U.S. Imposes Full Taxation On Canadians—Tax Reform 2017

The United States is “making noises” about “tax reform”. Senator Orrin Hatch requested submissions from “stake holders” on what should be included in tax reform. He has clearly received (as did the Ways and Means Committee in 2013 and the Senate Finance Committee in 2015) many suggestions advocating the repeal of “citizenship-based taxation”.

As noted at a site compiling the submissions of those affected by U.S. extra-territorial taxation:

In January 2015 the US Senate Finance Committee (SFC) launched five working groups to study and propose reforms to the United States Tax Code, including one devoted to individual taxation and another to international taxation. In March, the SFC called for public submissions to the five working groups. On April 29 those submitted documents became publicly available on the SFC website.

Of the 347 submissions to the International Taxation working group, 245 (71%) were about issues of concern to US persons living outside the USA, the rest being about corporate taxes. Of the 448 submissions to the Individual Taxation working group, 215 (48%) focused on taxation of persons outside the USA.

In July 2015 the International Taxation working group released its official report. Almost the entirety of its 82 pages is devoted to corporate taxes, with a mere three sentences tucked into its very last pages, acknowledging the existence of flesh and blood individuals, but offering no recommendations.

Hundreds of letters from Americans abroad, including many brave enough to incriminate themselves for the sake of amending unjust laws, but also scores of extensively – researched proposals for international tax reform, as well as documents from respected organizations, including the American Chamber of Commerce, Republicans Overseas, and Democrats Abroad, were all summarily ignored.

Changing the language of the discourse

Clearly the effectiveness of “repeal citizenship-based advocacy” will depend on how “citizenship-based taxation is described”. All submissions (of which I am aware) describe the intolerable impact of “citizenship-based taxation” on AMERICAN CITIZENS abroad (they are discriminated against in many aspects of life). It is not unusual for Americans abroad to pay higher U.S. taxes than a comparably situated Homeland American. As noted recently by Representative Holding, U.S. “citizenship-based taxation” impacts U.S. employers (it’s simply too expensive to incur the additional U.S. tax cost of hiring Americans).

Examples of this “U.S.-centric” perspective are represented by the able submissions of Jackie Bugnion, ACA (American Citizens Abroad) and Democrats Abroad (all of which argue strongly and effectively that the United States should stop imposing taxation on U.S. citizens who live in and pay taxes to other countries). Although these are all excellent submissions, none of them highlights the fact that U.S. “citizenship-based taxation” has a very large impact on the citizens and residents of other nations. Given the large number of “accidental Americans” and other kinds of “dual citizens”, this is no small matter. (I note also that the largest number and percentage of submissions regarding U.S. tax reform (in general) comes from those impacted by U.S. extra-territorial taxation and FATCA.)

I suggest that the phenomenon of “citizenship-based taxation” NOT be described exclusively from the perspective of U.S. citizens and U.S. interests. Furthermore, I suggest that the descriptive label of “Citizenship-based taxation” be avoided and a label that conveys the idea of  “Taxing the citizens and residents of other countries” be adopted.

What is an appropriate way of “labeling” (and thinking about) the uniquely American phenomenon of defining “tax residency” in terms of citizenship (and thereby imposing U.S. taxation in an extra-territorial manner)?

Because taxing the residents of other countries results in infringing the sovereignty of other countries and in the siphoning of capital from those countries to the USA, perhaps an appropriate label would be:

“U.S. Tax Colonization”  – (One person at a time)

Adopting a “new label” may change the terms of the discussion.

Descriptive label 1 – “Citizenship-based taxation”: Some (the overwhelming majority) describe this phenomenon (which is unique to the United States) as “citizenship-based taxation”. Although true, this descriptive label is a very “U.S. centric” description. It accurately describes what takes place, but it ignores the practical reality of who it actually impacts and how it impacts those persons. It’s as though, a U.S. citizen is also a U.S. resident. It also ignores the fact that U.S. citizens who are resident/citizens of other countries pay taxes to those countries. (What? It is sometimes  a surprise to “Homeland Americans” that U.S. citizens who live in other countries are required to pay taxes to those other countries.)

Descriptive label 2 – “U.S. Tax Colonization”: This label accurately describes the actual impact of  “citizenship-based taxation”. It accurately reflects the reality that those U.S. citizens who do NOT live in the United States pay taxes to the countries where they live. The reality of defining “tax residency” in terms of “citizenship”, is that it forces the citizen/residents of other countries to comply with the full terms of the Internal Revenue code. (A  Canadian resident must pay taxes to the United States in addition to paying taxes to Canada.)

The use of citizenship as a sufficient condition for taxation is NOT a theoretical issue. It is a “real” problem with “real” consequences inflicted on those who are the citizens and residents of other countries. If you have read this far, you might stop and consider what it would be like to be simultaneously subject to the tax laws of two jurisdictions.

Independence Day – July 4, 2017

On July 4, 2017, Americans living inside the USA celebrated their independence and freedom. On that same day, I had meetings with SEVEN American dual citizens, living outside the United States. This “Group of Seven” were in various stages of renouncing their U.S. citizenship. Each of them was also a citizen and tax paying resident of another country. They varied widely in wealth, age, occupation, religion, and political orientation. Some of them have difficulty in affording the $2350 USD “renunciation fee” imposed by the U.S. Government. Some of the SEVEN identify as being American and some did NOT identify as being American. But each of them had one thing in common. They were renouncing their U.S. citizenship in order to gain the freedom that Americans have been taught to believe is their “birth right”.

I live in Toronto, Canada. I assist those who are American citizens living outside the United States to respond to the “layers upon layers” of rules coming from the Internal Revenue Code (and other pieces of extra-territorial legislation) that affect and attempt to control EVERY aspect of their lives. Although these people are usually citizens and residents of other countries, the United States claims the right to control almost all aspects of their lives BECAUSE IT CONSIDERS THEM TO BE U.S. CITIZENS. (It is significant that many of those who the U.S. considers to be its citizens do NOT consider themselves to be U.S. citizens.) In many cases, the best response is to renounce U.S. citizenship AKA commit “citizide” (the formal process of terminating U.S. citizenship).

The U.S. extraterritorial application of its “Tax, Form and Penalty” edicts, impacts most aspects of their lives, including either tax consequences and/or “reporting requirements coupled with penalties”. The Internal Revenue Code triggers either U.S. tax or U.S. reporting requirements (or both) on (without limitation): they way they carry on business, who they marry, the cost of divorce, the extent to which they are allowed to have pension plans, their opportunities for retirement and financial planning, how they plan for their death and more. YET, THESE PEOPLE ARE THE CITIZENS AND TAX PAYING RESIDENTS OF OTHER NATIONS!

Those who contemplate compliance with these “citizenship-based rules” learn that they must choose between compliance with the U.S. laws governing Americans abroad or the opportunity to engage in normal retirement planning. As any “expatriation lawyer” will confirm, they cannot have both.

I have authored numerous submissions which detail the “technicalities” for how the Internal Revenue Code, the Bank Secrecy Act and other U.S. laws restrict the life opportunities of Americans who live in other countries. The “technicalities” are less relevant. What is relevant is WHAT THE TECHNICALITIES mean in the lives of those they affect. Rather then repeat the “technicalities” (described in previous submissions) let me just say that:

The “tradition” (seriously the attempts to justify “citizenship-based taxation” as “sound tax policy” are laughable) of imposing EVERY section of the Internal Revenue Code on any “U.S. citizen” who lives outside the United States has resulted in a situation where the United States is inflicting the Internal Revenue Code on people who are TAX PAYING RESIDENTS OF OTHER NATIONS and who are ALMOST ALWAYS CITIZENS of those other nations.

Thoughts on U.S. tax policy and the “moral capital” of America

What the USA calls “citizenship-based taxation” (the U.S. tradition of requiring U.S. citizens who do NOT live in the United States to pay U.S. tax on their income earned outside the United States) is in effect a set of rules that require the resident/citizens of other nations to abide by the rules of the Internal Revenue Code.

The sheer number of submissions, from Americans abroad (to the House Ways and Means Committee and Senate Finance Committee  in 2013 and 2015) indicates that U.S. tax policies are creating severe hostility toward the United States. The United States simply cannot impose taxation on the citizens and residents of other nations (in effect siphoning capital from those nations) without creating ill will.

Renunciations of U.S. citizenship are “forced” and “increasing”

U.S. “citizenship-based taxation” has and will continue to drive (I believe “force”) renunciations of U.S. citizenship.

From a U.S. perspective this may not matter. That said, forcing people to renounce U.S. citizenship (at tremendous financial cost to themselves – including the possibility of the S. 877A Exit Tax) is one more circumstance fueling “anti-Americanism”. (The “Exit Tax” rules are so punitive that (when applicable) they will impose full U.S. taxation on the “present value” of Canadian pensions earned while the person was a resident of Canada!)

There is NOT a single circumstance where “anti-Americanism” can be good for the United States.

Those who fail to learn from history are doomed to repeat it

History (particularly American history) suggests that in the long run the citizens of other countries will NOT tolerate taxation from the United States.  Americans are taught that the American Revolution was based largely on unjust taxation from England.

History (particularly American history) demonstrates the problems of imposing one country’s citizenship on the citizens of other countries. Americans are taught that the War of 1812 was partially the result of the British claiming that U.S. citizens were really British citizens.

History (as described by tax historian Charles W. Adams) demonstrates that the “rise and fall of civilizations” is impacted by tax policy.

Recommendation for U.S. tax reform 2017

The United should not impose U.S. taxation on individuals who do not reside in the United States (unless the income has a U.S. source). The Internal Revenue Code should be amended to define “tax residency” in terms of “residence” (as does the rest of the world) and NOT citizenship.

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 “U.S. Imposes Full Taxation On Canadians—Tax Reform 2017

  • Your points are all well taken and should form the basis for the change in U.S. tax laws that you propose but only for the persons with the characteristics you describe (i.e., those that are truly “accidental citizens). From a tax policy standpoint, the departure tax provisions of Section 877A should continue to apply to the accrued but unrealized income of those U S residents (whether citizens or green card holders) whose citizenship or permanent residence is relinquished. But true “accidental US citizens” should be given a one-time option to relinquish such accidental citizenship without cost or future US tax consequence on accrued but unrealized foreign source–but not U S source–provided their U S citizenship was demonstrably “accidental” AND they can show they had no close physical contacts with the U S during the period of their wealth accumulation AND it was not from U S sources. Additionally, US citizens that take up permanent residence abroad should be subjected to a mark-to-market taxation upon departure, payable either upon departure or, with the posting of a bond for tax on intangibles) and a tax lein on or preferred mortgage on any real property, whereever located.

  • Ed – thanks for your comment.

    At the end you state:

    “Additionally, US citizens that take up permanent residence abroad should be subjected to a mark-to-market taxation upon departure, payable either upon departure or, with the posting of a bond for tax on intangibles) and a tax lein on or preferred mortgage on any real property, whereever located.”

    What you seem to be proposing is a “departure tax” payable at the point of ceasing to reside in the USA. Are you suggesting this to be a substitute for the current tax triggered by renunciation of citizenship or are you suggesting that this is some kind of additional tax.

    Under what circumstances do you think that non-U.S. assets (including pensions) that were acquired after somebody ceased to reside in the USA, should be subject to some kind of exit/departure tax?

    There are many U.S. citizens who are NOT strictly speaking “accidentals” but who have not had residential ties to the USA for many years and have mostly assets acquired after they left the USA.

    Thanks in advance.

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