Category Archives: U.S. Canada Tax Treaty

Part 1: #FATCA is: Maloney "Overseas Americans Financial Access Act" is the wrong answer to the right question

Introduction and purpose …


On March 18, 2010, President Obama signed FATCA (“Foreign Account Tax Compliance Act”) into law. FATCA was:
– a revenue offset provision to the HIRE Act
– a series of conforming amendments to the Internal Revenue Code that:
(a) imposed requirements on Foreign Banks (Internal Revenue Code Sections 1471 – 1474); and
(b) imposed reporting requirements on individuals (Internal Revenue Code 6038D). Those reporting requirements are expressed in Form 8938.
On September 17, 2019 Representative Maloney introduced H.R. 4362 – “Overseas Americans Financial Access Act” – which introduced changes to BOTH the FATCA requirements imposed on Foreign Banks and requirements imposed on Individuals.
This post discusses ONLY the aspect to the Maloney bill that “relaxes” the requirements on Foreign Banks. I have writen a separate post discussing how the Maloney bill would impact individuals.
(Those interested in learning more about FATCA may be interested in my “Little Red FATCA Book)“.
The Maloney Bill is NOT The Same As SCE Previously Drafted!
The Good News:
The Maloney bill appears to apply to ALL Americans abroad – without regard to whether they are compliant with their U.S. tax filing requirements. (A previous version of SCE applied ONLY to Americans abroad who were compliant with their U.S. tax filing requirements.) Interestingly, the Bill (like Internal Revenue Code 911) would NOT apply to “permanent residents (Green Card Holders) in exactly the same way.
The Bad News:
The bill as drafted gives the banks the option to either continue to report on the depository accounts of Americans abroad or not. This is an option available to the bank. I (along with many others) suggest that banks will NOT be willing to engage with individuals with respect to whether they meet the requirements of the Maloney bill. The exact language of the bill includes:

(i) IN GENERAL.—Unless the foreign financial institution elects to not have this subparagraph apply, such term shall not include any depository account maintained by such financial institution if each holder of such account is—

The Maloney bill is too narrow in application
The bill as drafted applies ONLY to “depository accounts”. This means that the bill applies only to day-to-day bank accounts. It specifically does NOT apply to “custodial accounts”. This means that it excludes investment accounts, brokerage accounts, etc.
Verdict: The Maloney bill is clearly far too narrow. There is no reason why the Maloney proposal should not extend to ALL accounts (depository, custodial or any other kind of account) held by an American living outside the United States.
The technical analysis (which will NOT be of interest to the average reader) follows. It consists of Part A to Part D.
Thoughts and Suggestion
The Maloney bill is symbolic. It is not a serious attempt to alleviate the problems of Americans abroad. Representative Maloney should – as a Democrat – support Representative Holding’s “Tax Fairness For Americans Abroad Act of 2018”.
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The United States imposes a separate and more punitive tax system on US dual citizens who live in their country of second citizenship

Prologue


Do you recognise yourself?
You are unable to properly plan for your retirement. Many of you with retirement assets are having them confiscated (at this very moment) courtesy of the Sec. 965 transition tax. You are subjected to reporting requirements that presume you are a criminal. Yet your only crime was having been born in America (something you didn’t even choose) and attempting to live as a U.S. tax compliant American outside the United States. Your comments to my recent article at Tax Connections reflect and register your conviction that you should not be subjected to the extra-territorial application of the Internal Revenue Code – when you don’t live in the United States.
The Internal Revenue Code: You can’t leave home without it!
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How Americans moving to Canada can maximize the use of their existing Roth IRA

I have previously explained how the Canada U.S. Tax Treaty allows a U.S. citizen to move to Canada and continue the deferral of taxation (in both Canada and the United States) on his existing Roth.The treaty allows for deferral with respect to the existing balance in the Roth. It does NOT allow for deferral with respect to contributions made after the person becomes a tax resident of Canada.

That post concluded with:

Conclusions:

1. The owner of a ROTH who moves to Canada can will continue to not pay tax on the income earned by the ROTH and will not pay tax on distributions from the ROTH. We will see that this can prevent a tremendous investing opportunity; and

2. Contributions made to the ROTH after moving to Canada will cease to be “pensions” within the meaning of of Article XVIII of the Treaty! This means that post “resident in Canada” contributions will NOT be subject tax “tax deferral” (as per paragraph 7) and will be subject to taxation (as per paragraph 1).

Possible Additional Conclusion:

3. Because a Canadian TFSA is the same kind of retirement vehicle as a U.S. ROTH IRA, and the ROTH IRA is treated as a “pension” under Article XVIII of the treaty:

A TFSA should be treated as a pension under Article XVIII of the Canada U.S. Tax Treaty.

But, moving back to the U.S. citizen who moves to Canada with a Roth IRA.

How a U.S. citizen who moves to Canada can maximize use of the Roth and the Canada U.S. Tax Treaty

Q. How does this work? A. It takes advantage of the “stretch” principle
The general “stretch” principle is described at Phil Hogan as follows:

How US plans can “stretch” to Future Generations

Chris discusses the often overlooked benefits of US plans for Canadian residents. Under US tax laws IRA (and sometimes 401k) plans can be “stretched” or transferred to future generations tax free. Pursuant to Canada-US treaty provisions the same treatment can be had for Canadian tax purposes.

Unlike RRSP accounts, US IRA accounts can be transferred to a second generation (non-spouse) tax free under the Canada-US tax treaty. The impact of the tax free transfer and compounding investment over the lifetime of the beneficiary can be significant. This is outlined in detail in Chris’ new white paper report Roth IRAs in Canada – The gift that keeps on giving. How $250,000 can turn into $35 million TAX FREE to an heir.

Here is the full video …

And the written explanation …

Bottom line:

The features of a Roth IRA coupled with certain provisions of the Canada U.S. tax treaty may provide for better financial planning options for U.S. citizens who move to Canada than are available to Canadian residents who have not lived in the United States.

John Richardson Follow me on Twitter @ExpatriationLaw

How can the IRS enforce US tax debts in foreign countries? Does renunciation of citizenship matter?

For years people have asked the question: Can the United States enforce U.S. tax debts in foreign countries? If this is possible, how would this work. I sometimes answer questions on Quora. My answer to this question (comments invited) is here:
Read John Richardson's answer to Can the IRS confiscate non US-based assets for taxes owed after someone renounces their citizenship? on Quora

Part 29 – Can the full Canadian tax paid personally on distributions from Sec. 965 income be used to offset the @USTransitionTax

Introduction – As the year of the “transition tax” comes to an end with no relief for Americans abroad (who could have known?)
As 2018 comes to and end (as does my series of posts about the transition tax) many individuals are still trying to decide how to respond to the Sec. 965 “transition tax” problem. The purpose of this post is to summarize what I believe is the universe of different ways that one can approach Sec. 965 transition tax compliance. These approaches have been considered at various times and in different posts over the last year. As 2018 comes to an end the tax compliance industry is confused about what to do. The taxpayers are confused about what to do. For many individuals they must choose between: bad and uncertain compliance or no attempt at compliance. (I add that the same is true of the Sec. 951A GILTI provisions which took effect on January 1, 2018.)
But first – a reminder: This tax was NEVER intended to apply to Americans abroad!!!
A recent post by Dr. Karen Alpert – “Fixing the Transition Tax for Individual Shareholders” – includes:

There have been several international tax reform proposals in the past decade, some of which are variations on the final Tax Cuts and Jobs Act (TCJA) package. None of these proposals even considered the interaction of the proposed changes with taxing based on citizenship. One even suggested completely repealing the provision that eliminates US tax on dividends out of previously taxed income because corporate shareholders would no longer be paying US tax on those dividends anyway.

and later that …

One of the obstacles often mentioned when it comes to a legislative fix is the perceived requirement that any change be “revenue neutral”. While this is understandable given the current US budget deficit, it shouldn’t apply to this particular fix because the transition tax liability of individual US Shareholders of CFCs was not included in the original estimates of transition tax revenue.

The bottom line is:
Congress did not consider whether the transition tax would apply to Americans abroad and therefore did not intend for the transition tax to apply to them. Within hours of release of the legislation, the tax compliance industry, while paying no attention to the intent of the legislation, began a compliance campaign to assist owners of Canadian Controlled Private Corporations to turn their retirement savings over to the IRS. There was (in general) no “push back” from the compliance industry. There was little attempt on the part of the compliance industry to analyze the intent of the legislation. In general (there are always exceptions – many who I know personally – who have done excellent work), the compliance industry failed their clients. By not considering the intent of the legislation and not considering responses consistent with that intent, the compliance industry effectively created the “transition tax”.
In fairness to the industry, Treasury has given little guidance to practitioners and the guidance given came late in the year. In fairness to Treasury, by granting the two filing extensions, Treasury made some attempt to do, what they thought they could, within the parameters of the legislation.
The purpose of this post …
This post will summarize (but not discuss) the various options. There is no generally preferred option. This is not “one size fits all”. The response chosen will largely depend in the “stage in life” of the individual. Younger people can pay/absorb the “transition tax”. For people closer to retirement, for whom the retained earnings in their corporations are their pensions: compliance will result in the destruction of your retirement.
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#FATCA Trial to take place in January 2019. Plaintiff's Memorandum of Fact and Law in @ADCSovereignty FATCA Lawsuit Filed

Happy Thanksgiving!
As we move into Thanksgiving Weekend, I am pleased to report that the we have reached an important milestone in the ADCS FATCA lawsuit. As you know, ADCS is suing the Government of Canada for enacting a foreign law – the US Foreign Account Tax Compliance Act (“FATCA“) – on Canadian soil. By so doing Canada violated numerous rights found in the Canadian Charter of Rights and Freedoms.  These are Charter rights guaranteed to all Canadians, regardless of where they happened to have been born.
Please take the time to read this important document – the Memorandum of Law – prepared by our lawyers.
2018 10 03 Plaintiffs’ Memorandum of Fact and Law_summary trial_FINAL
We expect the hearing to take place in Vancouver in January of 2019.
The history of our FATCA lawsuit to date
The Government of Canada signed a FATCA IGA with the United States in February of 2014. FATCA became operational in Canada on July 1, 2014. Our lawsuit was also launched in 2014.
1. This video which explains the background leading leading up to Canada’s signing the FATCA IGA

2. See the  FATCA – @ADCSovereignty Book of Posts that I have written which describes the background to and evolution of the lawsuit.
______________________________________________________________________________
Thanks to all of you have made this possible!
Our FATCA lawsuit would never have been possible without each of  you. I would like to specifically recognize …
– the generosity of our numerous donors. Incredibly, this has been possible through the donations of ordinary Canadians who have given what they can. Although the amounts donated have been significant to the individual donors, we have not had a single “deep pockets” or Corporate Donor. Thank you again!
– the witnesses and the people who have contributed countless hours of their valuable time
– our plaintiffs: Gwen and Kazia – it takes tremendous courage and conviction to volunteer your name and circumstances to a lawsuit of this type
– our lawyers who have been with us since the beginning
On behalf of the Board of the Alliance For The Defence of Canadian Sovereignty I wish you the best.
John Richardson

Canada U.S. Tax Treaty: Why the 5th protocol of the Canada US Tax Treaty Clarifies that the TFSA is a pension within the meaning of the Canada U.S. Tax Treaty

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
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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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Part 7: Responding to the Sec. 965 “transition tax”: Why the transition tax creates a fictional tax event that allows the U.S. to collect tax where it never could have before


Introduction
This is the seventh in my series of posts about the Sec. 965 Transition Tax and whether/how it applies to the small business corporations owned by taxpaying 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.
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Part 5: Responding to the Sec. 965 “transition tax”: Shades of #OVDP! April 15/18 is your last, best chance to comply!

Introduction
This is the fifth 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 purpose of this post is to argue that (as applied to those who do not live in the United States) the transition tax is very similar to the OVDP (“Offshore Voluntary Disclosure Programs”) which are discussed here. Some of my initial thoughts (December 2017) were captured in the post referenced in the following tweet:


The first four posts in my “transition tax” series 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”
Part 3: Responding to the Sec. 965 “transition tax”: They hate you for (and want) your pensions!
Part 4: Responding to the Sec. 965 “transition tax”: Comparing the treatment of “Homeland Americans” to the treatment of “nonresidents”
*A review of what what the “transition tax” actually is may be found at the bottom of this post.
This post is for the purpose of the arguing that, as applied to those who live outside the United States, payment of the “transition tax” in 2018, is the financial equivalent to participation in 2011 OVDI (“Offshore Voluntary Disclosure Program”).
 


Seven Reasons Why The U.S. Transition Tax as applied to “nonresidents” is similar to the “Offshore Voluntary Disclosure Program As Applied To “Nonresidents”. In both cases there are benefits to Homeland Americans and extreme detriments to “nonresidents”. These detriments amount to a punishment for living outside the United States and becoming a “tax resident” of another country.
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