Dual citizenship, the lack of definition of "citizen" in the "Savings Clause" of U.S. Tax Treaties and why these are important

Introduction …
This is a “follow up” to my first post about the “Savings Clause” in the Canada U.S. Tax Treaty. The purpose of that first post was to demonstrate that pursuant to the “Savings Clause”, the Government of Canada has agreed to allow the United States to impose direct taxation on some Canadian citizens who are resident in Canada. The post generated a fascinating discussion about the “Savings Clause” and was widely discussed at the Isaac Brock Society. A subsequent post at the Isaac Brock Society provided greater detail about exactly how, and in what respects, the Government of Canada has agreed that the United States can impose direct U.S. taxation on some Canadian citizens and residents. One obvious conclusion from this discussion is reflected in the comment that:

Next time someone tells me that the tax treaty relieves double taxation, I’ll tell them that it causes it. We have RDSP’s and RESP’s to prove it.

I absolutely agree. Although there are a few specific areas where the Tax Treaty mitigates against double taxation, for the most part, because of the Savings Clause, the U.S. Canada Tax Treaty, does NOT prevent double taxation. By ensuring U.S. taxation of Canadian residents and citizens, the U.S. Canada Tax Treaty guarantees double taxation!
It’s a myth that the tax treaty prevents double taxation. As John F. Kennedy said in his commencement address at Yale University on June 11, 1962:

“The great enemy of truth is very often not the lie–deliberate, contrived and dishonest–but the myth–persistent, persuasive and unrealistic. Too often we hold fast to the cliches of our forebears. We subject all facts to a prefabricated set of interpretations. We enjoy the comfort of opinion without the discomfort of thought.”

It’s clear that there has been little or no “discomfort of thought” about:

U.S. Citizenship and the “Savings Clause”: How is citizenship defined? How does “citizenship operate”?  Why “citizenship” MUST be defined in any future “Savings Clause”!
A reminder of what the “Savings Clause” actually says …
The Savings Clause of the Canada U.S. 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.

So, what is meant by “residents” and what is meant by “citizens”?
Residents: Notice that the terms “residents” is defined by Article IV of the Treaty. In other words there is a mutually agreed (at least in theory) mechanism to decide the meaning of “resident”.
Citizens: Notice that there is NO agreed upon meaning of “citizen”. Hence, one would look to the “Article III – General Definitions” which reads:

2. As regards the application of the Convention by a Contracting State any term not defined therein shall, unless the context otherwise requires and subject to the provisions of Article XXVI (Mutual Agreement Procedure), have the meaning which it has under the law of that State concerning the taxes to which the Convention applies.

It appears that under the Canada U.S. Tax Treaty, the United States is free to unilaterally decide who is a U.S. citizen! This means, that the Government of Canada, has agreed to allow the United States, in its sole discretion, to decide which residents and citizens of Canada are to be treated as “U.S. citizens” for the purposes of U.S. taxation.
To put it even more simply:
Pursuant to the “savings clause” the Government of Canada has agreed to allow the United States to impose U.S. taxation on:
– any resident and citizen of Canada who the United States chooses, according to U.S. law, to define as a U.S. citizen,
– according to any provision of U.S. tax law (PFIC anyone?) that it wants to.
Through the use of the “Savings Clause”, the United States has managed to turn the ability to define someone as a “U.S. citizen”, into an “economic weapon” to be used against other nations. (Those who negotiate tax treaties should take note!) By defining someone as a “U.S. citizen”, the U.S. can turn that person into a WME (“Weapon of Mass Extraction“) to be used against other nations. There is NO DOUBT that U.S. “citizenship-based taxation” is being used as a tool to extract capital from the economies of other nations. That’s the power of the combination of “citizenship-based taxation”, the ability to designate who is a U.S. citizen”, the “Savings Clause” and the FATCA IGA (the FATCA IGA allows the U.S. to define who is a U.S. citizen”).
As George at the Isaac Brock Society comments:

@Ginny, I hope you read the following. It may be helpful for the ADCS lawsuit.
What both the US Canada Tax Treaty and the FATCA IGA does, is that it results in the “forcible destruction” of Canadian Citizenship of a Canadian Citizen resident in his/her own country of Canada.
Just as the US Supreme Court ruled in Afroyim v. Rusk in 1967 against the “forcible destruction of his citizenship” by Congressional action, so should a Canadian Court now be upholding the Charter and the rights of Canadian Citizens against the “forcible destruction” of their citizenship.
It can NOT be argued that either the Treaty itself or the IGA does not result in the forcible and involuntary destruction of ones Canadian Citizenship in favour of the remotest taint of tenuous US nationality, which in your case and that of Gwen was never asked for nor is wanted today.
Make no mistake, your Canadian Government is a party to the “forcible destruction” of your Canadian Citizenship in favour of a rather tenuous US Citizenship.
I think Brockers need to start referring to all these actions worldwide as the “forcible destruction” of our respective nationality. Notes to our friends in Australia who are diligent…..

Where to go from here …

I do NOT believe that the U.S. ability to define who is a “U.S. citizen” was some kind of “plot” by U.S. Treasury against other nations. It’s clear that this is much more of a problem of “citizenship”, than a problem of “taxation”. The definition of “U.S. citizen” has changed a great deal over the years (with more and more of the world becoming “U.S. citizens”).
It’s interesting that the IRS does NOT appear to understand that the Savings Clause was intended to prevent U.S. “citizens” from receiving any benefits from the tax treaty. Note how the IRS explains the “Savings Clause” (the emphasis is on “residents”):

Saving Clause
Most tax treaties have a saving clause that preserves the right of each country to tax its own residents as if no tax treaty were in effect. Thus, once you become a resident alien of the U.S., you generally lose any tax treaty benefits that relate to your U.S. income. However, many tax treaties have an exception to the saving clause that may allow you to claim certain treaty benefits even if you are a U.S. citizen or resident.

The evolving and more inclusive definition of U.S. citizenship …
As explored in an earlier post which describes the changing and shifting definition of U.S. citizenship:

The problems of U.S. citizenship have been exacerbated by the twin principles that:
1. U.S. citizenship has become less and less dependent on the existence of a “voluntary” connection to the U.S.; and
2. U.S. citizenship is now a status imposed on the individual, rather than a status chosen by the individual. (Although the 14th Amendment may have been motivated by a desire to “end slavery” it is now being used as a mechanism to “create tax slavery”.)
To put it another way: U.S. citizenship has become less “something that one chooses to voluntarily connect to” and more something “one is through an accident of birth, chosen for”. This is of huge significance because the U.S. (under the guise of citizenship-based taxation) attempts to control the lives of its citizens living abroad.

Advice for those negotiating tax treaties with the United States …
No country should enter into another treaty with the  United States that includes the “Savings Clause”. That said, if the “Savings Clause” is to be part of a treaty, the meaning of “citizens” should be defined by the treaty and must exclude those who are both citizens and residents of Canada (dual citizens)!
The “Savings Clause” and dual citizenship …
It seems obvious that the “Savings Clause” did NOT contemplate the reality of “dual citizenship” in a global world.
As George commented at the Isaac Brock Society:

Who should be concerned by this discussion?
This discussion applies to you if you are a resident of any country in the world that has a Tax Treaty with the United States! For a list of U.S. tax treaties see here.
John Richardson

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