Category Archives: U.S. Canada Tax Treaty

How Americans moving to Canada can maximize the use of their existing Roth IRA

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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 …

See the link in the above tweet here …

roth_IRA_in_Canada_compliance_approved-1 (1)

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?

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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

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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

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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.
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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 – Follow me on Twitter @Expatriationlaw

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

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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

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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

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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!

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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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Part 4: Responding to the Sec. 965 “transition tax”: Comparing the treatment of individuals who are US residents to US citizens living outside the USA

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Attorney Monte Silver has organized a worldwide petition to prevent the application of the “transition tax” and GILTI to “tax residents” of other countries. Please support him by participating. You will find his petition and further information here:

https://www.democratsabroad.org/remedy_repatriation_gilti_taxes

And now, back to our regularly scheduled programming.

Introduction

This is the fourth 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 three 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”

Part 3: Responding to the Sec. 965 “transition tax”: They hate you for (and want) your pensions!

Last night I was discussing the “transition tax” with an “individual” who is impacted by the tax AND is a Homeland American. He is a “tax resident” of ONLY the United States. For Homeland Americans who are subject to ONLY the U.S. tax system the “transition tax” is NOT a bad thing. For “non-residents” it is a terrible thing, which may destroy their retirements. The reason is that “nonresidents” are subject to both U.S. taxation and taxation in their countries of residence. The “transition tax” is an extremely egregious example of the terrible effects of the U.S. practice of imposing “worldwide taxation” on the residents of other countries. I hope that “the transition tax” will be the “straw that breaks the Camel’s back” and ends the U.S. practice of imposing taxation on people who don’t live in the United States.

After the discussion, I summarized our conversation in the following letter to him. Here is the letter.
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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"

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Beginning with the conclusion (for those who don’t want to read the post) …

For the reasons given in this post, I believe that there are grounds to argue that the imposition of the Sec. 965 “transition tax” on Canadian resident/citizens DOES violate the Canada U.S. tax treaty. It is my hope that this post will generate some badly needed discussion on this issue.
If you are an individual who believes you may be impacted by the “transition tax”, you should consider raising this issue with the Competent Authority. I would be happy to explore this with you.

Need some background on the Sec. 965 “U.S. transition tax”?
The following tweet references a 7 part video series about the Internal Revenue Code Sec. 965 “Transition Tax” created by John Richardson and Dr. Karen Alpert.


(Video 6 gives examples of what various approaches to “Transition Tax Compliance” might look like.)
A reminder of what the possible imposition of the “transition tax” would mean to certain Canadian residents

Interesting article that demonstrates the impact of the U.S. tax policy of (1) exporting the Internal Revenue Code to other countries and (2) using the Internal Revenue Code to impose direct taxation on the “tax residents” of those other countries.
Some thoughts on this:
1. Different countries have different “cultures” of financial planning and carrying on businesses. The U.S. tax culture is such that an individual carrying on a business through a corporation is considered to be a “presumptive tax cheat”. This is NOT so in other countries. For example, in Canada (and other countries), it is normal for people to use small business corporations to both carry on business and create private pension plans. So, the first point that must be understood is that (if this tax applies) it is in effect a “tax” (actually it’s confiscation) of private pension plans!!! That’s what it actually is. The suggestion in one of the comments that these corporations were created to somehow avoid “self-employment” tax (although possibly true in countries that don’t have totalization agreements) is generally incorrect. I suspect that the largest number of people affected by this are in Canada and the U.K. which are countries which do have “totalization agreements”.
2. None of the people interviewed, made the point (or at least it was not reported) that this “tax” as applied to individuals is actually higher than the “tax” as applied to corporations. In the case of individuals the tax would be about 17.5% and not the 15.5% for corporations. (And individuals do not get the benefit of a transition to “territorial taxation”.)
3. As Mr. Bruce notes people will not easily be able to pay this. There is no realization event whatsoever. It’s just: (“Hey, we see there is some money there, let’s take it). Because there is no realization event, this should be viewed as an “asset confiscation” and not as a “tax”.
4. Understand that this is a pool of capital that was NEVER subject to U.S. taxation on the past. Therefore, if this is a tax at all, it should be viewed as a “retroactive tax”.
5. Under general principles of law, common sense and morality (does any of this matter?) the retained earnings of non-U.S. corporations are first subject to taxation by the country of incorporation. The U.S. “transition tax” is the creation of a “fictitious taxable event” which results in a preemptive “tax strike” against the tax base of other countries. If this is allowed under tax treaties, it’s only because when the treaties were signed, nobody could have imagined anything this outrageous.
6. It is obvious that this was NEVER INTENDED TO APPLY TO Americans abroad. Furthermore, no individual would even imagine that this could apply to them without “Education provided by the tax compliance industry”. Those in the industry should figure out how to argue that this was never intended to apply to Americans abroad, that there is no suggestion from the IRS that this applies to Americans abroad, that there is no legislative history suggesting that this applies to Americans abroad, and that this should not be applied to Americans abroad.
7. Finally, the title of this article refers to “Americans abroad”. This is a gross misstatement of the reality. The problem is that these (so called) “Americans abroad” are primarily the citizens and “tax residents” of other countries – that just happen to have been born in the United States. They have no connection to the USA. Are these citizen/residents of other countries (many who don’t even identify as Americans) expected to simply “turn over” their retirement plans to the IRS???? Come on!

Some of these thoughts are explored in an earlier post: “U.S. Tax Reform and the “nonresident corporation owner”: Does the Section 965 “transition tax apply”?
And now, on to our “regularly scheduled programming”: The possible use of the U.S. Canada Tax Treaty to as a defense to the U.S. “transition tax”

In Part 1 of this series, I wrote: “Responding to the Section 965 “transition tax”: “Resistance is futile and compliance is impossible“. I ended that post with a reminder that the imposition of Section 965 “transition tax” on Canadian residents has (at least) four characteristics:

1.The U.S. Transition Tax is a U.S. tax on the “undistributed earnings” of a Canadian corporation; and
2. Absent deliberate and expensive mitigation provisions, the U.S. transition tax contemplates the “double taxation” of Canadian residents who hold U.S. citizenship.
3. The “transition tax” is a preemptive “tax strike” against a corporation in Canada. Historically Canada would have the first right of taxation over Canadian companies.
4. The U.S. Transition Tax creates a “fictitious” taxable event. It is not triggered by any action on the part of the shareholder.

The purpose of this post is to argue that the Canada U.S. tax treaty may be a defense to the application of the Section 965 “Transition Tax”
Part A – Exploring  what a “Subpart F” inclusion really is
Part B – The Canada U.S. Tax Treaty: Relevant provisions

Part C – Impact of the “Savings Clause”
Part D – The Interpretation of the tax treaty: WHO interprets the treaty and HOW is the treaty to be interpreted
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