Subject to the "unknown unknowns"
Thanks to Barrie McKenna of the Globe and Mail for this article and to his support on this important issue during this most difficult time for U.S. citizens residing in Canada and the rest of the world. Thanks also to Finance Minister Flaherty and the MPs who have supported Canada/U.S. dual citizens during this time.
On December 7, 2011 the IRS posted a Fact Sheet providing information about this issue. I have written some commentary about the Fact Sheet here.
I recently predicted that the IRS treatment of U.S. expats would become a diplomatic issue for the U.S. The December 2011 announcement by Ambassador Jacobson, concerning the IRS and U.S. expats, suggests that this is true.
After having read the following article, one might ask what this means for U.S. expats in other countries. American Citizens Abroad was very quick to point out that this issue applies to U.S. expats all over the world. Scott D. Michel and Mark E. Matthews, two U.S. tax lawyers with extensive experience with OVDI and the IRS have advocated allowing U.S. expats to bring themselves into tax compliance, by simply filing past returns. This is great news for U.S. expats the world over. Christine Dobby writing in the Financial Post reports that relief will also be coming for U.S. citizens residing in other countries. I suspect that in order to qualify for “penalty free treatment” that U.S. citizens will have to prove that they truly are American Citizens living abroad. So, although there are grounds for optimism, as the following article indicates, there are still issues that will need to be understood. One thing for sure: the accounting and legal costs to comply will be enormous! For example, as reported in the Financial Post:
“Maurice Williams, a professor from Kelowna, B.C. who has not lived in the United States since 1973, said he has already incurred $20,000 in accounting fees getting his application together under the offshore disclosure program.
The changes are too little too late in his view, as they will not address the money he has already spent.
“It’s been a financial nightmare,” he said.”
and the following comment from the Globe article:
“It just cost me $25,000.00 in Professional Fees to comply with US taxes, $6200.00 in US Taxes and penalties because I have an Alberta Small Business Corporation. Not to mention all the time and stress to deal with this ridiculous situation. I went to the US Consulate in Calgary to renounce my US Citizenship this week. They would not allow me to do it, handed me a package, and advised me I could meet with them in 2012 on Thursday’s only between 2:00pm and 3:00pm. This means I will have to file for two more years, even though I will be renouncing my US Citizenship.
All this because my father a Canadian went to University in the United States from 1955-1959.”
To make matters worse, U.S. Tax Return Preparers are now required to register with the IRS, pass an exam, and take continuing education. This will make it more expensive to file a U.S. tax return.
So, to use the words of Donal Rumsfeld, there are few “Known knowns“. There are many “Known unknowns“. The biggest problem and what is most fearful are the:
“Unknown unknowns”
On the subject of “Known unknowns”, Roy Berg, a Calgary based U.S. tax lawyer notes that:
“When the guidance is issued it will presumably address the multitude of additional questions that arise such as: what is the procedure for coming forward with unfiled returns? How many delinquent returns need to be filed? What certainty will the taxpayer have that penalties will not be applied? Will there be relief of the criminal sanctions imposed by the willful failure to file FBARs?
What the article does not address is relief, if any, for penalties imposed for the failure to file a multitude of other forms. Each of the failure to file penalties for the following may be reduced to $0.00 provided the taxpayer proves “reasonable cause.”
I refer you to Mr. Berg’s article, but the “other forms” to which he is referring include:
- New individual income tax returns – the new form 8938 (a FATCA requirement)
- Ownership of Registered Retirement Savings Plans – form 8891
- Certain ownership interests in non-US trusts or estates – form 3520 or 3520-A – these would include the TSFA
- Ownership in non-US corporations and partnerships – form 5471 or 8865
- Transfer of property to a non-US corporation or partnership – form 926 or 8865 may be required
- Receipt of a gift from a non-US person – form 3520
As you can see, the U.S. which prides itself on being a “Nation of Laws” is actually a “Nation of Forms”! Would any reasonable person imagine that all of these forms actually even exist?
But, take a day off from your worry and enjoy the following:
Americans living in Canada who’ve neglected to pay their U.S. taxes are getting a big break from Uncle Sam.
The U.S. Internal Revenue Service is poised to waive potentially massive penalties for Americans who agree to come clean and don’t owe any taxes, The Globe and Mail has learned.
The new rules will be announced within weeks by the IRS, according to David Jacobson, the U.S. Ambassador to Canada, who has been swamped with complaints from anxious Canadians.
“What the IRS is saying here is that if … you don’t owe taxes to the U.S., and you file your return and they show you don’t owe taxes, there aren’t going to be any penalties for having filed late,” Mr. Jacobson said in an interview Thursday.Fears of a looming U.S. tax crackdown has caused a wave of angst among the roughly one million Americans living in Canada. Many of them long ago stopped filing, assuming they owed no tax.
Unlike most countries, the United States requires its citizens to file annual tax returns regardless of where they live and work. Many are now worried they’ll be hit with punishing penalties as a result of recent U.S. efforts to expose citizens hiding assets in offshore tax havens.
Every year, Americans must also report all their foreign bank, brokerage, mutual fund and pension accounts. And by 2014, Canadian financial institutions will have to identify accounts held by U.S. citizens to the IRS.
“We had an obligation to make our situation clear,” Mr. Jacobson explained. “What they have done is clarify what’s going to happen with innocent folks who didn’t know their obligations and are now going to try to comply with the law.”
Even Mr. Jacobson acknowledged the penalties for not filing can be “draconian,” even for “typical” Americans in Canada who owe nothing because Canadian taxes are typically higher.
“Our intention was not to abscond with some innocent grandmothers’ savings,” he said. “From where I’m sitting, it’s going to take care of the problem I was most concerned about … which is that people just didn’t know they were supposed to do this.”
Failure to file so-called Foreign Bank Account Reports can result in penalties of $10,000 (U.S.) a year for every account – fines that can quickly reach hundreds of thousands of dollars. In some extreme cases, the IRS can seize up to half the contents of accounts. Neglecting to file certain tax schedules also triggers fines.
Mike Vance, a 26-year-old doctor from Nanaimo, B.C., who moved to Canada as a child, said the partial amnesty is good news. But he said he no longer trusts that the United States won’t come after his assets in the future as the country struggles to deal with its massive debt.
“I’m using this as a warning sign,” explained Mr. Vance, who recently began the complex process of renouncing his U.S. citizenship. “I’m just starting out as a young doctor and going to have a fair bit of money invested in Canada.”
Finance Minister Jim Flaherty, who repeatedly complained about the problem, said he was “happy” with the IRS policy shift.
“We told the U.S. that the vast majority of Canadians targeted were honest, hard-working and law-abiding individuals and they listened,” Mr. Flaherty said in a statement. “It’s a victory for Canadians and a testament to our positive working relationship with our American neighbours.”
The policy shift will come in the form of new guidance from the IRS, expected to be issued before the end of December. U.S. officials said the statement will make it clear that:
– If a U.S. citizen files tax returns late and owes no taxes, there are no penalties for failure to file.
– U.S. citizens who were unaware of the bank account reporting requirement can file previous reports now, along with a statement explaining why they’re late. No penalty will be imposed if the IRS determines that there is reasonable cause.
– Individuals who took part in earlier amnesty programs this year and in 2009 can reapply and get back penalties already paid.
Accountant Kevyn Nightingale, a U.S. tax specialist with MNP LLP in Toronto, said the changes are “fabulous news” and “a reasonable response” for Canadians unwittingly caught in the crackdown.
But he said it remains unclear how many years of back taxes are covered, or how professionals and consultants who often incorporate their businesses in Canada will be treated. U.S. officials would also not say what would happen to people who owe relatively small amounts to the IRS.
Nor does the change end the concerns of Canadian financial institutions, which complain they’ll face massive costs trying to track all their U.S. account holders. Mr. Flaherty has warned that the new U.S. bank reporting rules, slated to come in 2014, could violate Canadian privacy laws.
U.S. Persons Abroad - Members of a Unique Tax, Form and Penalty Club 
Too little too late. My wife’s cousin paid $5000 to an account to be able to comply. I know another lady, who hasn’t been a citizen that paid $3000. They think they are being reasonable, but they are still costing us a lot: (1) Our birth right – US citizenship; (2) Our money to pay lawyers and accountants to get into compliance. And finally, my attitude is that they can stick their FBARs where the sun don’t shine.
People are going to have to pay an enormous amount in accounting and legal fees. $5000 is a very low end payment. The accountants and lawyers will salivate over this opportunity. Let’s wait and see exactly what the offer is.
I am guessing is that this will encourage people to file their five years of returns (whatever the cost) and renounce. People have been so badly frightened by this, that they will view this offer (assuming it is what it is reported to be) as a “Get out of jail free card”. But, they will still want out of the jail.
The U.S. government and the Obama administration in particular have created an environment of such distrust that I don’t think people will want to live with the risk of being a U.S. citizen.
As I wrote in the post, there are still too many “unknown unknowns”.
With regard to your comment – I am curious why somebody who did not think she was a citizen paid $3000. Was she a green card holder or something?
She was caught in the net of not having officially informed the US State department of her relinquishment via the taking on of citizenship, which was necessary in those days to become a school teacher in the province of Ontario–so only lately did she go inform them. But back when it happened, there was no need to obtain a CLN. It was assumed, from what I gather. And indeed for 40 years she went back and forth between US and Canada, and nobody considered anything but a Canadian (but then they started giving people in her family hell about their US birth place and travelling on a Canadian passport, and then FBAR, and the rest is history).
I have yet to see a lawyer or an accountant advocate civil disobedience. It’s only writers like me, who suggest that this whole thing is a violation of rights and should be resisted.
I really doubt that she is still a U.S. citizen. I have written a couple of things about this problem. See for example:
The first thing that people should do is determine whether they are U.S. citizens. One should NOT ask the U.S. government. I know you don’t like lawyers, but this is an area where it could be the best money ever spent.
Also on the topic of accountants and lawyers: the only thing they will ever say is “comply with the law”, etc. I believe that it is probably professional misconduct for them to do otherwise. In fact, one or two lawyers/accountants have said this to me.
I would point out that if she is not a U.S. citizen, (or other kind of U.S. person for tax purposes) then these laws would not apply to her in any case.
This whole thing is a huge mess – people need to work through it in whatever way is most consistent with (at least their best guess) their longer term interests. There are a number of expats who feel very strongly that they want to return to the U.S. For them, it seems to me that they have two options:
1. Comply with the U.S. laws regarding tax and information reporting; or
2. Renounce and then enter the U.S. as a visitor when they want to do so. Would suggest that you get accurate legal advice on how long you are allowed to physically stay in the U.S. and how long you can physically stay before you are treated as a U.S. person for tax purposes.
As I said previously, my guess is that at least the people who are not “covered expatriates” for the purposes of the 877 exit tax, will renounce. Indeed if you have assets of less than two million you should renounce immediately (or commit some other kind of expatriating act which is evidence of relinquishing).
As I said, she was scared because someone in her family was harassed into traveling with US passport.
I realize that lawyers and accounts seek compliance. That’s why writers like us have our work cut out for us.
I very much like your blog, but I would like to correct Point 2 above. I am not an immigration or tax official, but as this is relevant to me, I have done some research.
The 30 day only rule for visits to the US for 10 years applies only to those people who renounced before 2008, when the “Exit Tax” was instated. People like Terry Gilliam of Monty Python are subject to this and mentions it in an interview. Look at Minute 5. http://www.youtube.com/watch?v=UNOvmQuyT8M
Under the 2008 rules, you are considered to be the same as any other non-US citizen and can visit the US for up to 121 days per year without having to pay tax. The normal rules applied to any non-US citizen are valid and you can do the math and in some years stay more days, if you stay less in another year. Phil Hodgen has addressed this in his blog: http://hodgen.com/the-substantial-presence-test-explained/
There was also a 1996 law passed that says that you are not allowed to give up your citizenship for tax reasons. So by all means, never say you are giving it up because of taxes. FBAR penalties might be acceptable, but just expressing your lack of interest in America might be the safest bet.
Thank you so much for your comment! Much appreciated! Keep them coming!
Obviously this blog is not intended to and cannot give legal advice. What I have done (thanks to your comment) is changed the text above to read as follows:
“2. Renounce and then enter the U.S. as a visitor when they want to do so. Would suggest that you get accurate legal advice on how long you are allowed to physically stay in the U.S. and how long you can physically stay before you are treated as a U.S. person for tax purposes.”
Thanks again.
Re: Your second comment:
“As further confirmation of what is said above take a look at the reply to the first comment to the article at the link below. The writer states that he renounced in 2009 and while he had to wait 6 months, he can now enter under the rules for non-US citizens.
The article itself is interesting to add the Swiss perspective to the Canadian perspective.
Apparently, it is becoming cool for 18 years olds to renounce.
http://www.swissinfo.ch/eng/politics/foreign_affairs/Tax_law_pushes_US_expats_to_give_up_passport.html?cid=31643032#loginLink”
Thanks again – I don’t know that it’s becoming “cool for 18 year olds to renounce”.
But, I will say this. Last week I was having a conversation with a young woman (early 20s). Her father is a U.S. citizen. She told me that he had recently suggested to her that she might want to get confirmation that she is a U.S. citizen (she was born in Canada) and if so renounce. I adding that in my opinion (given the insanity of FATCA, FBAR and all these other forms) and an IRS that is untrustworthy and the overall debt level in the U.S. that:
The single best investment she could make in her future happiness and effectiveness would be to renounce her U.S. citizenship. On the most basic level, retaining U.S. citizenship takes too much time and is too expensive to fill out all the forms. It’s just not worth it.
Furthermore, I suspect that things are going to get a lot worse. If you are interested in this (and you obviously are), I suggest you read the introduction and first couple of chapters of “The Sovereign Individual” by James Dale Davidson and Lord Rees Mogg.
As further confirmation of what is said above take a look at the reply to the first comment to the article at the link below. The writer states that he renounced in 2009 and while he had to wait 6 months, he can now enter under the rules for non-US citizens.
The article itself is interesting to add the Swiss perspective to the Canadian perspective.
Apparently, it is becoming cool for 18 years olds to renounce.
http://www.swissinfo.ch/eng/politics/foreign_affairs/Tax_law_pushes_US_expats_to_give_up_passport.html?cid=31643032#loginLink
My comment at globe and Mail:
Mr. McKenna wrote: “Failure to file so-called Foreign Bank Account Reports can result in penalties of $10,000 (U.S.) a year for every account – fines that can quickly reach hundreds of thousands of dollars. In some extreme cases, the IRS can seize up to half the contents of accounts. Neglecting to file certain tax schedules also triggers fines.”
This is very inaccurate: The IRS cannot seize money in Canadian accounts. They don’t have the power to do that. Secondly, they cannot get the CRA to collect it because it is not a tax, but a filing penalty which the Canadian government has said it will not collect under the tax treaty between the US and Canada.
This is the kind of misinformation in the press that is causing US citizens resident in Canada to lose sleep and it is incumbent upon the Globe and Mail to be more accurate.
The IRS can assign a civil penalty of 50%. But how can they make a Canadian resident pay FBAR penalties? Only by seizing their assets in the United States, or by invading and occupying Canada. Thus, Canadians need to remove their investments from the grasp of Uncle Sam.
Well, they may no longer have to invade. Check this out and enjoy the video of Rand Paul defending the U.S. constitution from Carl Levin and the rest of the Obama group.
Petros wrote on December 2, 2011 that “this whole thing is a violation of rights and should be resisted”. I couldn’t agree more. Those who are impacted by this IRS tax grab could exercise their CONSTITUTIONAL CHARTER EQUALITY RIGHTS through a legal challenge.
Taxation based on citizenship is a uniquely American concept which only impacts Canadians with US origins. No other group suffers the disadvantage of being taxed by a foreign government. The USA provides no representation and no services, and the internationally recognized norm for taxation is residency, not citizenship. Singling out one group of Canadians for taxation by the US government is clearly discriminatory and unfair, but must also violate Charter Equality Rights because such DISCRIMINATION BASED ON NATIONAL ORIGIN IS SPECIFICALLY PROHIBITED.
No other foreign government is permitted to tax dual-citizens or foreign citizens resident in Canada.
Additionally, the non-discrimination Article XXV of the Canada-US tax treaty says that US citizens resident in Canada are not to be treated any differently than Canadian citizens in Canada. The IRS is ignoring this provision, although I’m sure they would make a case for saying it doesn’t apply.
Thanks for your interesting comment. The problem with the Charter of Rights argument is that the Charter would not apply to the U.S. government which is causing all the the trouble. Would be interested in having you take us through (piece by piece) your argument using Section XXV of the Canada U.S. tax treaty. The U.S. may want to ignore it, but we can certainly use it if it applies.
I wonder if U.S. citizens could raise a constitutional argument in another way – examples might include:
– excessive FBAR fines
– 4th and 5th amendment rights (search and seizure and incrimination)
– equal protection, should American Citizens abroad be treated differently than American citizens resident in the country?
etc.
Thanks again.
However the Charter does apply in Canada. A ruling against the IRS would mean that no Canadian resident would be legally liable for any US taxes or US tax filings, at least on this side of the border. Such an outcome would frustrate the IRS and present real problems for their collection activities in Canada, probably making it impossible. I appreciate there would be no direct impact in the US but the indirect impact would be formidable.
As regards American constitutional rights, I’ll have to leave that to you but a positive ruling there would be the best outcome. As regards Article XXV of the Canada-US tax treaty, it’s straight forward. Each clause just repeats itself for different tax situations, never straying from the basic principle repeated in each clause that US citizens in Canada must be treated the same as Canadians, and Canadian citizens in the US must be treated the same as Americans. The US is a signatory and cannot, in my opinion, discriminate against American citizens in Canada either. The Article does not specify countries or citizenship as I have done here for illustration. The Article agreed to by Canada and the US simply says that citizens of one country cannot be discriminated against in the other country. It’s noteworthy that a positive ruling on Charter Equality Rights would support this interpretation of the Article, making it impossible for the IRS to argue in favour of its current discrimination.
Not quite true. There is one other government that taxes its citizens worldwide. That would be Eritrea, a dictatorship in the Horn of Africa, with one of the worst human rights records in the world. Good company the US is keeping.
Thanks again for taking the time to comment on this issue. With respect to the Charter of Rights argument (although I wish it were workable), I don’t see how it is (and I would like nothing more than for somebody to show me how I am wrong). Although, the Charter applies in Canada, it applies against the Federal and provincial governments – see S. 32. This would mean that there is no direct way to get leverage over the U.S. government by using the Charter. That said, since the Charter is binding on the Federal Government, I think one could argue that if the Canadian government entered into a treaty with the U.S. that conflicted with a Charter right, then one might be able to argue that the treaty was invalid. This would create indirect leverage over the U.S. government. Interestingly the first case decided by the Supreme Court of Canada which interpreted S. 15 of the Charter was a case that involved discrimination based on citizenship. The court held that citizenship was a ground of discrimination that was protected by S. 15 of the Charter. What might this mean? Of course, I don’t really know. But, to take a stab at this: I would think that a treaty entered into by the Canadian government that allowed for discrimination based on citizenship, might be reviewable. In other words, and this might be good to keep in mind down the road, any future treaty in which the Government of Canada allowed Canadian citizens who were also citizens of another specific country (example U.S.) to be discriminated against, might violate the Charter. But, this will cost a million in legal fees to determine.
See the following:
http://laws.justice.gc.ca/eng/Const/
http://laws.justice.gc.ca/eng/Charter/FullText.html
Equality Rights
Equality before and under law and equal protection and benefit of law
15. (1) Every individual is equal before and under the law and has the right to the equal protection and equal benefit of the law without discrimination and, in particular, without discrimination based on race, national or ethnic origin, colour, religion, sex, age or mental or physical disability.
Application of Charter
32. (1) This Charter applies
(a) to the Parliament and government of Canada in respect of all matters within the authority of Parliament including all matters relating to the Yukon Territory and Northwest Territories; and
(b) to the legislature and government of each province in respect of all matters within the authority of the legislature of each province.
I will have a look at the tax treaty later (my head hurts now) and possibly reply – but you are raising interesting issues. Keep them coming!
Thanks,
Re: The non-discrimination Article XXV of the tax treaty to which the USA is a signatory has 10 clauses.
Clause “1. Citizens of a Contracting State, who are residents of the other Contracting State, shall not be subjected in that other State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which citizens of that other State in the same circumstances are or may be subjected.”
Clause “10. Notwithstanding the provisions of Article II (Taxes Covered), this Article shall apply to all taxes imposed by a Contracting State.”
This is plain English. The IRS is in violation.
Clauses 3 to 9 do not touch on citizenship. They just cover different tax situations; eg, companies, double taxation, et cetera. Clause 2 supports clause 1.
Clause “2. Citizens of a Contracting State, who are not residents of the other Contracting State, shall not be subjected in that other State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which citizens of any third State in the same circumstances (including State of residence) are or may be subjected.”
Comments?
I find the language far from plain, but the typical legalese bureaucratese that muddles our entire legal system.
Gilbert you are damaging my brain trying to analyze this stuff – but let me give it a try. First, (if anybody else is paying attention) here is a link to the Canada U.S. tax treaty. You need to consider the whole thing if you are going to argue tax treaties.
http://www.fin.gc.ca/treaties-conventions/usa_-eng.asp
Now we are focusing specifically on Sections 1 and 2 of Article XXV – the non-discrimination provision which read as follows:
1. Citizens of a Contracting State, who are residents of the other Contracting State, shall not be subjected in that other State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which citizens of that other State in the same circumstances are or may be subjected.
2. Citizens of a Contracting State, who are not residents of the other Contracting State, shall not be subjected in that other State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which citizens of any third State in the same circumstances (including State of residence) are or may be subjected.
The question is how would this apply to a U.S. citizen living in Canada. We probably need to consider this from the perspective of that U.S. citizen being also a Canadian citizen or not.
First – Let’s assume a U.S. citizen living in Canada who is also a Canadian citizen.
First – Section 1:
Let’s provide the context. Section 1 would read contextually as follows:
U.S. citizens who are residents of Canada shall not be subjected in Canada to taxation that is more burdensome than Canadian citizens would be subjected to by the Government of Canada.
U.S. citizens in Canada are not subjected to more burdensome taxation by the Government of Canada. So, I don’t see how S. 1 helps.
Second – Section 2:
Let’s provide the context. Section 2 would read contextually as follows:
Canadian citizens who are not resident of the U.S. (this should include dual Canada U.S. citizens) cannot be subjected to tax requirements in the U.S. that are more burdensome than citizens of any third state “in the same circumstances” may be subjected.
At first this looked like it might be helpful (particularly in the area of “unearned income”, “subpart F income”, PFICs etc). But I wonder about the language “in the same circumstances”. I would imagine that “in the same circumstances” could be construed to mean “who are also U.S. citizens”. If so, S. 2 would not help. I.e. all U.S. citizens who are dual citizens in other countries would be affected in the same way. It seems to me the purpose of S. 2 is to prevent either non-resident (in the country of taxation) U.S. or Canadian citizens being singled out for special treatment.
So, unless you see a way to interpret this differently (and I hope you do, so please try), I don’t see how either Section 1 of Section 2 is helpful to U.S. citizens living in Canada who are dealing with the IRS. Perhaps another section. Or let me simply ask you: where do you see the discrimination?
Your interpretation of section 1 assumes mutual exclusiveness between the two governments.
You wrote: “U.S. citizens who are residents of Canada shall not be subjected in Canada to taxation that is more burdensome than Canadian citizens would be subjected to by the Government of Canada.”
No where is “by the Government of Canada” actually written in clause 1. If it’s not there in writing, it’s not there at all. For the USA to impose extra-territorial taxes, the authorization would have to be in the tax treaty and it’s not.
Without your assumption, this clause states that US citizens who are residents of Canada shall not be subjected in Canada to taxation that is more burdensome than Canadian citizens would be subjected to PERIOD, and Canadian citizens who are residents of the USA shall not be subjected to taxation that is more burdensome than American citizens would be subjected to PERIOD.
[Clause 1 with explanations in brackets:
Citizens (Canadian citizens and American citizens) of a Contracting State (Canada and the USA) who are residents of the other Contracting State (American citizens resident in Canada and Canadian citizens resident in the USA), shall not be subjected in that other State (American citizens in Canada and Canadian citizens in the USA) to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which citizens of that other State in the same circumstances are or may be subjected (American citizens shall not be subjected to more burdensome taxation in Canada than citizens of Canada in the same circumstances are subjected to, and Canadian citizens shall not be subjected to more burdensome taxation in the USA than citizens of the USA in the same circumstances).]
Clause 1 simply discusses the effects of taxation on citizens resident in the other state. It cannot be assumed that the taxation in question is that imposed by a government in its own territory, especially since the USA has extra-territorial tax laws. This is a very important notion.
When the US government taxes US citizens resident in Canada, the US government is subjecting them to taxation “more burdensome than the taxation and connected requirements to which citizens of that other State (Canada) in the same circumstances are subjected”, thereby discriminating against US citizens in Canada, contrary to this clause. If you read it the way it’s written, there is no doubt.
Clause 10: “Notwithstanding the provisions of Article II (Taxes Covered), this Article shall apply to all taxes imposed by a Contracting State.” In other words, this non-discrimination article applies to all taxes imposed by the USA and Canada, whether extra-territorial or not.
In the same circumstances refers to tax circumstances; ie, age, single, married, medical deductions, salaried income, rental income, etc.
I still say it’s plain English.
Thanks again – you offer a very interesting interpretation. The issue is whether the words “shall not be subjected in that other State” refer to the location of the taxpayer or to the government imposing the tax. My interpretation was that the words refer to the government and your interpretation is that the words refer to the taxpayer”. I wish somebody else would “weigh in on this”. Let’s assume your interpretation is correct – and I would love for that to be the case.
Can you know help with this question: how exactly are U.S. citizens in Canada being discriminated against by the U.S. in the payment of taxes – not sure that reporting requirements (at least FBAR) would be covered by this – a very practical example would be helpful.
The subject of the Clause 1 sentence is “Citizens of a contracting state”, the verb is “shall not be subjected”. The words “shall not be subjected in that other State” cannot possibly refer to the government imposing the tax because it’s not even mentioned. It’s clear the subject of “shall not be subjected in that other State” is “citizens of a contracting state.” It’s plain English grammar.
Love your analysis – hope is interpreted that way in the courts and tax treaty meisters!
The trouble with renouncing US citizenship is that you still have to pay all those illegitimate, uniquely American, extra-territorial taxes based on citizenship. What’s more, most people with US citizenship want to keep it. Getting legal judgements is a preferable, and ultimately superior, tactic in fighting this injustice. Keep in mind that there are legal avenues, that the USA provides no representation and no services, and that the only internationally recognized standard for taxation is residency.
I have to protect my Canadian wife who is the big wage earner in my family. The extra-territorial taxation thing combined with FBAR has thus forced me to “willingly” give up my citizenship.
What about a (Whale?): I do not have the energy to blog on this today but please see these links as this seemed to be hot news on the TV the last days.:
http://money.cnn.com/2012/02/07/markets/glencore_xstrata_merger/index.htm?hpt=hp_bn1
http://en.wikipedia.org/wiki/Marc_Rich
I have not thoroughly studied the Rich case and have no opinions at this time. Would anyone be able to embelish the discussion?