA situation, and yeah, we’re no where near as invisable as many here like to think.
Mainframe computers were developed in and around the 1940’s, and IBM invented hard drives in 1956. Databases were transferred from hard drives to hard drives when hard drive models changed. Credit rating agencies have used them for a long time.
Why don’t credit rating agencies detect identity fraud, well maybe it’s because they don’t profit from doing so, or maybe it’s because they do profit from not doing so.
@shovel et al
Another take on “ unsolicited CLNs”
Looking back on things chronologically.The 1952 INA section 349,mentions that one shall lose citzenship upon such acts. The 1967 Affroyim cout decision contradicted that section by saying that citzenship could not be remove forceably,the acts (naturalization ,etc) had to be voluntarily done. Along comes the 1980 Terrazas ruling that not only must it be voluntary but with actual intent (intentionally) since individuals can do something(naturalize ) volunarily without the intent or knowledge that they were losing their citzenship.
Along comes the “uniform letter of loss of citzenship” , or unsolicited LCN, (google it ,if you will) which is an advisement that the act of naturalization can result in one’s loss of citzenship and to contact the consulate asap and if one does not respond to this letter within 60 days,a final determination will be made that you voluntarily expatriated yourself under the provision of ……
Here is an extract:
“ if you fail to reply to this letter within sixty days of the date of this letter your silence will be considered to mean that you intended to relinquish your US citzenship by your action in obtaining voluntatry naturalization in Canada. In that event ,
a final determination will be made that you voluntarily expatriated yourself under the provisions of section 349a1 of the Immigration and Nationality Act with the intention to relinquish your US citzenship”
Upon receiving the naturalization list from the respective foreign government branch , appropriate US consulate would forward the uniform letter. That was the extent of their “investigation”.
This letter was sent from a consulate and seems to be the way that the DOS applied the two USSC rulings above.
The contradiction between statute and rulings was fixed in the 1986 INA section 349 by the addition of voluntary and intent.
If you received the letter and didn”t respond ,the DOS wrote you off.,
If the the letter was never sent ,did that mean that the DOS did not write you off.
I am sure that that situation is so muddled ,that no legal mind would enter it. For that reason I think whether you actually received it or not doesn’t really matter . I would assume that 1952 section should prevail if you never received it since it is the no response to the letter (that you never received).
Shovel, you already know all of this.I’m just arranging events in some logical order.
“Mainframe computers were developed in and around the 1940’s, and IBM invented hard drives in 1956. Databases were transferred from hard drives to hard drives when hard drive models changed. Credit rating agencies have used them for a long time.”
Yes, I know, but my school disctrict didn’t have one while I was a student. My high school, the only one in my district, had only 500 students. My records would have had to have been entered into whatever digital data system they first used, after my graduation. And then it would need to be constantly upgraded.
My point is, that anyone can easily go online, pay a small fee and find info on me that was first recorded long before such records were digitized, at specific institutions. Long after any need for most of these institutions to maintain these records, the records have none-the-less been digitized and are now readily available to everyone.
Are you thinking of these posts?
also see opening paragraphs of this post:
& this comment:
Would have been nice if more comments here were focused on the tax treaty and the potential to sue the Canadian government over it.