Category: Treaty Issues

Part 2: The transition tax: Is “resistance futile”? The possible use of the Canada U.S. tax treaty to defeat the “transition tax”

 

cross-posted from citizenshipsolutions blog

by John Richardson

Beginning with the conclusion (for those who don’t want to read the post) …

For the reasons given in this post, I believe that there are grounds to argue that the imposition of the Sec. 965 “transition tax” on Canadian resident/citizens DOES violate the Canada U.S. tax treaty. It is my hope that this post will generate some badly needed discussion on this issue.

If you are an individual who believes you may be impacted by the “transition tax”, you should consider raising this issue with the Competent Authority. I would be happy to explore this with you.

Need some background on the Sec. 965 “U.S. transition tax”?

The following tweet references a 7 part video series about the Internal Revenue Code Sec. 965 “Transition Tax” created by John Richardson and Dr. Karen Alpert.

(Video 6 gives examples of what various approaches to “Transition Tax Compliance” might look like.)

A reminder of what the possible imposition of the “transition tax” would mean to certain Canadian residents

Interesting article that demonstrates the impact of the U.S. tax policy of (1) exporting the Internal Revenue Code to other countries and (2) using the Internal Revenue Code to impose direct taxation on the “tax residents” of those other countries.

Some thoughts on this:

1. Different countries have different “cultures” of financial planning and carrying on businesses. The U.S. tax culture is such that an individual carrying on a business through a corporation is considered to be a “presumptive tax cheat”. This is NOT so in other countries. For example, in Canada (and other countries), it is normal for people to use small business corporations to both carry on business and create private pension plans. So, the first point that must be understood is that (if this tax applies) it is in effect a “tax” (actually it’s confiscation) of private pension plans!!! That’s what it actually is. The suggestion in one of the comments that these corporations were created to somehow avoid “self-employment” tax (although possibly true in countries that don’t have totalization agreements) is generally incorrect. I suspect that the largest number of people affected by this are in Canada and the U.K. which are countries which do have “totalization agreements”.

2. None of the people interviewed, made the point (or at least it was not reported) that this “tax” as applied to individuals is actually higher than the “tax” as applied to corporations. In the case of individuals the tax would be about 17.5% and not the 15.5% for corporations. (And individuals do not get the benefit of a transition to “territorial taxation”.)

3. As Mr. Bruce notes people will not easily be able to pay this. There is no realization event whatsoever. It’s just: (“Hey, we see there is some money there, let’s take it). Because there is no realization event, this should be viewed as an “asset confiscation” and not as a “tax”.

4. Understand that this is a pool of capital that was NEVER subject to U.S. taxation on the past. Therefore, if this is a tax at all, it should be viewed as a “retroactive tax”.

5. Under general principles of law, common sense and morality (does any of this matter?) the retained earnings of non-U.S. corporations are first subject to taxation by the country of incorporation. The U.S. “transition tax” is the creation of a “fictitious taxable event” which results in a preemptive “tax strike” against the tax base of other countries. If this is allowed under tax treaties, it’s only because when the treaties were signed, nobody could have imagined anything this outrageous.

6. It is obvious that this was NEVER INTENDED TO APPLY TO Americans abroad. Furthermore, no individual would even imagine that this could apply to them without “Education provided by the tax compliance industry”. Those in the industry should figure out how to argue that this was never intended to apply to Americans abroad, that there is no suggestion from the IRS that this applies to Americans abroad, that there is no legislative history suggesting that this applies to Americans abroad, and that this should not be applied to Americans abroad.

7. Finally, the title of this article refers to “Americans abroad”. This is a gross misstatement of the reality. The problem is that these (so called) “Americans abroad” are primarily the citizens and “tax residents” of other countries – that just happen to have been born in the United States. They have no connection to the USA. Are these citizen/residents of other countries (many who don’t even identify as Americans) expected to simply “turn over” their retirement plans to the IRS???? Come on!

Some of theses thoughts are explored in an earlier post: “U.S. Tax Reform and the “nonresident corporation owner”: Does the Section 965 “transition tax apply”?

And now, on to our “regularly scheduled programming”: The possible use of the U.S. Canada Tax Treaty to as a defense to the U.S. “transition tax”

In Part 1 of this series, I wrote: “Responding to the Section 965 “transition tax”: “Resistance is futile and compliance is impossible“. I ended that post with a reminder that the imposition of Section 965 “transition tax” on Canadian residents has (at least) four characteristics:

1.The U.S. Transition Tax is a U.S. tax on the “undistributed earnings” of a Canadian corporation; and

2. Absent deliberate and expensive mitigation provisions, the U.S. transition tax contemplates the “double taxation” of Canadian residents who hold U.S. citizenship.

3. The “transition tax” is a preemptive “tax strike” against a corporation in Canada. Historically Canada would have the first right of taxation over Canadian companies.

4. The U.S. Transition Tax creates a “fictitious” taxable event. It is not triggered by any action on the part of the shareholder.

The purpose of this post is to argue that the Canada U.S. tax treaty may be a defense to the application of the Section 965 “Transition Tax”

Part A – Exploring what a “Subpart F” inclusion really is

Part B – The Canada U.S. Tax Treaty: Relevant provisions

Part C – Impact of the “Savings Clause”

Part D – The Interpretation of the tax treaty: WHO interprets the treaty and HOW is the treaty to be interpreted

_________________________________________________________________________

Continue reading “Part 2: The transition tax: Is “resistance futile”? The possible use of the Canada U.S. tax treaty to defeat the “transition tax””

Can the Common Law “Revenue Rule” be used to stop Enforcement of #CBTax on non-US Residents?

 
cross-posted from Storify/Expatriation Law
 


 
INTRODUCTION

In 1775 Lord Mansfield proclaimed “no country ever takes notice of the revenue laws of another.” In common parlance this means that the courts of one country will not enforce the tax laws of another country. It is articulated in the “The Conflict of Laws, Rule #3 , a standard English text by Dicey and Morris. It has been practiced in common law countries as well as civil law countries. However, the law itself can be said to promote tax evasion and for that reason, its supremacy begins to be challenged, especially through tax treaties. Vern Krishna, a law professor at University of Ottawa, explored this briefly in his paper
The Demise of the Revenue Rule.
 

 

Topsnik 2 : Green Card Expatriation And The Exit Tax

 

reposted from Tax Connections Blog

Written by John Richardson | Posted in International

John Richardson
 
 

Introduction – Introducing Gerd Topsnik

“This case will be seen as the first of an (eventual) series of cases that determine how the definition of long term resident applies to Green Card holders. The case makes clear that if one does NOT meet the treaty definition of resident in the second country, that one cannot use that treaty to defeat the long term resident test. A subsequent case is sure to expand on this issue. Otherwise, the case confirms that the S. 877A Exit Tax rules are alive and well and that the 5 year certification test must be met to avoid non-covered status.”

Topsnik may or may not be a bad guy. But even “bad guys” are entitled to have the law properly applied to their facts. It would be very interesting to know how the court would have responded if Topsnik had been paying tax (a nice taxpayer) in Germany as a German resident.

This is part of a series of posts on: (1) tax residency, (2) the use of treaty tiebreakers when an individual is a tax resident of more than one jurisdiction and (3) how to use treaty tiebreakers to end tax residency in an undesirable tax jurisdiction.

This is the second of the two Topsnik posts. Topsnik 1 focused on the tax residence of Green Card Holders.

This post – Topsnik 2 – focuses on the expatriation of Green Card Holders and under what circumstances and in what manner they may be subjected to the S. 877A Exit Tax. The text of Topsnik 2 is here:

TopsnikOpinion2016

The Teachings of Topsnik 2

Green Card Holders ARE U.S. tax residents

Once again, the case confirms that one does NOT abandon the Green Card simply by moving from the United States. The Green must be either taken away by the Government, abandoned by the Green Card Holder, or be the result of a treaty election.

Tax Residence: The case confirms that the U.S. Germany Tax Treaty (as is true of all other treaties) requires that one be a tax resident, as defined by the treaty, to get any benefits of a treaty.

These benefits of being a tax resident of Germany (as defined by the treaty) potentially INCLUDE:

the right to be treated as a tax resident of Germany as well as being treated as tax resident of the United States
the right to use the tax treaty tie breaker (assuming that he is a tax resident of both countries) to make him ONLY a tax resident of Germany
the right to have the years that he is a tax resident of Germany NOT count toward determining whether he is a long term resident of the United States (Internal Revenue Code 877(e)(2)
Topsnik was not a tax resident of Germany as defined by the U.S. Germany tax treaty.

Applicability of the S. 877A Exit Tax:

Abandoning the Green Card by filing the I-407 is an expatriating act. Because, Topsnik was NOT a tax resident of Germany as defined by the tax treaty, he could NOT argue that he was NOT a long term resident (within the meaning of Internal Revenue Code 877(e)(2). As a result, Mr. Topsnik’s (1) expatriating by abandoning his Green Card, coupled with (2) the fact that he was a long term resident, meant that he could prevent the S. 877A Exit Tax ONLY if he was NOT a covered expatriate.

The failure to certify 5 years of tax compliance is a sufficient condition for being a covered expatriate:

Subparagraph (C) provides that a person is a covered expatriate if such individual fails to certify under penalty of perjury that he has met the requirements of this title for the 5 preceding taxable years or fails to submit such evidence of such compliance as the Secretary may require.

Notice 2009-85, sec. 8, 2009-45 I.R.B. at 611, explains that for purposes of certifying tax compliance for the five years before expatriation pursuant to section 877(a)(2)(C):

– 21 All U.S. citizens who relinquish their U.S. citizenship and all longterm residents who cease to be lawful permanent residents of the United States (within the meaning of section 7701(b)(6)) must file Form 8854 in order to certify, under penalties of perjury, that they have been in compliance with all federal tax laws during the five years preceding the year of expatriation. Individuals who fail to make such certification will be treated as covered expatriates within the meaning of section 877A(g)

Because Mr. Topsnik was a covered expatriate he was subject to the S. 877A Exit Tax:

All of the property that he owned on his date of expatriation was deemed to have been sold on the day before his expatriation. This resulted in an Exit Tax payable to the IRS.

IRS Notice 2009-85 is NOT a regulation and is therefore NOT binding:

Section 877A(i) provides that the Secretary shall prescribe regulations as may be necessary and appropriate to carry out the purposes of the section. Such regulations have not been yet been provided. Instead, the IRS has promulgated guidance regarding this section in Notice 2009-85, 2009-45 I.R.B. 598. We are not bound by Notice 2009-85, supra, see Compaq Computer Corp. v. Commissioner, 113 T.C. 363, 372 (1999), but it is an official statement of the Commissioner position and we may let it persuade us, see Nationalist Movement v. Commissioner, 102 T.C. 558, 583 (1994), 37 F.3d 216 (5th Cir.1994).

Summary

The 2016 Topsnik decision reminds us tax residence in both countries (as defined by the treaty) is necessary to invoke treaty tiebreaker rules. In addition, in order to avoid covered expatriate status (making one subject to the S. 877A Exit Tax) one must file Form 8854 certifying 5 years of tax compliance

Furthermore the case reminds us that the S. 877A Exit Tax is real, alive, well and brutal confiscatory.

Poll: Is it common for #Americansabroad to have a higher U.S. income tax bill than a comparably situated Homelander?

Reblogged from the Renounce U.S. Citizenship blog.
 


 
Imagine the following two people:

We are comparing “Homelander Ted” to “Expat Benedict Arnold”.

Assume that “Homelander Ted” lives and works in the Homeland and purchases in ONLY U.S. dollars. He would not consider using any other currency.

Assume the Expat Benedict Arnold” (having escaped from the Homeland) lives and works in Canada and purchases in ONLY Canadian dollars. He would NOT consider using any other currency.

Assume that each of “Homelander Ted” and “Expat Benedict Arnold” own a home in their respective countries of residence, have employment income, engage in personal finance which includes retirement planning. “Homelander Ted” commits “personal finance” ONLY in the Homeland. “Expat Benedict Arnold” commits “personal finance abroad”.

Assume that “Homelander Ted” and “Expat Benedict Arnold” have financial situations that are comparable in their respective countries of residence.

To be specific both of them:

1. Have a principal residence in that they have owned for more than two years and that was sold on November 30 of the year. Assume further that there was NO capital gain measured in local currency. Assume that the sale included a discharge of an existing mortgage and that interest was paid on the mortgage up to the November 30 sale. Assume further that they each carry a “casualty” insurance policy on the property.

2. Have employment income and have pensions provided under the terms of their respective employment contracts.

3. Have and use mutual funds as a retirement planning vehicle.

4. Have a 401(k) plan in the USA and an RRSP in Canada.

5. Have spouses and must consider whether to use the “married filing separately” or the “married” filing category. “Expat Benedict Arnold” is married to an “alien”.

6. Give their respective spouses a gift of $500,000 on January 1 of the year.

 

U.S. Tax owing – versus TAX MITIGATION PROVISIONS

Assume further that each of “Homelander Ted” and “Expat Benedict Arnold” each prepare a U.S. tax return. Imagine that the Internal Revenue Code does NOT have (TAX MITIGATION PROVISIONS) either the Foreign Earned Income Exclusion (Internal Revenue Code S. 911) or the Foreign Tax Credits (Internal Revenue Code 901). Imagine further that there is no U.S. Tax Treaty that mitigates tax payable to the USA under these circumstances.

The question is how much tax “Expat Benedict Arnold” would be required to pay the U.S. Government if there were no TAX MITIGATION provisions.

How likely is that without the TAX MITIGATION PROVISIONS that the “Expat Benedict Arnold” would be required to pay HIGHER U.S. taxes than “Homelander Ted”. In other words:

Does the Internal Revenue Code:

First, impose higher taxes on “Expat Benedict Arnold” for the crime of committing “personal finance abroad“?

Second, mitigate those higher taxes through one of the TAX MITIGATION PROVISIONS described above?

Are U.S. Taxes (not including foreign taxes) actually higher for Americans abroad than for Homelanders?

Please consider the questions (without considering tax paid by “Expat Benedict Arnold” to Canada) in the following poll:

[polldaddy poll=9667186]

How does the U.S. tax bill of an American Abroad compare to the U.S. tax bill of a comparably situated Homelander?
(polls)

 

The U.S. Saving Clause Facilitates the Expatriation Tax in 877A

 
What is evident is that our governments do not understand the effects of citizenship-based taxation. They did not believe us when we told them it was not just an issue of possibly not owing annual income tax. They did not believe us when we told them our tax-deferred accounts would be taxed. They did not listen when we told them sale of our (Canadian & others) principal residences would produce capital gains which would be taxed.

Will they listen when we tell them that “just renounce” (as if it were simple) will cause some to pay an Exit Tax that will cause a non-US pension valued as if it were paid out and taxed as regular income, in addition to capital gains on the rest of the assets? On those who have not just left the U.S. but left long ago, gaining all this as residents of the countries they live in?

This money belongs to the coutries where it was earned.

It DOES NOT belong to the United States.

We must repeat this over and over and over again until they get it:

It is abundantly clear that the United States is using it’s tax jurisdiction over U.S. citizens (a definition it can change at will) to attack the economies and sovereignty of other nations. In the event that this problem is NOT addressed, countries will no longer be able to afford the “fiscal risk” of accepting U.S. citizens as immigrants.

*******

This was a comment made by John Richardson made at FixTheTaxTreaty.org

It strikes me that the existence of the “savings clause” also facilitates the United States “Expatriation Tax” (AKA “Exit Tax”) which is found in Internal Revenue Code S. 877A.

The S. 877A Exit Tax includes (but is not limited to) the imposition of taxation on:

1. The “pretend capital gain” on assets that are located in Australia (for example “real property” located in Australia); and

2. Australian pensions that are located in Australia (is the Superannuation a pension?).

See the series of posts here:

Renouncing US citizenship? How the S. 877A “Exit Tax” may apply to your Canadian assets – 25 Parts

To put it simply through the S. 877A Exit Tax the United States is claiming the right to confiscate assets that are sourced in Australia and that were most likely acquired while the owner resided in Australia. Under normal rules of International taxation (as you describe in the first post of your trilogy http://fixthetaxtreaty.org/2017/01/12/explaining-the-saving-clause-i/) Australia would have the first (and presumptive) right of taxation on both of these assets. But what happens via the S. 877A Exit is that:

On the day before renouncing U.S. citizenship (while the person is still a U.S. citizen) the United States “swoops in” (steal it while we can) and claims the right to impose a preemptive tax on assets on which Australia clearly has the first right of taxation. In other words, the United States swoops in to impose taxation before Australia imposes taxation on the asset.

To put it simply:

This effect of the S. 877A Exit Tax is one of the most egregious examples of the United States “using it’s citizens” as “Trojan Horse Soldiers” to steal from the economies of other nations!

As described by one commentator:

“Although international tax law does not prohibit countries from imposing exit taxes
on their residents, there could be situations in which the levy of a tax on capital gains by a legislative fiction in one country infringes on a bilateral tax treaty.

In this respect, the Netherlands Supreme Court has ruled that the tax on a fictitious
alienation in specific circumstances can be incompatible with treaty law. If a taxable event was allocated for tax purposes to one state, the other state cannot by a later legal fiction attribute taxing rights to itself regarding a purchase or alienation that did not actually occur.”

Your post has proposed three possible solutions to the problem of the “Savings Clause”. How might each of these proposals defend Australia from the S. 877A Exit Tax? Interestingly the proposals operate differently.

1. Removal of the savings clause – (Australia does NOT agree that the USA can impose taxation on any person who it deems to be a U.S. citizen):

Th “Removal of the Savings Clause” does NOT mean the U.S. agrees that the U.S. WILL NOT unilaterally impose taxation on Australian assets. The United States might impose the taxation anyway. The precise effect of the removal of the “savings clause” would need to be considered on an “article by article” analysis of the treaty. If the savings clause were removed the individual treaty provisions would have to be strengthened to give Australia the exclusive right to impose taxation on Australian assets.

2. Citizenship tie breaker – (if included in the treaty this would mean that the U.S. would agree to NOT impose taxation on any Australian citizen resident in Australia):

This would ensure that the S. 877A Exit Tax could NOT be applied to dual U.S. Australian citizens living in Australia. It would protect the individual who is a “dual citizen”. It would NOT protect the U.S. citizen resident of Australia who was NOT an Australian citizen.

3. Tax Base Preservation Clause – (if included this would mean that the U.S. would agree to not impose taxation on any Australian asset)

This would protect both the individual (whether dual citizen or not) AND would protect the government and economy of Australia.

It is abundantly clear that the United States is using it’s tax jurisdiction over U.S. citizens (a definition it can change at will) to attack the economies and sovereignty of other nations. In the event that this problem is NOT addressed, countries will no longer be able to afford the “fiscal risk” of accepting U.S. citizens as immigrants.
Reply

Solving U.S. Citizenship Problems-with special guest Andrew Grossman Montreal Monday December 5, 2016

A very special meeting for “U.S. Born People” or those who are otherwise “U.S. Persons” !(Naturalized U.S. citizens or Green Card holders)

Joining John Richardson will be Andrew Grossman

Discussing the “hot topic” of U.S. citizenship (including its liabilities in a FATCA and FBAR world)

In addition to focusing on the problems faced by those who agree they are U.S. citizens (to be a citizen or not to be a citizen …), this seminar will include consideration of …

     

  • Why the US cannot automatically restore your citizenship without your consent

    •  

  • The advantages of not making use of benefits of U.S. citizenship

    •  

  • Why the U.S. cannot force those born abroad to accept U.S. citizenship

    •  

  • Dominant Nationality & FATCA

    •  

  • About the revenue rule: How is it affected by the Canada U.S. Tax Treaty? Is the Revenue Rule on the way out?

    •  

  • Can the IRS place a lien on my assets even though I live in Canada?

The idea for this meeting grew out of Andy’s participation on a post at the Isaac Brock Society (Andy05).

“If anyone wants to follow up on issues I have raised, I will be in Montréal Dec. 1-3 & 5-6 and in Stanstead QC Dec. 3-5 and would be glad to meet for coffee and exchange views. I do not seek and scarcely ever accept clients but like to exchange views as an academic lawyer with a view to nationality law, cross-border tax and conflict of laws. French or English ok.”
Continue reading “Solving U.S. Citizenship Problems-with special guest Andrew Grossman Montreal Monday December 5, 2016”

Dual Citizens of Sweden, France, Netherlands, Denmark & Canada take note! Your Country WILL NOT Collect for the U.S.

Last week in my email was a link to an article by Michael J DeBlis (unable to determine whether it was the father or the son). It runs in my memory that prior to the launch of the Tax Connections website, the younger Michael had started a blog that was specifically about expatriate issues and many of us joined and took part. He seemed particularly sympathetic and supportive of our plight and one who I would never have labelled a “condor.” And this post is in no way meant to be demeaning.

Imagine my surprise to read this:

Consider the following example. Pierre is a dual citizen of the U.S. and Canada who presently resides in Montreal. He has fastidiously filed U.S. and Canadian tax returns for the last ten years. Following an audit of his 2012 U.S. tax return, the IRS determined that there was a $ 20,000 deficiency and mailed him a notice of deficiency. Pierre timely filed a protest but Appeals found in favor of the IRS. Having failed to file a petition with the tax court, that deficiency soon became a $ 20,000 assessment.

The IRS now seeks to collect on its claim by imposing a tax lien on real estate owned by Pierre in Canada. Essentially, what the U.S. government is attempting to do is cajole collection officials from the Canadian Revenue Agency (Agence du revenue du Canada) to do its dirty work for it: namely, to collect Pierre’s unpaid U.S. taxes by enforcing an IRS tax lien on property located within Canada.

As incredible as this might sound, reliance upon a foreign taxing authority for assistance in collecting a tax judgment against a citizen of the requesting country is entirely permissible under the terms of the U.S.-Canadian Treaty. Of course, such a request must be accompanied by documents firmly establishing that the taxes have been finally determined.[ix]

Therefore, the Canadian Revenue Agency would have no choice but to enforce the lien and to collect the unpaid taxes. But what if Pierre filed a motion in a Canadian court to have the tax lien imposed by the Canadian Revenue Agency, at the behest of the IRS, set aside? Not surprisingly, the court would refuse Pierre’s request on the grounds that the imposition of the tax lien was proper under the terms of the treaty.

The reason for my surprise was that it is a well-known fact not only in Canada, but among expats in general, that Canadians are lucky because Canada will not collect tax for the U.S. on people who were Canadian citizens at the time the tax was incurred. Nor will the CRA collect FBAR penalties as they are not a tax, falling under Title 31 of the U.S.C. Most of us had become aware of that when our-then Finance Minister, the late Jim Flaherty had stated unequivocably that Canada would not collect for the U.S. under these two circumstances. So I decided to post a comment.

Patricia Moon
2016-10-26 18:51:10
Thanks for this article, particularly for outlining the limits of what can/cannot be done with regard to the border. While the officers can be bullies, along with knowing very clearly, the limits of the Reed Amendment, this is good information to have. Canada and Denmark both have provisions that state they will not collect for that US citizens/persons that are also, their own citizens. In the case of the US-CDN Treaty: Article XXVIA 8) No assistance shall be provided under this Article for a revenue claim in respect of a taxpayer to the extent that the taxpayer can demonstrate that: a) Where the taxpayer is an individual, the revenue claim relates either to a taxable period in which the taxpayer was a citizen of the requested state …………. So the CRA would not collect for the US in Pierre’s case, since he is dual and a citizen of Canada. While the boundaries for the revenue rule may be fading, it is still alive and one which the late Finance Minister, Jim Flaherty, reiterated many times while voicing his shock that the US would expect FATCA to be implemented in Canada. It is very clear that FBAR penalties, which are not part of Title 26 and therefore not covered under the Treaty, also would not be collected by the Canada Revenue Agency. The Canadian courts have refused to enforce claims of the US against Canadian citizens. I presume the Canadian government would honor XXVIA for US citizens/persons who are permanent residents of Canada who are not Canadian citizens. What I am afraid we will see, in spite of past rulings, is that the IRS will attempt to collect from Canadian bank branches in the US with corresponding branches in Canada. I have been told that this does happen by compliance people in spite of court rulings etc. However, it seems to me a bank would be liable to be sued, since presumably, PIPEDA (privacy laws) would in this case, apply to the US citizen/person even though it is overridden by the IGA when the bank sends info to the CRA. We have all seen how the compliance industry tends to enforce the “law” even when the IRS etc, has not provided guidance (which also, is not necessarily, the “law”). An example of this is putting someone who relinquished US citizenship decades ago, into the system according to 877A. Tax lawyers have tended to dismiss past citizenship laws that as far as can be seen, are not automatically changed retroactively. This is completely unacceptable. It is largely useless to Canada to have the right to collect on Canadian citizens resident in the United States due to the fact that once a Canadian is a permanent resident of another country, they are no longer liable for tax in Canada. This is also the reason that FATCA is of very little value to Canada.

and

Patricia Moon
2016-10-26 23:10:13
You may be interested in a few of the court cases mentioned (indirectly) above: United States of America v. Harden (1963), 41 D.L.R. (2d) 721 Supreme Court of Canada https://scc-csc.lexum.com/scc-csc/scc-csc/en/item/7322/index.do 68 O.R. (2d) 379; 1989 Ont. Rep. LEXIS 206 RE VAN DEMARK ET AL. AND TORONTO-DOM http://uniset.ca/other/cs6/68OR2d379.html Chua v. Minister of National Revenue, 2000 DTC 6527 (FCTD http://ca.vlex.com/vid/chua-v-minister-of-national-revenue-38618242

I received a message asking if I could confirm the information concerning Canadians at this post on the CitizenshipTaxation FB group.I became involved in the conversation and remembered that I had recently learned that Denmark also had such a clause protecting its citizens in the US-Denmark Treaty. So I wondered if it could be the same for the other three countries that have a Mutual Assistance in Collection clause in their treaties with the U.S. namely, Sweden, France and the Netherlands. It didn’t take too long to find that they do indeed have the same type of clause. I was dumbfounded. Why had we never heard this before? I was careful to look at the Protocols because some of the Treaty dates are over 20 years old; there was nothing to suggest the conclusion was incorrect. I also had a couple of professionals take a look and they agreed.

So this is A VERY BIG DEAL. If you are a dual citizen of DENMARK SWEDEN FRANCE the NETHERLANDS or CANADA and were a citizen at a time when the U.S. claims you owe U.S. tax, your country WILL NOT ASSIST THE U.S. in collecting U.S. tax. !!!!!!!!

Then I wondered about FBAR and where that might be confirmed since it is not specifically stated in the Treaty. I googled and found a link to a comment of mine that I have no memory of posting:

25 July 2012 T.I. 2011-0427221E5 – FBAR penalties

Principal Issues: Whether US FBAR penalties are included in “revenue claims” defined in Art.XXVI-A(1) of the Canada-US Treaty.

Position: No.

Reasons: FBAR penalties are not civil penalties in respect of taxes covered under Art.II of the Treaty.

https://www.taxinterpretations.com/tax-topics/treaties/article-26a#node-326646
25 July 2012 T.I. 2011-0427221E5 – FBAR penalties

XXXXXXXXXX
2011-042722
P. T.
(613) xxx-xxxx
July 25, 2012

Dear XXXXXXXXXX:

Re: Civil Penalties and Article XXVI-A

We are writing in response to your letter of November 7, 2011, in which you asked for our comments in respect of the application of Article XXVI-A of the Canada-United States Tax Convention (1980) (“Treaty”).

You have described a hypothetical situation involving an individual who is a citizen of the United States (“U.S.”) by right of birth, and a Canadian citizen by way of naturalization prior to 1995. The individual is a resident of Canada for purposes of the Income Tax Act (“Act”) and the Treaty. We are to assume that the individual has failed to file Form TD F90-22.1 Report of Foreign Bank and Financial Accounts with the U.S. Department of the Treasury as required under the U.S. Bank Secrecy Act. As such, the individual has been assessed a civil penalty (“FBAR Penalty”) in the U.S. for the failure to file Form F90-22.1.

In this regard, you have asked whether the FBAR Penalty could be considered a civil penalty that is included in a “revenue claim” as defined at paragraph 1 of Article XXVI-A of the Treaty, and if so, whether paragraph 8 of Article XXVI-A would preclude the collection of the FBAR Penalty by the Canada Revenue Agency (“CRA”) on behalf of the U.S. Government.

Our Comments

The CRA has previously indicated that Canada would assist the U.S. Government in the collection of interest and penalty in respect of U.S. taxes owing pursuant to Article XXVI-A of the Treaty. However, paragraph 8 of Article XXVI-A provides that Canada will not assist in the collection of a revenue claim from the U.S. Government in respect of an individual who is a Canadian citizen, such as the individual described in your hypothetical situation.

In addition, we are of the view that a civil penalty, such as the FBAR Penalty, which is imposed under the U.S. Bank Secrecy Act, is not a penalty in respect of U.S. taxes owing. Therefore, it is our view that an FBAR Penalty is not an amount that would be considered a “revenue claim” pursuant to the definition at paragraph 1 of Article XXVI-A.

We trust that our comments will be of assistance.

Yours truly,

Robert Demeter
Section Manager
for Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

Then I started wondering about FATCA. The “reassurance” we receive constantly from the Canadian government is that FATCA does not result in any new tax etc, that it is just an information exchange. Which begs the question, why is the information being collected if there won’t be any “new” taxes? In this regard:

Andrew Bonham, “FATCA and FBAR Reporting by Individuals: Enforcement Considerations
from a Canadian Perspective” (2012) 60:2 Canadian Tax Journal 305-54, at 345.

Still, as noted above, the minister has the discretion to refuse assistance in collection. Certainly from a public policy standpoint, it must be relevant that the Crown, in providing collection assistance on a FATCA revenue claim, would in many cases be acting against its own taxpayers in the enforcement of a claim founded upon information obtained in a manner that may not be constitutional under the laws of Canada. The Crown is not obliged to do anything contrary to the public policy of Canada in collecting a revenue claim under the treaty. This last point is analogous to the common-law public policy defence discussed above.

However, it is also quite possible, and perhaps probable, that FATCA is in equal part both an information-gathering tool and a revenue-generating tool. It is for this reason that FBAR will never go away. With information garnered from FATCA FFI reports, penalties can be levied under both FATCA and FBAR if an individual fails to file. However, as we have noted, the long arm of the IRS cannot reach Canada with respect to FBAR, and as further posited, it is likely that FATCA penalties would also be unenforceable in Canada. From the US perspective, the best-case scenario would see all financial institutions around the globe complying with the strictures of the disclosure requirement. Armed with the massive list that would be generated from such compliance, the IRS would merely have to check names against received disclosures and levy fines against those individuals who had not complied. Carrying this scenario further, the IRS could then, after the exhaustion of all administrative appeal periods and recourse, approach the minister of national revenue with a list of individuals owing FATCA penalties and ask that those penalties be enforced by the CRA under the terms of the Canada-US tax treaty. It is assumed that in a large number of cases, a notice from the IRS to an individual noting lack of FATCA compliance would not be responded to, and in those cases, a penalty of $50,000 would be levied, thereby raising a very significant amount of revenue.

Finally, although the revenue rule and the penal/public-law rule would currently preclude Canadian courts from assisting in collection, the ever-expanding role of judicial comity may one day see a repeal of these rules, or at least a relaxation of their strictures. Should that occur, the United States would be in a position to resort to principles of public international law as a basis for enforcement, even against dual citizens. In such a case, it may well be open to defendants to argue that the mere fact of their US citizenship should not, in and of itself, be enough to satisfy the real and substantial connection test—especially in cases where the defendant has had little or nothing to do with the United States and has certainly derived no benefit from his or her US citizenship.

A lot of interesting possibilities are discussed in the article above and it is definitely worth reading. While there are no guarantees that these Treaties will not change in the future, the advantage of this information now is:

  • if you are in an unsure situation at the moment, this is something that is as much a part of your situation as your “U.S. Person-ness” and can be a great help in deciding what your risk level is
  • if you are not compliant & not yet a citizen of the 2nd country, you might consider applying for citizenship now
  • you can help get this information out to other members of your expat community

Lastly, here are the actual wordings in the treaties involved; I am only including the Article/paragraphs that pertain to this idea.

SWEDEN
• Income Tax Treaty – 1994
• Protocol – 2005

ARTICLE 27

Administrative Assistance

1. The Contracting States undertake to lend assistance and support to each other in the collection of the taxes to which this Convention applies, together with interest, costs, and additions to such taxes.

4. The assistance provided for in this Article shall not be accorded with respect to the citizens, companies, or other entities of the State to which the application is made, except as is necessary to insure that the exemption or reduced rate of tax granted under this Convention to such citizens, companies, or other entities shall not be enjoyed by persons not entitled to such benefits.

FRANCE

• Income Tax Treaty – 1994
• Protocol – 2004, 2009

19 ARTICLE XII
Paragraph 5 of Article 28 (Assistance in Collection)
of the Convention shall be deleted and replaced by the following:

“The assistance provided for in this Article shall not be accorded with respect to citizens, companies, or other entities of the Contracting State to which application is made.”

ARTICLE 28
Assistance in Collection

1. The Contracting States undertake to lend assistance and support to each other in the collection of the taxes to which this Convention applies (together with interest, costs, and additions to the taxes and fines not being of a penal character) in cases where the taxes are definitively due according to the laws of the State making the application.

5. The assistance provided for in this Article shall not be accorded with respect to citizens, companies, or other entities of the Contracting State to which application is made except in cases where the exemption from or reduction of tax or the payment of tax credits provided for in
paragraph 4 of Article 10 (Dividends) granted under the Convention to such citizens, companies, or other entities has, according to mutual agreement between the competent authorities of the Contracting States, been enjoyed by persons not entitled to such benefits.

Article XII of the Protocol replaces paragraph 5 of Article 28 (Assistance in Collection) of the Convention. The change revises paragraph 5 so as to remove the now obsolete reference to the provision of paragraph 4 of Article 10 (Dividends) of the existing Convention prior to amendment by the Protocol related to the “avoir fiscal.”

NETHERLANDS

ARTICLE 31
Assistance And Support in Collection

1. The States undertake to lend assistance and support to each other in the collection of the taxes which are the subject of the present Convention, together with interest, costs, and additions to the taxes and fines not being of a penal character.

4. The assistance provided for in this Article shall not be accorded with respect to the citizen, corporations, or other entities of the State to which application is made, except in cases where the exemption or reduced rate of tax granted under the Convention to such citizens, corporations or other entities has, according to mutual agreement between the competent authorities of the States, been enjoyed by persons not entitled to such benefits.

DENMARK

INCOME TAX TREATY 2000

ARTICLE 27
Administrative Assistance

1. The Contracting States undertake to lend assistance to each other in the collection of taxes referred to in Article 2 (Taxes Covered), together with interest, costs, additions to such taxes, and civil penalties, referred to in this Article as a “revenue claim.”

8. No assistance shall be provided under this Article for a revenue claim in respect of a taxpayer to the extent that the taxpayer can demonstrate that a) where the taxpayer is an individual, the revenue claim relates to a taxable period in which the taxpayer was a citizen of the requested State, and b) where the taxpayer is an entity that is a company, estate or trust, the revenue claim relates to a taxable period in which the taxpayer derived its status as such an entity from the laws in force in the requested State.

CANADA

Article XXVI A
Assistance in Collection

1. The Contracting States undertake to lend assistance to each other in the collection of taxes referred to in paragraph 9, together with interest, costs, additions to such taxes and civil penalties, referred to in this Article as a “revenue claim”.
8. No assistance shall be provided under this Article for a revenue claim in respect of a taxpayer to the extent that the taxpayer can demonstrate that
(a) where the taxpayer is an individual, the revenue claim relates to a taxable period in which the taxpayer was a citizen of the requested State, and………

Article 22
1. Subparagraph 8(a) of Article XXVI A (Assistance in Collection) of the Convention shall be deleted and replaced by the following:

(a) Where the taxpayer is an individual, the revenue claim relates either to a taxable period in which the taxpayer was a citizen of the requested State or, if the taxpayer became a citizen of the requested State at any time before November 9, 1995 and is such a citizen at the time the applicant State applies for collection of the claim, to a taxable period that ended before November 9, 1995; and

2. Paragraph 9 of Article XXVI A (Assistance in Collection) of the Convention shall be deleted and replaced by the following:

9. Notwithstanding the provisions of Article II (Taxes Covered), the provisions of this Article shall apply to all categories of taxes collected, and to contributions to social security and employment insurance premiums levied, by or on behalf of the Government of a Contracting State.

How the “assistance in collection” provisions in the Canada US Tax Treaty facilitates “US citizenship based taxation”

cross-posted from Citizenshipsolutions

The above tweet references the comment I left on an article titled: ”

Why is the IRS Collecting Taxes for Denmark?

which appeared at the “Procedurally Speaking” blog.

The article is about the “assistance in collection” provision which is found in 5 U.S. Tax Treaties (which include: Canada, Denmark, Sweden, France and the Netherlands). I am particularly interested in this because of a recent post at the Isaac Brock Society.

This post discusses the “assistance in collection” provision found in Article XXVI A of the Canada U.S. Tax Treaty. The full test of this article is:

Continue reading “How the “assistance in collection” provisions in the Canada US Tax Treaty facilitates “US citizenship based taxation””

Do Canadian (or Australian etc.) Tax Attorneys Advising Canadian Clients on United States IRS Compliance Typically Comply With The “Professional Code of Conduct” of Their Law Societies?

cross-posted from Isaac Brock Society

In a recent post I mentioned the situation of a “Caroline” who seeks advice from a Canadian tax attorney (let’s say in B.C.) regarding a question of (IRS) tax compliance with a country foreign to Canada.

How should the Canadian tax attorney advise this frightened Canadian citizen– specifically, regarding the disclosure of relevant options she (or any Canadian) should consider before entering, or not entering, into tax compliance with United States Internal Revenue Service?

What information should (must) the attorney disclose to the Canadian to comply with professional standards and ethical obligations of an attorney?

USCitizenAbroad suggests that the Canadian tax attorney needs to disclose two relevant facts:

“It seems to me that the first thing that a Canadian lawyer (I note that the rules of B.C. Professional Conduct are included in this post) might be to say:

1. You are living in Canada. There is NO Canadian law (no matter who you are) that requires you to comply with U.S. tax laws. Canada may [find] it amusing. But Canadian law does not require compliance.

2. The Canada U.S. Tax Treaty means that Canada will not assist the IRS in collection on Canadian citizens”

I could well be wrong but suspect that few if any Canadian (or Australian) tax attorneys (irrespective of whether they are US persons or “enrolled agents”) ever provide this disclosure to their clients — who are just seeking good service.

The question I have is whether, by not making this disclosure, are these Canadian tax attorneys in violation of their law society’s (the governing body) Professional Code of Conduct? For example. the British Columbia Professional Code seems to be pretty clear on disclosure of facts and options:

“A [Canadian] lawyer should obtain sufficient knowledge of the relevant facts and give adequate consideration to the applicable law [This must include Canadian law — correct?] before advising a client, and give an open and undisguised opinion of the merits and probable results of the client’s cause…”

It would also seem that any Canadian tax attorney who is an “enrolled agent” with the IRS must disclose that significant conflict of interest (additional loyalty) to the client. Yes? See:

“A lawyer should disclose to the client all the circumstances of the lawyer’s relations to the parties and interest in or connection with the controversy, if any, that might influence whether the client selects or continues to retain the lawyer. A lawyer must not act where there is a conflict of interests between the lawyer and a client or between clients.”

Do these issues of “reasonable disclosure” need to be brought up with the law societies? Could someone from one of the Canadian provincial law societies please respond and address these questions?