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

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

Introduction

This is a continuation of the first post discussing the applicability of Canada’s vacant home taxes to U.S. residents. The first post is here.

You can see the complete twitter thread here.

A recent post describes how various Canadian Underused and Vacant property taxes might apply to unsuspecting U.S. residents (Toronto, Vancouver and Ottawa) and U.S. citizens (Canada’s Underused Property Tax).

Taxes that apply to ALL owners of property

The Toronto, Vancouver and Ottawa taxes apply to ALL owners (regardless of citizenship or residence) of residential property. Although these taxes apply to all owners, some U.S. citizen/residents have argued that they are disguised taxes on being American. The broad scope of these taxes makes them difficult to challenge.

Taxes that apply to property owners based on citizenship or immigration status

Interestingly Canada’s Underused Property Tax, by its express terms applies based on “citizenship” and/or “immigration status”. Specifically, it applies to people who are neither citizens nor permanent residents of Canada. In the same way that the United States imposes taxes on people based on and only on the status of being a U.S. citizen or permanent resident of the United States (Green Card holder), Canada’s Underused Vacant Property Tax is based on NOT being a citizen or permanent resident of Canada. Significantly, certain provincial human rights codes (presumptively) prohibit discrimination based on citizenship. The first case decided by the Supreme Court of Canada (Andrews) interpreting S.15 of Canada’s Charter of Rights struck down a British Columbia statute requiring Canadian citizenship to practise law in British Columbia. In 1974 – In Re Griffiths – the U.S. Supreme Court struck down a similar Connecticut provision requiring U.S. citizenship to be admitted to the bar in Connecticut. In the United States, classifications based on citizenship/alienage are “suspect classifications” and presumptively unconstitutional. Canada’s laws and judicial decisions are generally hostile to classifications based on citizenship.

To be clear: classifications based on citizenship clearly attract judicial scrutiny!

Enter Congressman Brian Higgins

Congressman Higgins represents voters in Upstate New York. Apparently a number of his constituents own property in Canada. Interestingly, the Congressman has NOT voiced any objections to Toronto’s vacant home tax. His objections are aimed at Canada’s Underused Property Tax. He frames his objection in various ways. His objection appears to be based principally on the fact that the Canadian tax targets individuals who are neither Canadian citizens nor permanent residents of Canada. As reported by American Expat Finance, he began registering his objection to the Canadian tax at least as early as 2021. U.S. citizens subject to the tax are required to file the return and pay the tax (1% of the value of the property) by April 30, 2023. As a result, the Congressman’s objections have in recent days become more public and more urgent. On February 15, 2023 he issued a press release which included:

Congressman Says New Tax is Both Offensive & a Violation of Binational Agreements

Congressman Brian Higgins (NY-26) is calling on the Biden Administration to address Canada’s Underused Housing Tax in upcoming discussions with the Government of Canada. The new 1% tax on “vacant or underused housing” owned by non-resident, non-Canadians is hitting Americans, many of whom have contributed to Canada’s economy and owned cottages in Canada and for generations, especially hard.

In a letter to U.S. Secretary of State Antony Blinken, Rep. Higgins writes, “At a time when encouraging cross-border travel and economic activity should be prioritized as both countries recover from the COVID-19 pandemic, this is an unnecessary burden and bad faith action by the Government of Canada, which violates the United States-Mexico-Canada Agreement (USMCA) as well as longstanding tax treaties. In your upcoming conversations with the Government of Canada, I request that objecting to this tax is a high priority.”

Rep. Higgins has heard from over 200 U.S. residents upset about the new tax, including over 165 who completed an online survey and dozens more who called and wrote to his office. Of the survey respondents, over 80% live in Western New York, about 10% live in Florida and others live across the U.S. including the states of South Carolina, Ohio, Virginia, Georgia, Pennsylvania, California, and Colorado. The majority own property in Fort Erie, Crystal Beach, Port Colborne, and Ridgeway in the province of Ontario. Many have been property owners in Canada for decades, with 42% of respondents having property in Canada for between 20 and 49 years, and 28% having their Canadian property for over 50 years.

In addition to the cost associated with the tax, many have expressed to Congressman Higgins frustration with the lack of information, clarity, and notification of the tax by the Government of Canada. The tax forms are due in Canada April 30th, but owners must first file to receive a tax identifier number. Failure to pay the tax comes with a minimum penalty of $5,000.

Higgins has objected to the Underused Housing Tax since it was first proposed in the Government of Canada’s Budget 2021, voicing opposition with the United States Trade Representative, the U.S. Department of the Treasury, and Canada’s Ambassador to the United States.

President Biden has announced plans to visit Canada for meetings with Prime Minister Trudeau and their Administrations in March.

Congressman Higgins serves on the House of Representatives Ways and Means Committee, which oversees U.S. Tax policy, and the Ways and Means Subcommittee on Trade, which has oversight of trade agreements like the USMCA. Higgins’ Western New York district, which includes the cities of Buffalo and Niagara Falls, borders southern Ontario. Higgins is co-chair of the Canada-U.S. Interparliamentary Group and the Northern Border Caucus.

Well, talk about the “pot calling the kettle black” …

The Congressman’s rage can be understood ONLY on the assumption that he doesn’t understand the principles of US citizenship taxation enforced by FATCA. He clearly doesn’t understand that the United States generally and the Democratic Party particularly have been on a frenzied campaign to impose U.S. citizenship-based income taxation on Canadian residents who were born in the United States. I don’t know whether double standards based on ignorance qualify as hypocrisy. But, the Congressman’s statements – in the context of U.S. citizenship taxation and FATCA – are nothing short of outrageous.

Congressman Higgins’s Allegation That Canada’s Underused Property Tax Is Offensive

Of course it is offensive. All taxes that are based on citizenship and immigration status are offensive. On the other hand, the United States makes both citizenship and immigration status a sufficient condition for U.S. tax residency. However, the offensive behavior of the United States is no justification for Canada behaving in the same way. Neither country should be imposing taxation based on citizenship.

Violation 1: Does Canada’s Underused Property Tax Violate The Canada/US Tax Treaty?

Article II of the Canada/US Tax Treaty includes:

Article II
Taxes Covered

1. This Convention shall apply to taxes on income and on capital imposed on behalf of each Contracting State, irrespective of the manner in which they are levied.
2. Notwithstanding paragraph 1, the taxes existing on March 17, 1995 to which the Convention shall apply are:

(a) in the case of Canada, the taxes imposed by the Government of Canada under the Income Tax Act;

The threshold question is whether Canada’s Underused Property Tax is a tax on capital. Turning to Article XXIII we find:

Article XXIII
Capital

1. Capital represented by real property, owned by a resident of a Contracting State and situated in the other Contracting State, may be taxed in that other State.

This appears to mean that:

1. Capital represented by real property, owned by a resident of the United States and situated in Canada, may be taxed in Canada.

Therefore, if the vacation homes of American residents are indeed “capital”, it appears that the tax treaty specifically provides that the homes may be taxed in Canada. (But, this is a very quick “back of the envelope” interpretation of this.)

Violation 2: Does Canada’s Underused Property Tax Violate USMCA?

Interestingly Article 32.3 of the USMCA agreement seems to create a presumption against tax provisions violating the USMCA agreement. It specifically includes:

2. Except as provided in this Article, this Agreement does not apply to a taxation measure.

3. This Agreement does not affect the rights and obligations of a Party under a tax convention. In the event of any inconsistency between this Agreement and a tax convention, that convention prevails to the extent of the inconsistency.

On the other hand, there are some exceptions (particularly with regard to Article 15 (Cross-Border Trade In Services) and Article 17 (Financial Services). See the *Appendix below.

In this context, it is interesting to ask the following questions:

Generally:

To what extent do/can the provisions of the Canada/US tax treaty violate the USMCA?

Without considering tax treaties, to what extent can tax laws independently violate the provisions of the USMCA?

If the Canada Underused Property Tax violates provisions of USMCA or the Canada/US tax treaty then would the general principles of U.S. citizenship taxation violate NAFTA and (the spirit) of the tax treaty?

Specifically:

Is the “saving clause” of the Canada U.S. tax treaty that allows the United States to impose U.S. taxation on Canadian residents with U.S. citizenship consistent with the terms and spirit of the USMCA?

Does the U.S. punitive taxation and treatment of Canadian mutual funds as PFICs violate any rules under the USMCA? After all, the rules certainly make it impossible for Canadian mutual funds to be sold to U.S. citizens.

Does the imposition of huge FATCA compliance costs on Canadian banks (that are not imposed on U.S. banks) violate any provision of the USMCA?

There are many more questions that should be asked. I hope that Congressman Higgins is willing to explore these important questions.

Conclusion:

Congressman Higgins’s core argument is that Canada should NOT be imposing a tax on Americans that is based on citizenship. I agree with him! Of course, the United States shouldn’t be imposing taxes on Canadians based on citizenship either. Citizenship should NOT be the basis for any form of taxation by either country, under any circumstances!

It’s conceivable that his fight against Canada’s Underused Property Tax could result in Congressman Higgins being “accidentally the American” who helps “accidental Americans“. He could well be the new champion in the fight against citizenship taxation!

Citizenship taxation is taxation that is based primarily on “circumstances of birth” and NOT on “circumstances of life”. Surely the Congressman would believe that ALL taxes based on citizenship are unjust!

A warm welcome to Congressman Higgins! I think he will be surprised at where this discussion could potentially go!

*Appendix – CUSMA – Canada US Mexico Agreement

The general agreement is found here:

https://www.international.gc.ca/trade-commerce/trade-agreements-accords-commerciaux/agr-acc/cusma-aceum/text-texte/toc-tdm.aspx?lang=eng

Of particular interest is Article 32.3 which speaks to matters of taxation …

Article 32.3: Taxation Measures

1. For the purposes of this Article:

designated authorities means:

(a) for Canada, the Assistant Deputy Minister for Tax Policy, Department of Finance;
(b) for Mexico, the Deputy Minister of Revenue of the Ministry of Finance and Public Credit (Subsecretario de Ingresos); and
(c) for the United States, the Assistant Secretary of the Treasury (Tax Policy),

or any successor of these designated authorities as notified in writing to the other Parties;

tax convention means a convention for the avoidance of double taxation or other international taxation agreement or arrangement; and

taxes and taxation measures include excise duties, but do not include:

(a) a “customs duty” as defined in Article 1.5 (General Definitions); or
(b) the measures listed in subparagraphs (b), (c), and (d) of that definition.

2. Except as provided in this Article, this Agreement does not apply to a taxation measure.

3. This Agreement does not affect the rights and obligations of a Party under a tax convention. In the event of any inconsistency between this Agreement and a tax convention, that convention prevails to the extent of the inconsistency.

4. In the case of a tax convention between two or more Parties, if an issue arises as to whether an inconsistency exists between this Agreement and the tax convention, the issue shall be referred to the designated authorities of the Parties in question. The designated authorities of those Parties shall have six months from the date of referral of the issue to make a determination as to the existence and extent of any inconsistency. If those designated authorities agree, the period may be extended up to 12 months from the date of referral of the issue. No procedures concerning the measure giving rise to the issue may be initiated under Chapter 31 (Dispute Settlement) or, as between the United States and Mexico, Annex 14-D (Mexico-United States Investment Disputes), or Annex 14-E (Mexico-United States Investment Disputes Related to Covered Government Contracts) until the expiry of the six month period, or any other period as may have been agreed by the designated authorities. A panel or tribunal established to consider a dispute related to a taxation measure shall accept as binding a determination of the designated authorities of the Parties in question made under this paragraph.

5. Notwithstanding paragraph 3:

(a) Article 2.3 (National Treatment) and other provisions of this Agreement that are necessary to give effect to that Article apply to taxation measures to the same extent as does Article III of the GATT 1994, including its interpretative notes; and
(b) Article 2.15 (Export Duties, Taxes, or other Charges) applies to taxation measures.

6. Subject to paragraph 3:

(a) Article 15.3 (National Treatment) and Article 17.3 (National Treatment) apply to a taxation measure on income, on capital gains, or on the taxable capital of corporations that relate to the purchase or consumption of particular services, except that this subparagraph does not prevent a Party from conditioning the receipt or continued receipt of an advantage that relates to the purchase or consumption of particular services on requirements to provide the service in its territory;
(b) Article 14.4 (National Treatment), Article 14.5 (Most-Favored-Nation Treatment), Article 15.3 (National Treatment), Article 15.4 (Most-Favored-Nation Treatment), Article 17.3 (National Treatment), Article 17.4 (Most-Favored-Nation Treatment), and Article 19.4 (Non-Discriminatory Treatment of Digital Products) apply to a taxation measure, other than a taxation measure on income, on capital gains, on the taxable capital of corporations, or taxes on estates, inheritances, gifts, and generation-skipping transfers; and
(c) Article 19.4 (Non-Discriminatory Treatment of Digital Products) apply to a taxation measure on income, on capital gains, or on the taxable capital of corporations that relate to the purchase or consumption of particular digital products, except that this subparagraph does not prevent a Party from conditioning the receipt or continued receipt of an advantage relating to the purchase or consumption of particular digital products on requirements to provide the digital product in its territory,

but nothing in the Articles referred to in subparagraphs (a), (b), and (c) apply to:

(d) a most-favored-nation obligation with respect to an advantage accorded by a Party pursuant to a tax convention;
(e) a non-conforming provision of a taxation measure in existence as of the date of entry into force of NAFTA 1994;
(f) the continuation or prompt renewal of a non-conforming provision of a taxation measure in existence as of the date of entry into force of NAFTA 1994;
(g) an amendment to a non-conforming provision of a taxation measure in existence as of the date of entry into force of NAFTA 1994 to the extent that the amendment does not decrease its conformity, at the time of the amendment, with any of those Articles;
(h) the adoption or enforcement of a new taxation measure aimed at ensuring the equitable or effective imposition or collection of taxes, including a taxation measure that differentiates between persons based on their place of residence for tax purposes, provided that the taxation measure does not arbitrarily discriminate between persons, goods or services of the Parties;Footnote 4 
(i) a provision that conditions the receipt or continued receipt of an advantage relating to the contributions to, or income of, a pension trust, pension plan, or other arrangement to provide pension, or similar benefits, on a requirement that the Party maintain continuous jurisdiction, regulation, or supervision over that trust, plan, fund, or other arrangement; or
(j) an excise duty on insurance premiums to the extent that the excise duty would, if levied by another Party, be covered by subparagraphs (e), (f), or (g).

7. Subject to paragraph 3, and without prejudice to the rights and obligations of the Parties under paragraph 5, Article 14.10.2 (Performance Requirements), Article 14.10.3, and Article 14.10.4 apply to a taxation measure.

8. Article 14.8 (Expropriation and Compensation) applies to a taxation measure. However, as between the United States and Mexico, no investor may invoke Article 14.8 (Expropriation and Compensation) as the basis for a claim if it has been determined pursuant to this paragraph that the measure is not an expropriation. An investor of the United States or Mexico that seeks to invoke Article 14.8 (Expropriation and Compensation) with respect to a taxation measure must first refer to the designated authorities of the Party of the investor and the respondent Party, at the time that it gives its notice of intent under Article 14.D.3 (Submission of a Claim to Arbitration), the issue of whether that taxation measure is not an expropriation. If the designated authorities do not agree to consider the issue or, having agreed to consider it, fail to agree that the measure is not an expropriation within a period of six months of the referral, the investor of the United States or Mexico may submit its claim to arbitration under, as applicable, Annex 14.D.3 (Submission of a Claim to Arbitration) or paragraph 2 of Annex 14-E (Mexico-United States Investment Disputes Related to Covered Government Contracts).

Have a question? Contact John Richardson, Citizenship Solutions.

The Reality of U.S. Citizenship Abroad

My name is John Richardson. I am a Toronto based lawyer – member of the Bar of Ontario. This means that, any counselling session you have with me will be governed by the rules of “lawyer client” privilege. This means that:

“What’s said in my office, stays in my office.”

The U.S. imposes complex rules and life restrictions on its citizens wherever they live. These restrictions are becoming more and more difficult for those U.S. citizens who choose to live outside the United States.

FATCA is the mechanism to enforce those “complex rules and life restrictions” on Americans abroad. As a result, many U.S. citizens abroad are renouncing their U.S. citizenship. Although this is very sad. It is also the reality.

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

  • Norman Benoit

    If a dual citizen who lived, worked and contributed to a pension plan in Canada moved back to the US he will receive a slips showing pension received without separating taxable income from total income. These amounts are not available even though the IRS allows only the income earned in the pension plan to be reported as the tax payer did not benefit from the contribution
    There is also an other occasion where dual citizens residing in Canada are unfairly treated in Canada. If a dual citizen living, working in the US and contributed to an IRA (not a 401K),moves to Canada he will experience double taxation. As the contributions were not taxed at time the time of of contributing, he will be taxed on withdrawals including income earned on his US return. He will again be taxed on the same withdrawals even though he did not deduct the amounts in Canada as he did not have to make a Canadian tax return as he was not living in Canada. Foreign tax credits in Canada on US pensions is limited to 15% and Canadian tax rated are greater than that.

    • John Richardson

      Norman – thanks for your message. With respect to your comments on the taxation of the IRS I am not sure if you aware that there is a provision in the Canada/U.S. Tax Treaty that deals specifically with a U.S. citizen moving to Canada with an IRA. In any case, here is a link to a series of articles that I have written on this topic:

      http://citizenshipsolutions.ca/category/roth-ira/

      With respect to the pension reporting I suggest that you figure out how to apportion the difference between income and return of taxed contributions yourself.

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