Taxes that apply to property owners based on citizenship or immigration status
Interestingly Canada’s Underused Property Tax, by its express terms applies based on “citizenship” and/or “immigration status”. Specifically, it applies to people who are neither citizens nor permanent residents of Canada. In the same way that the United States imposes taxes on people based on and only on the status of being a U.S. citizen or permanent resident of the United States (Green Card holder), Canada’s Underused Vacant Property Tax is based on NOT being a citizen or permanent resident of Canada. Significantly, certain provincial human rights codes (presumptively) prohibit discrimination based on citizenship. The first case decided by the Supreme Court of Canada (Andrews) interpreting S.15 of Canada’s Charter of Rights struck down a British Columbia statute requiring Canadian citizenship to practise law in British Columbia. In 1974 – In Re Griffiths – the U.S. Supreme Court struck down a similar Connecticut provision requiring U.S. citizenship to be admitted to the bar in Connecticut. In the United States, classifications based on citizenship/alienage are “suspect classifications” and presumptively unconstitutional. Canada’s laws and judicial decisions are generally hostile to classifications based on citizenship.
To be clear: classifications based on citizenship clearly attract judicial scrutiny!
Enter Congressman Brian Higgins
Congressman Higgins represents voters in Upstate New York. Apparently a number of his constituents own property in Canada. Interestingly, the Congressman has NOT voiced any objections to Toronto’s vacant home tax. His objections are aimed at Canada’s Underused Property Tax. He frames his objection in various ways. His objection appears to be based principally on the fact that the Canadian tax targets individuals who are neither Canadian citizens nor permanent residents of Canada. As reported by American Expat Finance, he began registering his objection to the Canadian tax at least as early as 2021. U.S. citizens subject to the tax are required to file the return and pay the tax (1% of the value of the property) by April 30, 2023. As a result, the Congressman’s objections have in recent days become more public and more urgent. On February 15, 2023 he issued a press release which included:
Congressman Says New Tax is Both Offensive & a Violation of Binational Agreements
Congressman Brian Higgins (NY-26) is calling on the Biden Administration to address Canada’s Underused Housing Tax in upcoming discussions with the Government of Canada. The new 1% tax on “vacant or underused housing” owned by non-resident, non-Canadians is hitting Americans, many of whom have contributed to Canada’s economy and owned cottages in Canada and for generations, especially hard.
In a letter to U.S. Secretary of State Antony Blinken, Rep. Higgins writes, “At a time when encouraging cross-border travel and economic activity should be prioritized as both countries recover from the COVID-19 pandemic, this is an unnecessary burden and bad faith action by the Government of Canada, which violates the United States-Mexico-Canada Agreement (USMCA) as well as longstanding tax treaties. In your upcoming conversations with the Government of Canada, I request that objecting to this tax is a high priority.”
Rep. Higgins has heard from over 200 U.S. residents upset about the new tax, including over 165 who completed an online survey and dozens more who called and wrote to his office. Of the survey respondents, over 80% live in Western New York, about 10% live in Florida and others live across the U.S. including the states of South Carolina, Ohio, Virginia, Georgia, Pennsylvania, California, and Colorado. The majority own property in Fort Erie, Crystal Beach, Port Colborne, and Ridgeway in the province of Ontario. Many have been property owners in Canada for decades, with 42% of respondents having property in Canada for between 20 and 49 years, and 28% having their Canadian property for over 50 years.
In addition to the cost associated with the tax, many have expressed to Congressman Higgins frustration with the lack of information, clarity, and notification of the tax by the Government of Canada. The tax forms are due in Canada April 30th, but owners must first file to receive a tax identifier number. Failure to pay the tax comes with a minimum penalty of $5,000.
Higgins has objected to the Underused Housing Tax since it was first proposed in the Government of Canada’s Budget 2021, voicing opposition with the United States Trade Representative, the U.S. Department of the Treasury, and Canada’s Ambassador to the United States.
President Biden has announced plans to visit Canada for meetings with Prime Minister Trudeau and their Administrations in March.
Congressman Higgins serves on the House of Representatives Ways and Means Committee, which oversees U.S. Tax policy, and the Ways and Means Subcommittee on Trade, which has oversight of trade agreements like the USMCA. Higgins’ Western New York district, which includes the cities of Buffalo and Niagara Falls, borders southern Ontario. Higgins is co-chair of the Canada-U.S. Interparliamentary Group and the Northern Border Caucus.
Well, talk about the “pot calling the kettle black” …
The Congressman’s rage can be understood ONLY on the assumption that he doesn’t understand the principles of US citizenship taxation enforced by FATCA. He clearly doesn’t understand that the United States generally and the Democratic Party particularly have been on a frenzied campaign to impose U.S. citizenship-based income taxation on Canadian residents who were born in the United States. I don’t know whether double standards based on ignorance qualify as hypocrisy. But, the Congressman’s statements – in the context of U.S. citizenship taxation and FATCA – are nothing short of outrageous.
Congressman Higgins’s Allegation That Canada’s Underused Property Tax Is Offensive
Of course it is offensive. All taxes that are based on citizenship and immigration status are offensive. On the other hand, the United States makes both citizenship and immigration status a sufficient condition for U.S. tax residency. However, the offensive behavior of the United States is no justification for Canada behaving in the same way. Neither country should be imposing taxation based on citizenship.
Violation 1: Does Canada’s Underused Property Tax Violate The Canada/US Tax Treaty?
Article II of the Canada/US Tax Treaty includes:
1. This Convention shall apply to taxes on income and on capital imposed on behalf of each Contracting State, irrespective of the manner in which they are levied.
2. Notwithstanding paragraph 1, the taxes existing on March 17, 1995 to which the Convention shall apply are:
(a) in the case of Canada, the taxes imposed by the Government of Canada under the Income Tax Act;
(Note the language “irrespective of the manner in which they are levied”!)
The threshold question is whether Canada’s Underused Property Tax is a tax on capital. Turning to Article XXIII we find:
1. Capital represented by real property, owned by a resident of a Contracting State and situated in the other Contracting State, may be taxed in that other State.
This appears to mean that:
1. Capital represented by real property, owned by a resident of the United States and situated in Canada, may be taxed in Canada.
Therefore, if the vacation homes of American residents are indeed “capital”, it appears that the tax treaty specifically provides that the homes may be taxed in Canada. (But, this is a very quick “back of the envelope” interpretation of this.)
Violation 2: Does Canada’s Underused Property Tax Violate USMCA?
Interestingly Article 32.3 of the USMCA agreement seems to create a presumption against tax provisions violating the USMCA agreement. It specifically includes:
2. Except as provided in this Article, this Agreement does not apply to a taxation measure.
3. This Agreement does not affect the rights and obligations of a Party under a tax convention. In the event of any inconsistency between this Agreement and a tax convention, that convention prevails to the extent of the inconsistency.
On the other hand, there are some exceptions (particularly with regard to Article 15 (Cross-Border Trade In Services) and Article 17 (Financial Services). See the *Appendix below.
In this context, it is interesting to ask the following questions:
To what extent do/can the provisions of the Canada/US tax treaty violate the USMCA?
Without considering tax treaties, to what extent can tax laws independently violate the provisions of the USMCA?
If the Canada Underused Property Tax violates provisions of USMCA or the Canada/US tax treaty then would the general principles of U.S. citizenship taxation violate NAFTA and (the spirit) of the tax treaty?
Is the “saving clause” of the Canada U.S. tax treaty that allows the United States to impose U.S. taxation on Canadian residents with U.S. citizenship consistent with the terms and spirit of the USMCA?
Does the U.S. punitive taxation and treatment of Canadian mutual funds as PFICs violate any rules under the USMCA? After all, the rules certainly make it impossible for Canadian mutual funds to be sold to U.S. citizens.
Does the imposition of huge FATCA compliance costs on Canadian banks (that are not imposed on U.S. banks) violate any provision of the USMCA?
There are many more questions that should be asked. I hope that Congressman Higgins is willing to explore these important questions.
Congressman Higgins’s core argument is that Canada should NOT be imposing a tax on Americans that is based on citizenship. I agree with him! Of course, the United States shouldn’t be imposing taxes on Canadians based on citizenship either. Citizenship should NOT be the basis for any form of taxation by either country, under any circumstances!
It’s conceivable that his fight against Canada’s Underused Property Tax could result in Congressman Higgins being “accidentally the American” who helps “accidental Americans“. He could well be the new champion in the fight against citizenship taxation!
Citizenship taxation is taxation that is based primarily on “circumstances of birth” and NOT on “circumstances of life”. Surely the Congressman would believe that ALL taxes based on citizenship are unjust!
A warm welcome to Congressman Higgins! I think he will be surprised at where this discussion could potentially go!
So if credit unions are provincially based financial institutions, could one be able to seek justice in something like the Ontario Human Rights Tribunal for discrimination based on citizenship?
I think none of us who are familiar with this issue are even slightly surprised at this level of hypocrisy. Does Brian understand how the USA is using citizenship to rob people and nations of money that has precisely nothing to do with the USA? Probably not, very few US politicians understand how their own tax code applies to others nations residents and citizens.
I’m going to make a prediction – when this is pointed out to Brian, he’s going to suggest that “this is different” and tie himself in knots trying to justify US citizenship based taxation of Canadian residents while condemning the Canadian tax on US owned property in Canada.
This could indeed by quite amusing.