Canadian retirement plans of “U.S. persons” subject to double taxation

The above tweet references a comment to the Allison Christians revelation that the U.S. Treasury has no authority to enter into IGAs.

Although I have not had time to research this specific issue, the questions it raises are so important that discussion must begin now. I have reproduced the comment in its entirety. See also the comments responding to this comment. If this is true, the effect is that:

The retirement plans of Canadian citizens who are considered to be U.S. taxpayers will be subject to taxation in both Canada and the U.S. – pure double taxation. In other words, you work you whole life for retirement only to see the plan subject to double taxation. Assuming the truth of this (and I intend to do further extensive investigation) it is absolutely essential that you renounce U.S. citizenship at the earliest possible moment. It is my sincere hope that this commenter is incorrect. But, I will find out.

I hope you are sitting down before you read this.


@Bubblebustin; @Just Me; @Polly; @Moaner –

The Canadian IGA makes FATCA Canadian law ; The Canada-U.S. Tax Treaty makes US CBT permissible under Canadian law.

While there is momentum to upend the Canadian IGA, upending the Canadian IGA should be the focus. However, revision of the Canada-U.S. Tax Treaty needs focus as well.

Example, as the Canadian-U.S. Tax Treaty does not exempt from U.S. taxation Canadian retirement accounts, the U.S. laws in regards to these accounts extend over Canadian territory as if Canada were a sovereign part of the United States. Canadian retirement accounts – incentivised by the Canadian government to help Canadians save for their retirement – get their benefit neutralised and penalised when treated by the IRS as “unqualified pension plans” as if Canadians have a choice of putting money in these “unqualified pension plans” and plans deemed qualified under U.S. Law ( 401K savings and IRA and Keogh may only be accessible by U.S. residents). Generally, the best tax breaks of either country get cancelled out by the other, under the tax treaty.

The Canada-U.S. Tax Treaty needs revision to include specific mention for Canadian tax residents: exemption from US taxation of Canadian retirement accounts, Canadian family home, proceeds of Canadian life insurance, Canadian mutual funds, and include a very significant exemption threshold from taxation – a blanket exemption – for other Canadian income and assets. Exemption may also be made against FIBAR and nonfiling penalties for Canadian tax residents.

The existing Canadian-US Tax treaty has many holes in it. One example is the new ObamaCare tax which gets put on top of all other taxes paid (and your gain in your pension account over the year gets included on top of your income to reach the threshold for this tax). This Obamacare tax law was written in a way to be exempt from any tax treaty credits!

The retirement account taxation is another example. If your income is over $105,000 you are considered a “high earner” and get taxed on the change in account value each year which gets put on top of your other income to determine a U.S. marginal tax rate that the U.S. wants to tax it at every year. If you are below US$105,000 income the U.S. wants to tax these accounts at the marginal rate when the money is taken out- similar to U.S. 401K and IRA. (Who knows what happens if you are a “high earner” one year but not the next or next many years).

Here is the rub: the Canadian-US Tax Treaty does not have provision for credit against Canadian tax for any U.S. tax paid on Canadian retirement accounts – as the U.S. tax is not considered on “foreign” income. Nor is there any credit against U.S. tax with any Canadian tax paid on Canadian retirement accounts. Plus Canadian law does not have special provision for withdrawals from retirement accounts to pay for the U.S. tax liability.

The way the tax treaty works is that each tax is considered its own silo. For instance, with earned income the extra Canadian tax paid on income compared to the U.S. tax (as the Canadian income tax rates are higher than in the U.S.) may not be used as a credit against other taxes the U.S. has but Canada does not – such as U.S. tax on Canadian pension accounts, family home, and death tax.

In my opinion, the Canadian-U.S. Tax Treaty represents the Canadian government giving up some of its sovereignty to the U.S. government in regards to Canadians who happen to be U.S. citizens. It does not have to be this way. Canada should stand up to the U.S. in regards to its right as a sovereign country for self determination of its own people free from interference by another sovereign country.




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