Category Archives: U.S. tax treaties

Canada U.S. Tax Treaty: Article XVIII incorporating the 5th Protocol of September 21, 2007 – An American moves to Canada with a #Roth

Part 1 of 3 – The 5th Protocol to the Canada U.S. Tax Treaty – U.S. Residents Moving To Canada With a ROTH
This is the another post describing an aspect of the September 21, 2007 5th Protocol to the Canada U.S. tax treaty. This post describes how the owner a Roth IRA can maintain significant advantages from a Roth IRA which has been funded prior to a move to Canada. In my next post I will argue that the same provisions should apply to a TFSA that was funded prior to a Canadian resident moving to the United States.
http://laws-lois.justice.gc.ca/eng/acts/I-3.3/FullText.html#h-82
Introduction – The United States taxes ONLY one thing! Everything!
The United States has one of the most (if not the most) comprehensive and complicated tax systems in the world.
1. Who is subject to U.S. taxation?
The United States is one of only two countries to impose taxation on its citizens who do NOT live in the United States. In practical terms, (in a world of dual citizenship), this means that the United States imposes taxation on the citizens and residents of other nations. This is to be contrasted with a system of “residence based taxation” – a system where only “residents of the nation” are subject to full taxation. A system of “residence based taxation” assumes that the purpose of taxes is so that the government can  provide services to residents. A system of “citizenship-based taxation” assumes that the purpose of taxation is so that taxpayers can fund the activities of the government. (It’s interesting that the United States is (1) the only modern country with “citizenship” taxation and (2) a country that provides comparatively few services to its residents.
2. What is the source of the income that is subject to U.S. taxation?
The United States (along with Canada and most other countries) uses a system of “worldwide taxation”. In other words a U.S. citizen who is a tax-paying resident of France, is expected to pay taxes to the United States on income earned anywhere in the world. This is to be contrasted with “territorial taxation”. A country that uses a “territorial tax system” imposes taxes ONLY on income earned in the country.

3. What are the rules that determine how the tax owed is calculated?

The American citizen living in France as a French citizen is subject to exactly the same rules in the Internal Revenue Code that Homeland Americans are subject to. The problem is that the Internal Revenue imposes a different kind of tax regime on “foreign income” and “foreign property. In effect, this means that the United States imposes a separate and more punitive regime on people who live outside the United States. (This has the effect of making it very difficult for American citizens living outside the United States to engage in rational financial and retirement planning.)
The Impact of Tax Treaties in General and the “Pension Provisions” in Particular
4. What about tax treaties? How do they affect this situation?
In general (except in specific circumstances) U.S. tax treaties do NOT save Americans abroad from double taxation. In fact, the principal effect of most U.S. tax treaties is to guarantee that Americans abroad are subject to double taxation. This is achieved through a tax treaty provision known as the “savings clause“. Pursuant to the “savings clause”, the treaty partner country agrees that the United States can impose U.S. taxation, according to U.S. tax rules on the residents of the treaty partner countries who are (according to the USA) U.S. citizens.
In practice this means that the United States imposes “worldwide taxation” on residents of other countries. In fact, the United States imposes a separate and punitive tax system on those who reside in other countries.
5. The specific problem of pensions are recognized in many tax treaties
Many U.S. tax treaties address the issue of pensions. The Canada and U.K. tax treaties give strong protection to the rights of individuals to have pensions. The Australia tax treaty has very weak pension protection. The problem of how the Australian Superannuation interacts with the Internal Revenue Code has been the subject of much discussion. The “Pensions Provisions” are found in Article XVIII of the Canada U.S. Tax Treaty (as amended over the years).
The 5th Protocol – effective September 21, 2007 – made numerous changes to the pensions provisions (Article XVIII of the Canada U.S. Tax Treaty)
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Canada U.S. Tax Treaty – Article XXVIA: How the 5th Protocol Enhances protection for Canadian citizens


Introduction – The Purpose of this post
This is an addition to “The Little Red Tax Treaty Book“.
I was recently asked the following question:
I heard that the Canada U.S. Tax Treaty means that the Canada Revenue Agency will not help the United States collect a U.S. tax debt on a Canadian citizen, provided that the person was a Canadian citizen at the time the U.S. tax debt arose. But, what if the person was NOT a Canadian citizen when the U.S. tax debt arose? Will the Canada Revenue Agency help the United States collect U.S. tax debt?
My answer to the question:
On September 21, 2007 Canada and the United States signed the 5th Protocol to the Canada U.S. tax treaty (first entered into in 1980). As a result of the 5th protocol, Paragraph 8 (a) of Article XXVIA now reads:
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Part 3: Responding to the Sec. 965 "transition tax": They hate you for (and want) your pensions!


Introduction
This is the third in my series of posts about the Sec. 965 Transition Tax and whether/how it applies to the small business corporations owned by tax paying residents of other countries (who may also have U.S. citizenship). These small business corporations are in no way “foreign”. They are certainly “local” to the resident of another country who just happens to have the misfortune of being a U.S. citizen.
The first two posts were:
Part 1: Responding to The Section 965 “transition tax”: “Resistance is futile” but “Compliance is impossible”
Part 2: Responding to The Section 965 “transition tax”: Is “resistance futile”? The possible use of the Canada U.S. tax treaty to defeat the “transition tax”
Those who fail to learn from history are doomed to repeat it
Immediately prior to the passing of President Obama’s “Affordable Care Act” (which was subsequently ruled to be constitutional BECAUSE it was a “tax”), legislators were faced with a comprehensive, complex and incomprehensible piece of legislation. Very few members of Congress understood the details and impact of what they were voting for.


Nancy Pelosi secured her in place of history by suggesting that:
“We really need to pass the law so that you can see what’s in it!”
Ms. Pelosi meant (I think) that it’s one thing to know what a law says. It’s quite another to know how it actually impacts people.
Notwithstanding the April 15, 2018 deadline for the first “transition tax” payment, very few “tax professionals” understand what the Internal Revenue Code Sec. 965 “transition tax” says, (let alone what it actually might mean – assuming it applies).
What the application of the “transition tax” might actually mean in the life of an individual owner of a Canadian Controlled Private Corporation
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U.S. Citizenship clarification: Time between your actual renunciation and the date your CLN is issued

Two questions that I frequently receive from people who have renounced U.S. citizenship are:
I. An immigration question: What if I attempt to travel to the United States during the period of time between my actual renunciation of U.S. citizenship and actually receiving my CLN (which is my proof of having renounced U.S. citizenship)?
II. A tax question: At what point after I renounce U.S. citizenship do I cease to be treated as a U.S. citizen for U.S. tax purposes? For example, when am I free to sell my house (located outside the USA) and NOT be subject to U.S. capital gains taxes?
Two kinds of U.S. citizenship: How the issuance of a CLN affects (1) U.S. citizenship for Immigration purposes and (2) U.S. citizenship for tax purposes
1. How the issuance of a CLN affects U.S. citizenship for immigration and nationality purposes:
Immigration and Nationality Act S. 349(a) (U.S. Code 1481(a)) make it clear that the issuance of a CLN is completely irrelevant to your status as a U.S. citizen for immigration purposes. A CLN is of value ONLY for the purposes of PROVING that you are not a U.S. citizen.
Therefore, one ceases to a U.S. citizen for immigration purposes on the date of the relinquishing (renunciation) act.
2. How the issuance of a CLN affects U.S. citizenship for U.S. tax purposes
Internal Revenue Code 877A(g)(4) mandates that those relinquishing/renouncing U.S. citizenship after June 16, 2008:
– will continue to be treated as U.S. citizens for U.S. tax purposes until the CLN is actually issued; and
– the date of ceasing to be a U.S. citizen for U.S. tax purposes will be the actual date of the relinquishing act (date of renunciation).
Therefore, (assuming a relinquishing act after June 16, 2008) one continues to be a U.S. citizen for tax purposes until the CLN is issued.
These distinctions are discussed in an earlier post:
Renunciation is one form of relinquishment – It’s not the form of relinquishment but the time of relinquishment
Bottom line: One ceases to be a U.S. citizen for immigration purpose before one ceases to be a U.S. citizen for tax purposes.
Generally people are more concerned with travelling to the USA during the time gap between renouncing U.S. citizenship and before receiving a CLN. Fortunately, we have a “guest post” written by someone who has just experienced this issue from the Immigration perspective. He has shared his thoughts as follows:

Travel Limbo? Keep calm and CLN on.
Recently, I found myself in a potentially sticky situation enroute to a holiday in the U.S while at a Canadian airport. My Canadian passport showed a U.S. birthplace and before allowing me
through, the U.S. Border Officer wanted me to show my Certificate of Loss of Nationality (CLN) or an American passport.
Although I had renounced my U.S. citizenship several months earlier, the U.S. Department of State had not yet issued my CLN. Before this experience, I had always been able to cross the border to the U.S. with my Canadian passport (the only passport I’d ever had).
Fortunately, the situation didn’t escalate. I attempted to give the officer a simple explanation that I had renounced at a U.S. Embassy many months before but the approved CLN had not been couriered in time for my trip. If he would permit me, I would show him my email correspondence with the U.S. embassy.
The officer accepted my explanation. Before he waived me through, I asked if he had any advice to share with anyone caught in travel limbo without their CLN.
Hopefully, his comments will help others to navigate a soft landing:
Keep calm
There is a line-up of people behind you. This is not the time to be outraged or to educate agents about the plight of Accidental Americans or dual citizens.
Show proof
Travel with a copy of your CLN. If you’re still waiting for it, carry a copy of Form DS-4080 (the form you sign when you renounce and swear an oath at a U.S. Embassy). Keep copies on your phone.
Provide a reasonable explanation
If you accidentally forget your documents or booked a trip before your CLN arrives, a simple description of the renunciation process and the long wait times for the approved CLN to arrive will hopefully be reasonable enough to a reasonable officer.

Thanks to our guest blogger for the relaying the above experience!
John Richardson

The teaching of Topsnik 2 – 2016: #Greencard expatriation and the S. 877A "Exit Tax"

What! You want to abandon your Green Card and leave the USA!


Introduction – Introducing Gerd Topsnik – The World According to Facebook

“This case will be seen as the first of an (eventual) series of cases that determine how the definition of “long term resident” applies to Green Card holders. The case makes clear that if one does NOT meet the treaty definition of “resident” in the second country, that one
cannot use that treaty to defeat the “long term resident” test. A subsequent case is sure to expand on this issue. Otherwise, the case confirms that the S. 877A Exit Tax rules are “alive and well” and that the “5 year certification” test must be met to avoid “non-covered status”
Topsnik may or may not be a “bad guy”. But even “bad guys” are entitled to have the law properly applied to their facts. It would be very interesting to know how the court would have responded if Topsnik had been paying tax (a nice taxpayer) in Germany as a German resident.”

A nice summary of Topnik 1 and Topsnik 2


This is part of a series of posts on: (1) “tax residency“, (2) the use of “treaty tiebreakers” when an individual is a “tax resident” of more than one jurisdiction and (3) how to use “treaty tiebreakers” to end “tax residency” in an undesirable tax jurisdiction.
This is the second of the two Topsnik posts.
Topsnik 1 focused on the “tax residence” of Green Card Holders. The decision in Topsnik 1 is here:
topsnikdiv.halpern.TC.WPD
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Part 2: OECD Common Reporting Standard ("CRS"): "tax residence" and the "tax treaty tiebreaker"


This is Part 2 – a continuation of the post about “tax residency under the Common Reporting Standard“.
That post ended with:

Breaking “tax residency” to Canada can be difficult and does NOT automatically happen if one moves from Canada. See this sobering discussion in one of my earlier posts about ceasing to be a tax resident of Canada. (In addition, breaking “tax residency in Canada” can result in being subjected to Canada’s departure tax. I have long maintained that paying Canada’s departure tax is clear evidence of having ceased to be a “tax resident of Canada”.)
Let’s assume that our “friend”, without considering possible “tax treaties” is or may be considered to be “ordinarily resident” in and therefore a “tax resident” of Canada.
Would a consideration of possible tax treaties (specifically the “tax treaty residency tiebreaker) make a difference?
This question will be considered in Part 2 – a separate post.

What is the “tax treaty residency tiebreaker”?
It is entirely possible for an individual to be a “tax resident” according to the laws of two (or more countries). This is a disastrous situation for any individual. Fortunately with the exception of “U.S. citizens” (who are always “tax residents of the United States no matter where they live), citizens of most other nations are able to avoid being “tax residents” of more than one country. This is accomplished through a “tax treaty tie breaker” provision. “Treaty tie breakers” are included in many tax treaties. (Q. Why are U.S. citizens always U.S. tax residents? A. U.S. treaties include what is called the “savings clause“).
Some thoughts on the “savings clause”
First, the “savings clause” ensures that the United States retains the right to impose full taxation on U.S. citizens living abroad (even those who are dual citizens and reside outside the United States in their country of second citizenship).
Second, the U.S. insistence on the “savings clause” ensures that other countries agree to allow the United States to impose U.S. taxation on their own citizen/residents who also happen to have U.S. citizenship (generally because of a U.S. place of birth.)
Where are “tax treaty tie breakers” found? What do they typically say?
Many countries have “tax treaty tie breaker” provisions in their tax treaties. The purpose is to assign tax residence to one country when a person is a “tax resident” of more than one country.
As explained by Wayne Bewick and Todd Trowbridge of Trowbridge Professional Corporation (writing in the context of Canadian tax treaties):
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Green card holders: the "tax treaty tiebreaker" and eligibility for Streamlined Offshore

Before you read this post!! Warning!! Warning!!
Before a “Green Card” holder uses the “Treaty Tiebreaker” provision of a U.S. Tax Treaty, he/she must consider what is the effect of using the “Treaty Tiebreaker” on:
A. His/her immigration status under Title 8 (will he/she risk losing the Green Card?)
B. His/her status under Title 26 (will he expatriate himself under Internal Revenue Code S. 7701(b)) and subject himself to the S. 877A “Exit Tax” provisions?
This is another in a series of posts on the “tax treaty tiebreaker” (which is a standard provision in most U.S. tax treaties). “Tax treaty tiebreakers” are rules that are used to assign a person’s “tax residency” to one country when an individual is a “tax resident” of both countries. In the context of U.S. tax treaties, “treaty tie breaker” rules are used when an individual is both:
1. A “U.S. person” for tax purposes (U.S. citizen or U.S. resident); and
2. A “tax resident” of another country.
It is very common to use tax treaties to assign “tax residency” to a country when an individual is  a tax resident of more than one country.
For example, Article IV of the Canada U.S. tax treaty provides for a rule to assign an individual’s “tax residency” to either Canada or the United States when an individual is a “tax resident” of Canada and and a tax resident of the the United States.
The “savings clause” prohibits U.S. citizens from using the “tax treaty tiebreaker” from avoiding being a “tax resident” of the United States.
Article IV of the Canada U.S. tax treaty includes:

2. Where by reason of the provisions of paragraph 1 an individual is a resident of both Contracting States, then his status shall be determined as follows:
(a) he shall be deemed to be a resident of the Contracting State in which he has a permanent home available to him; if he has a permanent home available to him in both States or in neither State, he shall be deemed to be a resident of the Contracting State with which his personal and economic relations are closer (centre of vital interests);
(b) if the Contracting State in which he has his centre of vital interests cannot be determined, he shall be deemed to be a resident of the Contracting State in which he has an habitual abode;
(c) if he has an habitual abode in both States or in neither State, he shall be deemed to be a resident of the Contracting State of which he is a citizen; and
(d) if he is a citizen of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement.

It is clear that the “tax treaty tiebreaker” provision does NOT exclude Green Card Holders from it’s application. In fact, the impact of the “tax treaty tie breaker” may be the reason why the Canada Revenue Agency advises that “Green Card Holders” are NOT U.S. residents for FATCA reporting purposes.
The application of the “tax treaty tiebreaker” makes one a “nonresident alien, WITH RESPECT TO INCOME TAXATION, for U.S. tax purposes but NOT for other purposes (including FBAR and other information returns).
The “nonresident alien” and the 1040NR
Nonresident aliens file a 1040NR. A “nonresident alien” filing a 1040NR is filing to report and pay tax on income connected to the United States. A 1040NR is NOT used to report “non-U.S. income”. General information for the 1040NR is here. IRS Publication 519 – The U.S. Tax Guide For Aliens” is here.
Possible advantages for a “Green Card Holder” using the “tax treaty tiebreaker” to file the 1040NR
1. A Green Card Holder, by virtue of the “tax treaty tiebreaker”, would NOT be subject to U.S. taxation on “foreign income” which includes Subpart F income and PFIC income.
2. A Green Card Holder, by virtue of the “tax treaty tiebreaker”, would NOT be required to file Form 8938, Form 8621 and is subject to modified reporting requirements for Form 5471.
A reminder …
A Green Card Holder, using the “tax treaty tiebreaker” IS still a “U.S. Person”. He is a “U.S. Person” who is deemed to NOT be a U.S. person for the limited purposes of the “tax treaty tiebreaker”. He is a “U.S. Person”, who is NOT treated as a “U.S. Person” and  who is therefore able to file a 1040NR.
There are millions of “U.S. persons” (citizens and Green Card Holders) abroad who have not been filing U.S. taxes
Many of them are “coming into compliance” using the IRS Streamlined Foreign Offshore Program. As a general principle, “streamlined” is NOT available to “nonresident” aliens. This makes sense. After all, a “nonresident alien” is NOT a “U.S. person” for tax purposes.
Is “streamlined” available to a “U.S. Person”, who is filing a 1040NR, because he is treated as a “nonresident” pursuant to the “tax treaty tiebreaker”?
I suggest the answer comes from the instructions for streamlined which include:
“Eligibility for the Streamlined Foreign Offshore Procedures
In addition to having to meet the general eligibility criteria, individual U.S. taxpayers, or estates of individual U.S. taxpayers, seeking to use the Streamlined Foreign Offshore Procedures described in this section must: (1) meet the applicable non-residency requirement described below (for joint return filers, both spouses must meet the applicable non-residency requirement described below) and (2) have failed to report the income from a foreign financial asset and pay tax as required by U.S. law, and may have failed to file an FBAR (FinCEN Form 114, previously Form TD F 90-22.1) with respect to a foreign financial account, and such failures resulted from non-willful conduct. Non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.”
Let’s focus specifically on this part of the requirements:

“(2) have failed to report the income from a foreign financial asset and pay tax as required by U.S. law,”

If one is filing a 1040NR, then one is reporting ONLY U.S. source income. The whole point of the 1040NR would be to NOT have to report income from foreign financial assets. Think of the specific examples of Subpart F income and PFIC income.
Therefore, (although I will confess to never having analyzed this in terms of the streamlined rules) I suggest that one could NOT use the Foreign Offshore streamlined program to file the 1040NR.
It’s NOT that Green Card Holders who use the “tax treaty tiebreaker are NOT “U.S. Persons”. It’s that filing a 1040NR means that there is no reason to report income from a foreign financial asset (meaning that one fails the eligibility test for streamlined)!
John Richardson

Green card holders, the "tax treaty tiebreaker" and reporting: Forms 8938, 8621 and 5471

Before you read this post!! Warning!! Warning!!
Before a “Green Card” holder uses the “Treaty Tiebreaker” provision of a U.S. Tax Treaty, he/she must consider what is the effect of using the “Treaty Tiebreaker” on:
A. His/her immigration status under Title 8 (will he/she risk losing the Green Card?)
B. His/her status under Title 26 (will he expatriate himself under Internal Revenue Code S. 7701(b)) and subject himself to the S. 877A “Exit Tax” provisions?
Now, on to the post.
The “Treaty Tiebreaker” and information reporting …
The Internal Revenue Code imposes on “U.S. Persons” (citizens or “residents”):
1. The requirement to pay U.S. taxes; and
2. The requirement to file U.S.forms.
All “U.S. Persons” (citizens or residents) are aware of the importance of “Information Returns” AKA “Forms” in their lives.
What is a U.S. resident for the purposes of taxation?
This question is answered by analyzing Internal Revenue Code S. 7701(b). If one is NOT a U.S. citizen, a physical connection to the United States (at some time or another) is normally required for one to be a “tax resident” of the United States..
What happens if one is a “tax resident” of more than one country?
The “savings clause” ensures that U.S. citizens are the only people in the world who have no defence to being deemed a tax resident of multiple countries. U.S. citizens (“membership has its privileges”) are ALWAYS tax residents of the United States. U.S. citizens who reside in other nations, may also be “tax residents” of their country of residence.
In some cases, a U.S. “resident” (which includes a Green Card holder) may be deemed to be a “nonresident” pursuant to the terms of a U.S. Tax Treaty. A Green Card holder “may” be able to use a “Treaty Tiebreaker” provision to be treated as a “nonresident”.
Warning!! Warning!!
Before a “Green Card” holder uses the “Treaty Tiebreaker” provision of a U.S. Tax Treaty, he/she must consider what is the effect of using the “Treaty Tiebreaker” on:
A. His/her immigration status under Title 8 (will he/she risk losing the Green Card?)
B. His/her status under Title 26 (will he expatriate himself under Internal Revenue Code S. 7701(b)) and subject himself to the S. 877A “Exit Tax” provisions?
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Green card holders: the "tax treaty tiebreaker" rules and taxation of Subpart F and PFIC income

Before you read this post!! Warning!! Warning!!
Before a “Green Card” holder uses the “Treaty Tiebreaker” provision of a U.S. Tax Treaty, he/she must consider what is the effect of using the “Treaty Tiebreaker” on:
A. His/her immigration status under Title 8 (will he/she risk losing the Green Card?)
B. His/her status under Title 26 (will he expatriate himself under Internal Revenue Code S. 7701(b)) and subject himself to the S. 877A “Exit Tax” provisions?
Now, on to the post …
The Internal Revenue Code of the United States imposes (1) requirements for taxation (determining how much tax is payable by various individuals) and (2) requirements for information reporting returns. For “U.S. Persons Abroad” the “information reporting requirements” are far more onerous.
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US Taxation of the Australian Superannuation? – No, #DontMessWithTheSuper!

I recently engaged in a discussion with people who are worried that they might be “U.S. Persons” living in Australia. Their primary concern (and understandably so) is the possible U.S. taxation of their Australian Superannuations. For many, the “Super” is considered to be their most important retirement planning asset.
In a FATCA world, where  possible “USness” is now an issue, one must consider whether U.S. tax laws, effectively disable a group of Australians from effective retirement planning. But, hey! Even Americans should have the right to plan for retirement? Shouldn’t they?
There have been a number of recent articles attempting to understand the possible U.S. taxability of the Australian Super. I don’t know whether this is good or bad.
Most of these articles (what would you expect?) attempt to analyze the issue from the perspective of U.S. law – specifically the Internal Revenue Code. Rightly or wrongly, this approach assumes that the USA has the right to impose taxation on the retirement plans created by other nations. I don’t believe that this should be assumed!
In any event, what follows is a presentation that I created to discuss this issue. It is NOT intended to be a legal analysis. (If you want trouble, call up a lawyer!) It is intended to be a “contextual” and “common sense” analysis. Sooner or later, all laws (if they are to survive) must move towards “common sense”.
My message to residents of Australia is this:
Your Superannuation is far too important to be left in the hands of the tax professionals!
You will find “my thoughts” by clicking on the following:
The Australia Superannuation For Dummies
Feel free to leave “your thoughts” as comments to this post.
John Richardson