Introduction – Two kinds of tax systems – Two kinds of “tax residency”
Title 26, the Internal Revenue Code of the United States is composed of twelve subtitles. Subtitle A deals with “Income Taxes”. Subtitle B deals with “Estate and Gift Taxes” AKA the “transfer tax regime”. The two subtitles are administered separately. They also have different definitions of “tax residence”. Continue reading →
What is domicile? About domicile …
Domicile is an old “common law” concept. Domicile is NOT the same as “residency” (although it might include residency). Domicile is NOT the same as “citizenship” (although one could be a citizen of the country where one is domiciled). Domicile is a concept that refers to one’s permanent home and point of reference. Different jurisdictions might have differing definitions of domicile. It is also a concept that is relevant for a variety of purposes. Why might domicile matter?
Learning about domicile …
Much has been written about domicile. Here is a fantastic article written on domicile that was presented in 2011 at an ABA convention. It doesn’t get better than this: domicile ABA Meeting 2011 Let me offer 5 key points from this article:
Domicile as the definition of “tax residency” for U.S. Estate and Gift tax purposes How do we know that “residence” for Estate and Gift Tax purposes means “domicile”?
The answer is found in the Treasury Regulations – Specifically Reg. 25.2501-1(b) which defines “residency” for Estate and Gift Tax purposes as follows:
(b)Resident. A resident is an individual who has his domicile in the United States at the time of the gift. For this purpose the United States includes the States and the District of Columbia. The term also includes the Territories of Alaska and Hawaii prior to admission as a State. See section 7701(a)(9). All other individuals are nonresidents. A person acquires a domicile in a place by living there, for even a brief period of time, with no definite present intention of moving therefrom. Residence without the requisite intention to remain indefinitely will not constitute domicile, nor will intention to change domicile effect such a change unless accompanied by actual removal.
Please note that different jurisdictions may define “domicile” differently. Conclusion …
“Domicile” is largely a “subjective” concept that is proven by “objective” evidence.
Domicile matters! John Richardson
Article XVIII of the Canada U.S. Tax Treaty Continued – The question of the TFSA
In a previous post I discussed how a U.S. citizen moving to Canada with an existing ROTH will be treated under the Canada U.S. Tax treaty. The purpose of this post is two-fold: First,to argue that the the TFSA should be treated as a “pension” within the meaning of Article XVIII of the Canada U.S. Tax Treaty; and Second, to argue that the 5th protocol (which clarifies that the ROTH IRA) is a pension within the meaning of the Canada U.S. Tax Treaty means that the Canadian TFSA has the same status. This will be developed in three parts: Part A – How the Canada U.S. Tax Treaty affects U.S. Taxation of the Canadian TFSA Part B- Wait just a minute! I heard that the “Savings Clause” means that the treaty would not apply to U.S. citizens? Part C – The TFSA and Information Returns: To file Form 3520 and 3520A or to not, that is the question Continue reading →
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) Continue reading →
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) May 20, 2018
“Understanding U.S. Tax Residency …
The United States uses a form of “deemed tax residency“.
The Internal Revenue of the United States deems that all “individuals” (wherever they live in the world – including citizens and residents of other countries) except “nonresident aliens” are subject to taxation in the United States on their world wide income. One qualifies as a “nonresident alien” unless one is a:
1. A U.S. citizen
2. A U.S. resident as defined by Internal Revenue Code Sec. 7701(b) Continue reading →
Canada U.S. Tax Treaty – Article XXVIA: How the 5th Protocol Enhances protection for Canadian citizens https://t.co/DMdIlHqMU7
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) May 6, 2018
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: Continue reading →
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) May 5, 2018
Written submissions from the public were invited.
This post includes the letter that I sent to the Senate Finance Committee describing the possible impact of the Sec. 965 “Transition Tax” on Americans abroad in general and Canadian residents in particular. Continue reading →