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