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Canada’s Underused Housing Tax May Violate The Non-discrimination Clause In Tax Treaties

Purpose and summary of this post:

Because Canada’s Underused Housing Tax treats nonresidents of Canada differently, based on their citizenship, the tax may violate the non-discrimination Article in many of Canada’s tax treaties (including the Canada U.S. tax treaty). Nonresidents of Canada are treated differently depending on whether or not they are Canadian citizens. For example a Canadian citizen who is a nonresident of Canada is “excluded” from the tax. But, a U.S. citizen who is a nonresident of Canada is “affected” by the tax. This appears to violate paragraph 1 of Article XXV of the Canada U.S. tax treaty (and other Canadian tax treaties).

Paragraph 1 of Article XXV of the Canada U.S. tax treaty:

1. Nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith that is more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances, particularly with respect to taxation on worldwide income, are or may be subjected. This provision shall also apply to individuals who are not residents of one or both of the Contracting States.

The question is what is meant by “in the same circumstances”. Relevant commentary from the OECD and from U.S. Treasury underscores that the words “particularly with respect to taxation on worldwide income” include whether the individual is taxed as a tax resident of the country or as a nonresident of the country.

Arguably all “nonresidents” of Canada are “in the same circumstances” (in relation to Canada’s tax system). Hence, “nonresidents” should not be treated differently depending on their citizenship.

Discussion and analysis follows.

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Introduction – The Hypocrisy Of Representative Brian Higgins Continues

“Good Americans should NOT have a Canadian tax imposed on them!”

This is a recent statement from Congressman Brian Higgins. Click on the following tweet to listen to a recent interview with the Congressman.

The background …

As discussed here, Canada has a number of “Vacant Home Taxes“. Canada’s Underused Housing Tax is taxation based on citizenship and/or immigration status. (It is NOT based on “tax residency” and “tax residency” is irrelevant.) Notably the United States is the only major country in the world that makes citizenship and/or immigration status a sufficient condition for “tax residency”. In fact the United States imposes worldwide taxation and FATCA compliance on a approximately one million Canadian residents. Nevertheless, Congressman Higgins is certain of the injustice of Canada’s imposition of a citizenship based tax on U.S. residents. (The fact that the tax is based on property located in Canada appears to him to be irrelevant.) Furthermore, he seems intent on NOT acknowledging that:

“Good Canadians should not have an American tax imposed on them”.

Apparently what’s okay for the USA is somehow not okay for Canada.

But, hypocrisy aside …

Congressman Higgins’s objections hopefully will generate a discussion of the injustice of citizenship taxation generally. While ignoring the fact that the U.S. citizenship tax regime imposes direct U.S. taxation on the Canadian source income of millions of Canadian residents, Congressman Higgins is certain that Canada’s tax (which affects at most a few thousand Americans) violates the U.S. Canada tax treaty. In other words, Congressman Higgins’s hypocritical position appears to include:

Only the United States has the right to impose taxation on the residents of other countries under the principle of citizenship taxation“.

In the spirit of affirming that Canada’s citizenship tax on Americans is in violation of the principle that only the United States has the right to engage in citizenship taxation, Congressman Higgins appeared as a witness before a Canadian Parliamentary Committee to discuss Canada’s Underused Housing Tax. The hearing took place in June 2023. During the hearing he raised the spectre of two possible legal challenges to Canada’s threat to the (presumptive) U.S. monopoly on citizenship taxation. The claim that Canada’s Underused Housing Tax violates the “non-discrimination” Article of the Canada U.S. tax treaty (and other Canadian tax treaties) is the subject of this post.

Food for thought:

The non-discrimination clause in the standard tax treaties suggests that certain kinds of citizenship taxation may be inappropriate. (How this reality bears on the question of U.S. citizenship taxation generally will be the subject of a separate post.)

Outline:

Part A – About Canada’s Underused Housing Tax
Part B – Representative Brian Higgins June 5, 2023 testimony to Canadian Parliamentary Committee – Includes “potential violations”
Part C – Thinking about the “non-discrimination” clause – A basic analysis
Part D – What does U.S. Treasury’s Technical Explanation suggest?
Part E – What about Canadian tax treaties with other countries? – Considering the Canada UK treaty
Part F – Appendixes – Various Tax Treaties

Part A – About Canada’s Underused Housing Tax

The statute and regulations are here. S. 2 of the statute deems certain individuals to be “excluded owners” of residential property. Those “excluded” from the application of the Act are defined to include:

(b) an individual who is a citizen or permanent resident, except to the extent that the individual is an owner of the residential property in their capacity as a trustee of a trust (other than a personal representative in respect of a deceased individual) or as a partner of a partnership;

To put it simply: Canadian “citizens” and those with the legal status of being “permanent residents” of Canada are excluded from the application of the statute. They are not subject to the tax. Those who are NEITHER Canadian citizens NOR permanent residents of Canada are (depending on the occupancy of the property) subject to the tax. This means that (in general) U.S. citizens, living in the United States, are subject (as”affected” owners) to the statute and may (depending on the occupancy of the property) be required to pay the tax.

To simplify the application of the law:

Canadian citizens and permanent resident owners (regardless of whether they are tax residents of Canada) are not subject to the tax.

U.S. citizens (who are neither Canadian citizens nor permanent residents) are subject to the tax.

To simplify the context:

Imagine four neighbors living in Buffalo, New York. They all drive Ford trucks. They all drink Budweisers. They all watch the Buffalo Bills on Sundays. They all work for the same company. They all file taxes jointly with their spouses. They all own seasonal homes (in their names only) located in Fort Erie Ontario, Canada (where they become “neighbours” instead of “neighbors”. Interestingly and completely arbitrarily, Canada’s Underused Housing Tax may or may apply to them. Let’s see how the tax might affect each of them.

Neighbor 1: Neither a Canadian citizen nor permanent resident of Canada – subject to the tax

Neighbor 2: A dual citizen of Canada and the United States – NOT subject to the tax

Neighbor 3: A U.K, citizen who has the legal status of “permanent resident” of Canada, but also a U.S. Green Card holder – NOT subject to the tax

Neighbor 4: A U.K. citizen living in the United States on an L visa – subject to the tax.

Notice that all four of these neighbors live in Buffalo, New York and are NOT tax residents of Canada. Neighbor 2 (Canadian citizen) and Neighbor 3 (permanent resident of Canada) are NOT subject to the tax. Neighbors 1 and 4 (neither Canadian citizens nor permanent residents of Canada are subject to the tax).

Part B – Representative Brian Higgins June 5, 2023 testimony to Canadian Parliamentary Committee – Includes “potential violations”

Excerpt from his testimony:

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@RepBrianHiggins Begins Formal Challenge Of Canada’s Underused Housing Tax

Prologue

Are Buffalo Cottage Owners Exempt From Canada’s Underused Housing Tax?

It’s Official – Congressman Higgins Begins Formal Claim That Canada’s Underused Housing Tax Violates the USMCA Free Trade Agreement

Mar 7, 2023
Press Release
Congressman Says Tax 1% Property Tax Violates Standing Trade Agreements

Congressman Brian Higgins (NY-26) is asking United States Trade Representative Katherine Tai to open formal consultations with the Government of Canada to explore if the Underused Housing Tax is inconsistent with the United States-Mexico-Canada Agreement (USMCA).

In a letter to Ambassador Tai, Rep. Higgins writes, “The United States and Canada have a longstanding, cooperative, and mutually beneficial relationship. Western New York and Southern Ontario exemplify this unique bond. The UHT’s impact on Americans who own property in Canada, however, threatens our binational community and appears to be inconsistent with the USMCA.”

One of the principles of the USMCA is the requirement that all parties not discriminate against each other or provide preferential treatment solely to domestic companies or citizens, including with respect to internal taxation. Canada’s Underused Housing Tax does not apply equally to Canadian and U.S. citizens and therefore may violate these principles. The USMCA stipulates parties can request consultations with another party when trade agreement disputes arise.

Canada recently imposed a 1% tax on “vacant or underused housing” owned by non-resident, non-Canadians. The intent was to target foreign investment speculation negatively impacting affordable housing in Canada, but it is impacting good-faith, longtime cottage owners who have maintained and enjoyed living among their Canadian neighbors for years.

Higgins began sounding the alarm about the Underused Housing Tax since it was first proposed in the Government of Canada’s Budget 2021. Most recently, Higgins asked the U.S. Secretary of State to object to the Underused Housing Tax in conversations with the Government of Canada.

Outreach from frustrated U.S. residents has increased in recent weeks as the April 30th tax form deadline approaches in Canada. Congressman Brian Higgins has heard from hundreds of U.S. residents negatively impacted by the Underused Housing Tax, including over 320 property owners who completed an online survey.

Congressman Higgins is a member of the House of Representatives Ways and Means Subcommittee on Trade and serves as Co-Chair of the Northern Border Caucus and the Canada – U.S. Interparliamentary Group. His Western New York district, which includes the Cities of Niagara Falls and Buffalo, borders southern Ontario. 

The Opportunity – Perhaps All Forms Of Citizenship Violate The Canada US Mexico Free Trade Agreement?

This is an opportunity to bring all issues of citizenship tax to the attention of those responsible for interpreting the free trade agreement.

PFIC anyone?

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John Richardson – Follow me on Twitter @Expatriationlaw

Like Canada’s Underused Housing Tax, U.S. Estate Taxation Depends On Citizenship Of The Owner

Taxation based on source vs. taxation based on residence – More commentary on the Canada Underused Housing Tax

Suzanne Herman has got it right!

There is no doubt that Canada’s “Underused Housing Tax” is triggered by citizenship. There is no doubt that Canada’s Underused Housing Tax is unfair to Americans who own second homes and cottages in Canada. There is no doubt that Canada’s “Underused Housing Tax” in its application to noncitizen and nonresidents is similar to the U.S. Estate Regime*. (They both impose taxation on the noncitizen/nonresident owners of property located in their countries.) There is no doubt that while complaining about Canada’s “Underused Housing Tax” that Congressman Higgins should be apologizing for the way the U.S. Estate Tax treats nonresident/noncitizen owners. They are both taxes triggered by (n0n) citizenship and are based on property located in their respective jurisdictions.

Taxation of nonresidents triggered by the ownership of local property is different from U.S. taxation of non-US source income received by persons who don’t live in the United States

That said, there is no moral equivalence between Canada’s Underused Housing Tax based on property located IN CANADA and the U.S. taxation of INCOME received OUTSIDE THE United States by a person who does not live in the United States. The United States is using “citizenship” as a pretext to claim that people who are tax residents of other countries (including Canada) are U.S. tax residents.

It is an assumption of international taxation that every country has the right to define who are its “tax residents”. On the other hand, no country has the right to (1) claim that the tax residents of other countries are also their tax residents and (2) disable those “claimed” tax residents from using a treaty tie break provision to avoid the claim of tax residence! (The “saving clause” included in all U.S. tax treaties prevents U.S. citizens from using a treaty residence tax break provision to assign allocate residence to solely their country of actual residence.)

In FATCA related discussions it has been common for Government Officials to claim that the United States has the sole right to determine who are its tax residents. Although true, this cannot mean that the United States (or any country) has the right to claim the residents of another country as its tax residents. (The debate is illuminated here and here.)

It’s about American exceptionalism

The international standard for definitions of tax residence is “residence”. Residence is a term that is correlated with the “circumstances of one’s life”. The United States (in addition to “residence”) claims tax residence based on “citizenship” (which is mostly based on the “circumstances of one’s birth”). To put it simply U.S. tax residence is primarily defined in terms of the “circumstances of birth” rather than the “circumstances of life”.

In the 21st Century there is almost NO correlation between citizenship and residence.

At first blush, one might say:

Both Canada and the United States are taxing based on citizenship. They are both equally wrong. Nothing could be further from the truth.

Suzanne Herman’s tweet explains the difference. As her tweet makes clear the Canadian tax is based on property that is located in Canada. It is a tax based on citizenship because of property located in Canada. Although the tax is based on the citizenship of the owner, Canada is NOT claiming that U.S. residents are “tax residents of Canada” for all purposes. The Canadian tax, although based on citizenship, is a tax based on the ownership of property located in Canada.

On the other hand, the United States is imposing full taxation on certain Canadian residents because and only because the U.S claims them as U.S citizens. The claim is that because they were “Born In The USA” that they are U.S. tax residents for ALL purposes. They are subject to U.S. taxation on ALL of their income received outside the United States. They are subject to reporting on all their assets LOCATED OUTSIDE THE UNITED STATES. This is because and only because they are U.S. citizens.

To put it simply: The U.S. is using citizenship (the circumstances of their birth) to claim that residents of other countries are U.S. tax residents for ALL purposes!

A U.S. resident can avoid the Canadian tax by simply selling the property located in Canada.

A Canadian resident subject to the U.S. citizenship tax can avoid the tax only through relinquishment of U.S. citizenship or death (and that may not be enough).

Bottom line: Canada is imposing a tax based on the citizenship of the owner of property located in Canada. This is different from the U.S. imposing taxation on income earned outside the United States and received by a Canadian resident who has U.S. citizenship. The Canadian tax is based on the location of property in Canada. The U.S. tax is based on the citizenship of the person who is actually living in Canada.

The United States is using citizenship as the basis to claim the tax residents of other countries as U.S. tax residents.

The question becomes:

Should the United States be permitted to use citizenship to effectively claim the tax residents of other countries as U.S. tax residents? Should the rest of the world tolerate this blatant assault on their sovereignty and erosion of their tax base? Should the world sign tax treaties with the U.S. that entrench this principle (via the “saving clause”) in their tax treaties with the United States? Should U.S. citizens be the only people in the world who disabled because of their citizenship from being able to become treaty nonresidents?

Although all forms of taxation based on citizenship are wrong. There is no moral equivalence between Canada’s tax based on property located in Canada and the U.S. tax based on claiming Canadian residents as U.S. tax residents.

John Richardson – Follow me on Twitter at @VacantHomeTax

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*Appendix – The U.S. Estate Tax System Is Similar To Canada’s Underused Housing Tax

When it comes to the ownership of U.S. situs assets:

– a U.S. citizen is subject to an 11 million dollar lifetime estate tax exemption

– a noncitizen, who is NOT domiciled in the U.S. is subject to taxation on all U.S. situs assets in excess of $60,000 USD.

Although not the specific topic of this post I highly recommend the article by Omer Harel about the application of the U.S. Estate Tax to nonresident aliens. The article includes:

The U.S. estate tax imposed on NRAs today is an inefficient tax without serious policy justifications and it distorts behavior in ways that the estate tax imposed on residents does not. Also, this tax decreases the attractiveness of investments in the U.S. from the NRAs’ perspective as it forces NRAs to invest in U.S.-situated assets using a foreign corporation. This insulates them from estate tax exposure and subjects them to additional costs and higher taxes that the U.S. Treasury does not necessarily benefit from. The fairness arguments that were presented to support the retention of the NRA estate tax are not persuasive as NRAs owe much lower ‘‘debt’’ to the U.S. government than residents and, unlike residents, are sometimes unable to fully benefit from the step-up in basis. Further, after the Obama tax reform — which basically repealed the estate tax for almost all residents in 2011-2012 — the current regime has become extremely discriminatory and might in some instances violate U.S. income tax treaties.

Now that the U.S. (in particular the real estate industry) needs foreign investments more than ever, it is the right time to rethink this tax and repeal it or drastically modify it so that it will not deter foreign investors.

Bottom line: The United States is already doing exactly what Canada does in it’s Underused Housing Tax! Nobody seems to complaint about it! But, everybody should complain about it. Like Canada’s Underused Housing Tax, the U.S. Estate tax regime is simply a system of asset confiscation based on citizenship! Perhaps, Congressman Higgins should raise this issue with the U.S. Government?

Canada’s Underused Housing Tax: No Good Options For U.S. Residents Who Own A Second Home In Canada

Introduction – Responding To Canada’s Underused Housing Tax

Canada’s Underused Housing Tax is NOT a tax imposed because the “foreign owner” doesn’t spend enough time in the property. Rather Canada’s Underused Housing Tax is a tax imposed because the “foreign owner” doesn’t make the property sufficiently available to non-owners!!

This is the fourth in my series of posts about Canada’s “citizenship-based” Underused Housing Tax.

The first three post are:

1. US Residents Who Own Residential Property In Canada May Be Subject To Various Vacant And Underused Property Taxes

2. NY Congressman Brian Higgins Draws Attention To The Injustice Of Citizenship Taxation By Challenging Canada’s Underused Housing Tax

3. U.S. FBAR And Form 8938 Penalties May Be A Bigger Problem For U.S. Residents Than Canada’s Underused Housing Tax

The purpose of this post is two-fold:

First: to explain what “Canada’s Underused Housing Tax” really means for “foreign owners” of certain Canadian property:

Conclusion: It means that foreign owners who own property that is NOT in a designated recreational location and who do NOT release their property into the rental market will be forced to pay the 1% tax.

Second: to explain that owners of most Canadian residential property that is not in a designated recreational location, who are neither Canadian citizens nor permanent residents of Canada can avoid releasing their property into the rental market ONLY if they either:

1. Pay Canada’s Underused Housing Tax

2. Sell their property in Canada

In my opinion U.S. (and other foreign residents) should be advised to simply pay the annual tax.

The Government Of Canada’s “Underused Housing Tax” is designed to force “foreign owners” of property to choose among the choices of: releasing their property into the rental market, paying the 1% tax or selling their property!

Explaining this conclusion.

This post ignores the “fringe situations” of properties that are newly purchased, uninhabitable, etc. I am focussing on the situation as it is likely to affect the majority of people. I urge people to read the actual legislation.

Final warning!!! All individual owners of residential housing in Canada who are neither Canadian citizens nor permanent residents of Canada are required to file the Underused Housing Tax return even if the tax is not payable! The penalty for failing to file the return is $5000 CDN.

Here we go …

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