U.S. citizenship taxation burdens Canada’s sovereignty by imposing U.S. taxes on Canadian residents

Prologue: Prime Minister Pierre Trudeau speaking to the Washington, DC Press Club – 1969

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The Elephant Today: FATCA, FBAR and U.S. Citizenship Taxation – How “even-tempered” is the beast?

I have been watching with interest a recent discussion at the Isaac Brock Society about U.S. citizenship taxation. Much of the discussion was focused on whether the Alliance For The Defence of Canadian Sovereignty  should initiate a lawsuit against U.S. citizenship taxation. (This post is NOT to comment on that specific question.) Interestingly, much of the discussion centered around the question of whether,  U.S. citizenship impacts on Canada’s Sovereignty. Some commenters believe it DOES impact on Canada’s sovereignty. Others believe U.S. citizenship taxation does NOT impact on Canada’s Sovereignty. I use the word “impact” to mean “effect” and NOT “intent”.

sovereignty

What if one were to ask the question this way:

Can one country forcibly impose taxes on the residents of another county? If so, does the imposition of those taxes burden the sovereignty of that other country?

Does U.S. citizenship taxation impose either direct or indirect taxes on Canadian citizens resident in Canada? If so, does the U.S. taxation of Canadian citizens resident in Canada  interfere with Canada’s sovereignty? Remember that FATCA is a deliberate attempt by the United States to enforce U.S. tax law on Canadian soil.

Let’s review some basic principles that are NOT in dispute.

1. The U.S. claims the right to define who it’s citizens are. In fact, the FATCA IGA specifically allows the U.S. to define who its citizens are. (Interestingly, the IGA specifically says that U.S. citizens are defined by the Internal Revenue Code.) The U.S. has the right to expand it’s definition of U.S. citizen.

2. The U.S. subjects its citizens to taxes on WORLDWIDE income wherever they live (including in Canada).

3. Many people who the U.S. claims as its citizens are Canadian citizens resident in Canada.

4. Therefore, the U.S. imposes taxes on Canadian citizens who are resident in Canada.

5. There are numerous examples of U.S. citizens residing in Canada being subjected to both:

– double taxation (for example the 3.8% Obamacare Surtax,  etc.); and

– taxation on income that is NOT taxed in Canada (sale of principal residence, TFSA, RESP, gambling winnings, etc.)

6. Therefore, the effect of U.S. citizenship taxation in Canada is to transfer Canadian capital to the United States. If a Canadian resident (deemed U.S. citizen) sells his house 23.8% of the capital gain (that exceeds $250,000 USD floor) will be transferred to the U.S.

To put it another way:

Through “citizenship taxation taxation” (imposed primarily because of a U.S. “place of birth”), the U.S. is actually EXPANDING ITS TAX BASE INTO CANADA AND OTHER COUNTRIES. (See the recent discussion of the large number of U.S. born residents of Stanstead, Quebec.) Does U.S. taxation of Canadian residents burden Canada’s sovereignty?

Here is a possible answer coming from ProudAussie:

In June of 2012, a fascinating discussion of FATCA (which included Dick Harvey and Jackie Bugnion) took place in Switzerland. Both Professor Harvey and Ms. Bugnion have played important roles in the FATCA debate. To his credit, (although an advocate of FATCA), Professor Harvey has acknowledged the difficulties that FATCA has created for Americans abroad. (See his paper: “Worldwide Taxation of U.S. Citizens Living Abroad – Impact of FATCA and Two Proposals“.)

I strongly recommend the ENTIRE video. It is highly educational and a comprehensive introduction to FATCA. What is most interesting is Richard Harvey’s claim that the U.S. has the right to use FATCA to PROTECT it’s tax base (which is defined to include citizens and residents of other nations). Such is the reality and immorality of U.S. citizenship-based taxation.

FATCA may have been initially intended to protect America’s “legitimate” tax base. In actuality and effect, FATCA has allowed the U.S. to more easily expand it’s tax base into other countries. (If you consider the evolution of U.S. citizenship law, more and more people have become or retained U.S. citizenship. In fact, there are many people who are not even aware they are considered to be U.S. citizens.)

See in particular this two minute clip:

Is FATCA about “protecting” the U.S. tax base or about “expanding” the U.S. tax base?

A better way to view the “tax base” issue  would be that:

U.S. “citizenship taxation” allows the U.S. to EXPAND it’s tax base into other countries. This is reinforced by the “Savings Clause” in U.S. tax treaties. The “Savings Clause” in the U.S. Canada Tax Treaty reads as follows:

Article XXIX
Miscellaneous Rules

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.

As I have previously argued, the “Savings Clause” has three clear effects:

First: to ensure three that a tax treaty cannot defeat “citizenship taxation”. The “savings clause” operates so that the treaty partner country agrees that the United States can levy taxes on its citizens who live in that country.

Second: by allowing the U.S. to levy taxes on residents of the treaty partner country, the U.S. will be able to impose a “capital tax” on that country.

Third: to ensure that a U.S. citizen resident in the treaty partner country will always pay an amount of tax that is as great as he would pay under the Internal Revenue Code. (Although, some of this total tax payable would be paid to Canada, the U.S. citizen pays a total tax equal to the amount he would pay under U.S. law.)

In other words, the “tax treaty” is of no use to Americans abroad for the purpose of reducing the total tax payable. In fact:

The tax treaty ensures that U.S. citizens abroad will always be subjected to the “worst of both worlds”.

This has led one commenter to suggest that:

There is a very strong argument to be made that:

I presented this theory to the Government of New Zealand in “Paying Tribute to America” (how U.S. citizenship taxation affects the economy of New Zealand).

In conclusion …

For it’s worth, I believe that U.S. citizenship taxation is IN EFFECT a threat to Canada’s sovereignty and the sovereignty of every country where U.S. citizens (as defined by and only by the U.S.) reside.

For the record this does NOT mean that the Alliance For The Defence of Canadian Sovereignty is planning to initiate a lawsuit against U.S. citizenship taxation.

John Richardson

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9 comments on “U.S. citizenship taxation burdens Canada’s sovereignty by imposing U.S. taxes on Canadian residents
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  3. John Hanson says:

    When the United States taxed Boris Johnson on the sale of his home, that was more than $USD 100,000 removed from the UK economy and inserted into the American economy. That was a job lost in the UK and a job gained in America, and it completely disregards UK tax policy of non-taxable capital gains on private residences. The fact that he couldn’t claim mortgage interest to offset it as homelanders can is insane.

    If an American citizen won the Governor General’s Award for fiction, that would be $CDN 25,000 taxable in America but tax free in Canada. It’s a disgusting practice.

    If I won a $50 million Lotto-Max, that would turn into a $19 million windfall for the American economy and a loss for the Canadian economy. If a job is $100k, then that`s 170 jobs lost to America.

    These are just a few examples of how America’s citizen-based taxation is a kick in the head of all foreign nations.

    Like

  4. WK Dreamer says:

    Impose is an interesting word. For example my obnoxious neighbour crashes my dinner party and I get sucked into letting him stay. I don’t have to let him stay, but I don’t want to make a scene, and thus I feel he has imposed on me. He did not hold a gun to my head, I could have shut the door, but In the end I chose to let him in. Imposition is not enforcement. But it sucks none the less.

    Anyone who gets the immorality of ‘place of birth/circumstance of birth/who cares how long ago you left’ US taxation policy(otherwise known as CBT), understands on a gut level that if ENFORCED, such policy is an obvious violation of the sovereignty of non-US countries. Unenforced it is at best an imposition. You can say ‘no’.

    History is ripe with examples of old laws on the books that were never stricken down, yet never enforced, thus remaining dormant. Until recently CBT was one of those. A poison seed for sure, but unable to inflict harm in its unwatered state.

    Some ‘US citizens’ living in Canada, aware of this uniquely US law, played by the books, feeling it was their duty to file US tax returns. That was their choice, just as any Canadian can spend his/her hard earned Canadian income anywhere he/she likes including outside the boundaries of Canada.

    Unless CBT, is FORCED onto another country giving those affected NO CHOICE, it remains as it has always remained – benign and powerless – not a threat to the sovereignty of its closest neighbour nor any other country. Imposition – maybe, but tell the neighbour to fuck off if you don’t want to let him in. It is your right.

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  5. WK Dreamer says:

    Re: ” Unless CBT, is FORCED onto another country giving those affected NO CHOICE, it remains as it has always remained – benign and powerless”

    Not quite right, as CBT no longer remains dormant thanks to FATCA

    Like

  6. WK Dreamer says:

    OK, so this is where I think I am really going with this – you cannot IMPOSE on SOVEREIGNTY. You can attack it, but you can never IMPOSE on it.

    Like

  7. WK Dreamer says:

    ooops…lol…I meant, “Unenforced it is at WORST an imposition. You can say ‘no’.

    ….not BEST

    Like

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