(Note that “tax advantaged retirement programs available to ALL residents are different from “pensions” (which are established through employment). My next post will discuss the issue of “pensions” and US citizens.)
US citizens are disabled from full participation in retirement planning schemes that a country creates for its residents. Examples include but are NOT limited to the: the Australian Superannuation, the New Zealand KiwiSaver, and the Canadian TFSA. There are certainly other countries that have created similar programs (example UK ISA). These programs are all based on the principle that money is contributed to one of these plans. The income earned in the plan is always treated tax favourably under the law of the country that created the plan. Either the income earned inside the plan is not taxed at all (TFSA or ISA) or is taxed at a preferential rate (Australian Superannuation or New Zealand KiwiSaver). Because US citizens are subject to US tax laws they do NOT generally (subject to treaty exceptions) receive the tax benefits available to other residents of their country. (I acknowledge that a variant of the Australian Superannuation is treated as 402(b) plan under the US Internal Revenue Code).
Q. How can such a perverse state of affairs exist?
A. The injustice is created by US tax treaties!
It’s because of the “saving clause” that is included in all US tax treaties
All US tax treaties contain a “saving clause” pursuant to which the treaty partner agrees that:
(1) US citizens do NOT presumptively receive benefits from the tax treaty; and
(2) the treaty partner agrees that the US may tax its own citizens according to US tax law.
This has unforeseeable effects. One of the effects is that when a country creates a new tax incentivized plan to encourage its residents to save for retirement, some of its residents are NOT permitted – because of the disability of US citizenship – to take advantage of that plan!!!
This is the result of a combination of US tax laws (which recognize ONLY US retirement plans), US citizenship-based taxation (US citizens are subject to US tax laws regardless of where they live), the “saving clause” found in all US tax treaties (their country of residence agrees that the US may tax US citizens according to US tax laws) and a failure to anticipate the possibility of developing new retirement planning programs when negotiating tax treaties with the United States (the Australian Superannuation, New Zealand Kiwisaver and Canadian TFSA were all created AFTER the most recent tax treaties).
To put it simply:
By entering into tax treaties with the United States, countries are impeding their ability to develop tax advantaged retirement/savings plans for their residents!!!!!! The USA will generally NOT allow US citizens to benefit from these plans!
The crippling of part of the population of (at least) three countries ….
Australia – US/Australia tax treaty entered into in 1982 – Australian Superannuation created in 1992*
New Zealand – US/New Zealand tax treaty entered into in 1982 – Kiwisaver created in 2007**
Canada – Canada/US tax treaty last updated in 2008 – TFSA created in 2009***
JR Note:In previous posts I have argued that the Canada/US Tax Treaty should be interpreted to preserve that tax advantaged status for US citizens living in Canada.
A suggestion for how to end the injustice of the “saving clause”
I have previously written a suggestion that the “saving clause” should NOT apply to US citizens who are both “tax residents” of the countries where they reside AND bona fide residents of those other countries under the provisions of US Internal Revenue Code Section 911.
The “saving clause” should be neither interpreted nor used to allow the United States to impose worldwide taxation on individuals who are tax residents of other countries!
The “saving clause” found in US tax treaties means that the treaty partner country agrees that the US may capture some of the “tax residents” of the treaty partner country as US tax residents. The effect of this capture is that when the country (Australia, New Zealand or Canada) creates new retirement planning programs, those captured residents (US citizens) will generally NOT be able to participate.
*Appendix A – The “Saving Clause” and the US Australia Tax Treaty
Australia Tax Treaty: The “saving clause” and exclusions from the “saving clause” are found in paragraphs 3 and 4 of Article 1 of the US Australia Tax Treaty as follows:
(3) Notwithstanding any provision of this Convention, except paragraph (4) of this Article, a Contracting State may tax its residents (as determined under Article 4 (Residence)) and individuals electing under its domestic law to be taxed as residents of that state, and by reason of citizenship may tax its citizens, as if this Convention had not entered into force. For this purpose, the term “citizen” shall, with respect to United States source income according to United States law relating to United States tax, include a former citizen whose loss of citizenship had as one of its principal purposes the avoidance
of tax, but only for a period of 10 years following such loss.
(4) The provisions of paragraph (3) shall not affect:
(a) the benefits conferred by a Contracting State under paragraph (2) of Article 9 (Associated Enterprises), paragraph (2) or (6) of Article 18 (Pensions, Annuities, Alimony and Child Support), Article 22 (Relief from Double Taxation), 23 (Non-Discrimination), 24 (Mutual Agreement Procedure) or paragraph (1) of Article 27 (Miscellaneous); or
(b) the benefits conferred by a Contracting State under Article 19 (Governmental Remuneration), 20 (Students) or 26 (Diplomatic and Consular Privileges) upon individuals who are neither citizens of, nor have immigrant status in, that State (in the case of benefits conferred by the United States), or who are not ordinarily resident in that State (in the case of benefits conferred by Australia).
**Appendix B – The “Saving Clause” and the US New Zealand Tax Treaty
New Zealand Tax Treaty: The “saving clause” and exclusions from the “saving clause” are found in paragraphs 3 and 4 of Article 1 of the US New Zealand Tax Treaty as follows:
3. Notwithstanding any provision of the Convention except paragraph 4, a Contracting State may tax its residents (as determined under Article 4 (Residence)), and the United States may tax its citizens and United States companies, as if the Convention had not come into effect. For this purpose, the term “citizen” shall include a former citizen whose loss of citizenship had as one of its principal purposes the avoidance of tax, but only for a period of 10 years following such loss.
4. The provisions of paragraph 3 shall not affect:
(a) the benefits conferred in a Contracting State under the Convention in accordance with paragraph 2 of Article 9 (Associated Enterprises), paragraph 1(b) of Article 18 (Pensions and Annuities), and Articles 22 (Relief From Double Taxation), 23
(Non-discrimination), and 24 (Mutual Agreement Procedure); and
(b) the benefits conferred in a Contracting State under the Convention in accordance with Articles 19 (Government Service), 20 (Students), and 26 (Diplomatic Agents and Consular Officers), upon individuals who are neither citizens of, nor have
immigrant status in, that State.
***Appendix C – The “Saving Clause” and the US Canada Tax Treaty
Canada Tax Treaty: The “saving clause” and exclusions from the “saving clause” are found in paragraphs 2 and 3 of Article XXIX of the US Canada Tax Treaty 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 on capital.
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);
(b) under Article XX (Students), toward individuals who are neither citizens of, nor have immigrant status in, that State.
It is my conclusion that nations really have no idea what they signed up to when they signed these treaties. When I told my MP that this applied to tens of thousands of full time US residents and citizens that had lived here for decades and were often born here, she was lost for words for a moment. She had visions of the US expat on a corporate mission in London for a year or two.
Nope, it’s not him getting taxed – it is my UK born UK citizen friend born to a US father that just wants to save, invest and take part in business like anyone else. Yes she gets it now but is she interested in fighting this? Nope.
All roads lead to renunciation.
The irony of the “saving” clause is that it’s a deterrent to saving for a certain class of resided. Thanks for the article.
As ever, any dual citizen born outside the US (like these children in New Zealand) can avoid all this by not disclosing US citizenship to banks and not filing US tax returns. Why Ms. Bacal of Auckland hasn’t figure that out is a bit of a mystery.
Yes Ron, people can go through their lives lying and hoping it never comes back to bite them in the ass.
Some of us don’t think that is a solution. Certainly, if I was the person I mentioned, I would be extremely wary of taking a UK stock and shares ISA or mutual funds, a lot can happen in 45 years and the US is starting to look more like an empire to me.
I didn’t think the world would swallow FATCA either, but they did.
After all, it’s only a few “US citizens resident in the UK” and they can always take up their grievances with their own government, right?
If Auckland mother-of-four Kira Bacal had her wits about her, she wouldn’t be trying to close the kids’ accounts, she’d be smart enough not report them (after ensuring that they opened the accounts without being identified as US citizens). On the other hand, she’s probably making good money on US child tax credits (not to mention the pandemic benefit) which gives her an incentive to maintain a relationship with the IRS.
I had no concept of “selective honesty” until I discovered the US had citizenship based taxation. At that point I realized lying or omitting certain information was going to be necessary for my financial survival.
I can’t speak for other countries, but Canadian front line bank employees show zero interest in enforcing FATCA (assuming they have even heard of it) or any other US silliness, for that matter. They ask the standard questions in robotic fashion, the customer gives the standard replies, the appropriate boxes on the forms are ticked in the standard places, and that is the end of it. Its the same with online forms. Nobody is actively seeking US connections and the only people who get snared are either ignorant or careless. (But if you are ignorant or careless with your finances, far worse things will happen than being outed to the IRS.)
The US government will collapse before any of this changes.
Problem is not everyone knows to be wary of place of birth or citizenship questions. The mass media in Canada covered FATCA/CBT a bit back in the 2010-2014 era, but not much since and has rarely written specifically on tax-advantaged savings account. And if someone has no clue that a US place of birth or US citizenship could be problematic, they wouldn’t know to google and find sites such as this one. So, it’s easy for someone to be caught off guard.
I was asked place of birth at my bank a couple of years ago, as a long-time customer opening a new account, and I knew how to handle it. I know to beware; I’m quite comfortable using a false place of birth, my preferred course of action; and I have a CLN if needed, should push ever come to shove .
But I can see how someone could innocently fall into the trap because CBT is not as widely known as it should be and US citizenship or place of birth was not problematic (it was a non-issue) for most of our lives.
I’m not “ignorant or careless” with my financial life. I take my financial life very seriously and follow developments in Canadian tax law. But I never had any reason to follow US tax law or suspect my having been born in the US would have any impact on my financial life until I accidentally came across an article on FATCA in the Winnipeg Free Press in 2011. Without that, I would not have a had a clue to know that I should google the topic, dig deeper, and take precautions.
So, I don’t blame a person who falls into the trap, and I feel as long as CBT exists, some people will have problems, either because they had no reason to know their citizenship/birthplace was a potential problem or because their circumstances are such that it is unavoidable.
The fact that people like me/us can avoid this doesn’t mean that shutting US persons out of tax-advantaged savings accounts or subjecting them to FATCA is not a problem for many other individuals and IMO immoral in principle.
If Auckland mother-of-four Kira Bacal had her wits about her, she wouldn’t be trying to close the kids’ accounts, she’d be smart enough not report them (after ensuring that they opened the accounts without being identified as US citizens). On the other hand, she’s probably making good money on US child tax credits (not to mention the pandemic benefit) which gives her an incentive to maintain a relationship with the IRS.”
Are you sure you are still in the right place here, Ron?
Those US citizens complaining about US obligations while “enjoying” their US citizenship?