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The Canada-U.S. Tax Treaty Does Not Protect From Tax Liability



Dewees 1: The Canada-U.S. tax treaty does NOT protect Canadians from U.S. tax liability but does mean that Canada will NOT assist the U.S. in collection!

There are certainly benefits to being a Canadian citizens. Perhaps Canadian citizenship is the most important line of defense against the confiscation that is OVDP.

Can the common law “revenue rule” be used to stop the enforcement of U.S. “citizenship taxation” on non-U.S. residents?

What the United States calls “citizenship taxation” is actually U.S. taxation of certain citizens and residents of other countries. The U.S. claims the right to impose full U.S. taxation on the “world income” of certain people who do NOT even live in the United States.

Prologue: In August 2017, it was widely reported that the Canada Revenue Agency had assisted the IRS in enforcing a massive penalty ON A CANADIAN RESIDENT levied under the U.S. Internal Revenue Code. The penalty was imposed on that Canadian resident was for failing to report to the IRS, that he had been carrying on a Canadian business, through a Canadian Controlled Private Corporation. At the time of collection, the penalty was for approximately $133,000 U.S. dollars!

Q. How did this happen?

A. He entered the 2009 IRS OVDP (“Offshore Voluntary Disclosure Program”). Those who entered OVDP were basically “signing up” to pay penalties to the IRS. Those interested in reading about the horrific treatment of another Canadian resident, who tried to “do the right thing” by entering OVDP should read this.

These horrendous stories invite the question, “To what extent will other countries assist the United States in enforcing U.S. taxation on their own citizen/residents?” To put it simply, “Can the United States seek the assistance of another country in enforcing a U.S. tax debt on a resident of that other country?”

Let’s start with the common law “revenue rule”. The general rule is that the courts of one country will not enforce the tax debts of another country.

Like many other “common law” doctrines, the “revenue rule ” can be overridden by either a treaty or by a statute. The United States is working hard to override the “revenue rule” by treaty. There are many people (including U.S. tax lawyers) who do NOT like the “revenue rule”.

The United States is the only country that claims the right to impose taxation on ALL of the income of certain residents of other countries. Therefore, the United States would benefit greatly(and more than any other country) if the “revenue rule” ceased to exist. The United States attempts to override the “revenue rule” through “assistance in collection” treaty provisions. Yes, it’s true. The United States has “assistance in collection” as part of treaties entered into with: Canada, Sweden, Denmark, France and the Netherlands. This helps the United States more than it helps the treaty partner country.

What does the United States “give up” in return for the “assistance in collection” provisions in the treaty? As explained by McGill law professor Allison Christians, the “assistance in collection” provisions do NOT apply to the citizens of the “partner country”.

Meanwhile in Canada, what is the specific treaty provision that protects Canadian citizens from the treaty “assistance in collection” provision?

Article 22 (September 21, 2007 Protocol to the Canada U.S. Tax Treaty)

1. Subparagraph 8(a) of Article XXVI A (Assistance in Collection) of the Convention shall be deleted and replaced by the following:

(a) Where the taxpayer is an individual, the revenue claim relates either to a taxable period in which the taxpayer was a citizen of the requested State or, if the taxpayer became a citizen of the requested State at any time before November 9, 1995 and is such a citizen at the time the applicant State applies for collection of the claim, to a taxable period that ended before November 9, 1995

It appears that Canada will not assist the U.S. in enforcing a U.S. tax debt on any Canadian citizen who became a Canadian citizen before November 9, 1995. This appears to extend protection to a very large number of people!!

Epilogue: In August of 2017 it was widely reported that the Canada Revenue Agency had assisted the IRS in enforcing a massive penalty ON A U.S. CITIZEN RESIDENT IN CANADA. This penalty was levied under the U.S. Internal Revenue Code. The penalty was imposed on a Canadian resident for failing to report to the IRS, that he had been carrying on a Canadian business, through a Canadian Controlled Private Corporation. At the time of collection, the penalty was for approximately $133,000 U.S. dollars! TOO BAD THIS PERSON WAS NOT A CANADIAN CITIZEN!

The Reality of U.S. Citizenship Abroad

My name is John Richardson. I am a dual citizen. I am a 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.”

I am also a member of the American Citizens Abroad Professional Tax Advisory Council (PTAC). This is an advisory panel focused on assisting American Citizens Abroad in an FBAR and FATCA world.

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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