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.
In the absolute height of hypocrisy, @RepBrianHiggins claims "Good Americans should not have a Canadian tax imposed on them!" Suggest listening to this outrageous and offensive interview in its entirety. https://t.co/MxVsHivdHE via @WBEN
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) November 1, 2023
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:
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”