Are Green Card holders resident outside the USA “US persons” under the #FATCA IGA?

Introduction …

The above tweet references a comment that was left on Olivier Wagner’s Tax Samurai blog. Olivier is discussing an earlier post of mine called “When It Comes To FATCA, There Are Four Kinds Of Americans Abroad“.

I highly recommend his “post about my post”.

The comments discuss the question of:

Is a Green Card Holder resident in Canada a “U.S. Person” for the purposes of FATCA?

The last comment notes that the Canada Revenue Agency is advising U.S. Green Card Holders who are resident in Canada that they should NOT identify as “U.S. Persons” under the FATCA IGA.

The exact text of the comment reads:

Green Card holders in Canada are interpreting the following statement from the Government of Canada to mean that FATCA does NOT apply to them:

http://www.cra-arc.gc.ca/tx/nnrsdnts/nhncdrprtng/ndvdls-eng.html

“I hold a U.S. green card. How does this affect my tax residency?

If you are a green card holder (that is, a lawful permanent resident of the U.S.), the U.S. considers you to be a U.S. resident.

However, if you are a resident of Canada for tax purposes and do not hold U.S. citizenship, you should not identify yourself as a U.S. person to your Canadian financial institution.”

The actual IGA is here.

http://www.fin.gc.ca/treaties-conventions/pdf/FATCA-eng.pdf

The definition section includes “U.S. residents” which presumably means tax residents (which in the case of Green Card Holders may be affected by a Treaty election).

The plain reading of the statement on the CRA site will mean that Green Card holders resident in Canada will NOT identify as being U.S. tax subjects.

Note: I tried to leave a similar comment a moment ago, but it didn’t seem to show up. This is a duplicate. Feel free to pick one comment or the other.

– See more at: http://www.taxsamurai.com/index.php/2014/09/06/four-kinds-americans-abroad-response/#comment-7

The purpose of this post is to expand this discussion …

Let me take you through a step-by-step analysis in 9 parts.

Part 1. What does the Canada U.S. FATCA IGA actually say?

FATCA is a “hunt” for “U.S. Persons” (focusing on those born in the U.S.) and, according to the IGA:

1 (ee) The term “U.S. Person” means

(1) A U.S. citizen or resident individual,

This subparagraph 1(ee) shall be interpreted in accordance with the U.S. Internal
Revenue Code.

https://www.fin.gc.ca/treaties-conventions/pdf/FATCA-eng.pdf

Part 2. Who is a “U.S. Person” according to the Internal Revenue Code?

S. 7701(a) of the Internal Revenue Code tells us that:

(a) (30) United States person

The term “United States person” means—

(a) a citizen or resident of the United States,

(and more that is not relevant to this post)

Part 3. Is a Green Card holder considered to be a “resident” of the United States?

Well, let’s look to the Internal Revenue Code. The answer is found in S. 7701(b) of the Internal Revenue Code.

(b) Definition of resident alien and nonresident alien

(1) In general

For purposes of this title (other than subtitle B)—

(A) Resident alien

An alien individual shall be treated as a resident of the United States with respect to any calendar year if (and only if) such individual meets the requirements of clause (i), (ii), or (iii):

(i) Lawfully admitted for permanent residence

Such individual is a lawful permanent resident of the United States at any time during such calendar year.

(ii) Substantial presence test

Such individual meets the substantial presence test of paragraph (3).

First year election

Such individual makes the election provided in paragraph (4).

(B) Nonresident alien

An individual is a nonresident alien if such individual is neither a citizen of the United States nor a resident of the United States (within the meaning of subparagraph (A)).

https://www.law.cornell.edu/uscode/text/26/7701

Conclusion: Under the Internal Revenue Code, a Green Card Holder (whether living in the United States or not) is considered to be a “resident” for tax purposes.

Part 4. If a Green Card Holder is a “resident” of the U.S. under the provisions of the Internal Revenue Code, then isn’t a Green Card Holder a “U.S. Person” under the Canada U.S. FATCA IGA?

Interesting …

First, Canada has the right to interpret the IGA.

Second, Canada and the U.S. have a “Tax Treaty”. One of the purposes of the Tax Treaty is to determine “residence” if a person qualifies as a “resident” of both Canada and the U.S. for tax purposes.

Under U.S. law a Green Card holder is a “U.S. resident” for tax purposes. But, under Canadian law, a Green Card holder who is resident in Canada is also a Canadian resident for tax purposes. It’s totally unfair for a Green Card holder to be considered to be a “resident” of BOTH Canada and the United States for tax purposes, right? (Only U.S. citizens should be subjected to this level of unfairness, see below.)

Does the Tax Treaty resolve the question of “dual residency”? The answer is YES. You will find the answer in Article IV of the Treaty, which includes:

2. Where by reason of the provisions of paragraph 1 an individual is a resident of both Contracting States, then his status shall be determined as follows:

(a) he shall be deemed to be a resident of the Contracting State in which he has a permanent home available to him; if he has a permanent home available to him in both States or in neither State, he shall be deemed to be a resident of the Contracting State with which his personal and economic relations are closer (centre of vital interests);

(b) if the Contracting State in which he has his centre of vital interests cannot be determined, he shall be deemed to be a resident of the Contracting State in which he has an habitual abode;

(c) if he has an habitual abode in both States or in neither State, he shall be deemed to be a resident of the Contracting State of which he is a citizen; and

(d) if he is a citizen of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement.

Therefore, under the Canada U.S. Tax Treaty, a Green Card Holder who is “resident” in Canada, will be deemed to be a resident of Canada and NOT of the United States.

And this is why I believe that the Canada Revenue Agency provides the following advice to Green Card Holders who are “resident in Canada”:

I hold a U.S. green card. How does this affect my tax residency?

If you are a green card holder (that is, a lawful permanent resident of the U.S.), the U.S. considers you to be a U.S. resident.

However, if you are a resident of Canada for tax purposes and do not hold U.S. citizenship, you should not identify yourself as a U.S. person to your Canadian financial institution.

http://www.cra-arc.gc.ca/tx/nnrsdnts/nhncdrprtng/ndvdls-eng.html

(Note that in taking this position, the Government of Canada, is under the provisions of the tax treaty, “treating” Green Card Holders who are resident in Canada as residents of Canada and NOT of the United States. Note also that those Green Card Holders are NOT required to actually elect to claim the benefits of the treaty.)

Part 5. Oh my God! If Green Card Holders resident in Canada are NOT “U.S. Persons” under the FATCA IGA, then shouldn’t this apply to U.S. citizens resident in Canada too?

Not so fast. The Canada U.S. Tax Treaty contains a provisions commonly known as “the savings clause”. You will find it in Article XXIX, paragraph 2:

Miscellaneous Rules

1. The provisions of this Convention shall not restrict in any manner any exclusion, exemption, deduction, credit or other allowance now or hereafter accorded by the laws of a Contracting State in the determination of the tax imposed by that State.

2. Except as provided in paragraph 3, nothing in the Convention shall be construed as preventing a Contracting State from taxing its residents (as determined under Article IV (Residence)) and, in the case of the United States, its citizens (including a former citizen whose loss of citizenship had as one of its principal purposes the avoidance of tax, but only for a period of ten years following such loss) and companies electing to be treated as domestic corporations, as if there were no convention between the United States and Canada with respect to taxes on income and on capital.

3. The provisions of paragraph 2 shall not affect the obligations undertaken by a Contracting State:

(a) under paragraphs 3 and 4 of Article IX (Related Persons), paragraphs 6 and 7 of Article XIII (Gains), paragraphs 1, 3, 4, 5, 6(b) and 7 of Article XVIII (Pensions and Annuities), paragraph 5 of Article XXIX (Miscellaneous Rules), paragraphs 1, 5 and 6 of Article XXIX B (Taxes Imposed by Reason of Death), paragraphs 2, 3, 4 and 7 of Article XXIX B (Taxes Imposed by Reason of Death) as applied to the estates of persons other than former citizens referred to in paragraph 2 of this Article, paragraphs 3 and 5 of Article XXX (Entry into Force), and Articles XIX (Government Service), XXI (Exempt Organizations), XXIV (Elimination of Double Taxation), XXV (Non-Discrimination) and XXVI (Mutual Agreement Procedure);

(b) under Article XX (Students), toward individuals who are neither citizens of, nor have immigrant status in, that State.

http://www.fin.gc.ca/treaties-conventions/usa_-eng.asp

Just see the part that I bolded in paragraph 2. This is how the “savings clause” works. Because of the “Savings Clause” you do NOT get the benefits of the Tax Treaty if you are a U.S. citizen!

An injection of commentary: The ONLY people (if they are worth calling people) who should be justly considered to be tax residents of BOTH Canada and the United States for tax purposes are U.S. citizens. Clearly they should be punished for having been “Born In The USA” and having left the USA, right? (If you don’t note the sarcasm, this sentence is to emphasize the sarcasm!).

Understand that the Canada U.S. Tax Treaty does NOT prevent double taxation on U.S. citizens resident in Canada. The “savings clause” GUARANTEES double taxation of U.S. citizens resident in Canada. Any relief from double taxation comes NOT from the Treaty but from the Internal Revenue Code under the “Foreign Tax Credit” rules or under the “Foreign Earned Income Exclusion”!

Yet people have been conned into believing that the Treaty is to prevent double taxation on U.S citizens. Go figure!

Part 6. Wow the “tie breaker” rules in that Treaty are an amazing thing? But, what if I am a Green Card Holder in a country (1) has a FATCA IGA with the USA but that (2) does NOT have a “tax treaty” with the USA?

Interesting question.

First, the U.S. Treasury makes it clear that a country can have a FATCA IGA without having a Tax Treaty.

Second, a list of countries that the U.S. has a tax treaty with does NOT include all the countries in the world.

Who could have known? The Bahamas (which by the way is a great place to combine a vacation with a renunciation of U.S. citizenship) has a FATCA IGA but no tax treaty.

The relevant provision of the U.S. Bahamas IGA include:

1(aa) The term “U.S. Person” means a U.S. citizen or resident individual, a partnership or corporation organized in the United States or under the laws of the United States or any State thereof, a trust if (i) a court within the United States would have authority under applicable law to render orders or judgments concerning substantially all issues regarding administration of the trust, and (ii) one or more U.S. persons have the authority to control all substantial decisions of the trust, or an estate of a decedent that is a citizen or resident of the United States. This subparagraph 1( aa) shall be interpreted in accordance with the U.S. Internal Revenue Code.

https://www.treasury.gov/resource-center/tax-policy/treaties/Documents/FATCA-Agreement-Bahamas-11-3-2014.pdf

Looks like the Green Card Holder in the Bahamas is “SOL” a “U.S Person” under the U.S. Bahamas FATCA IGA.

In the same way that the U.S law treats U.S. citizens abroad differently depending on their country of residence, FATCA treats Green Card Holders abroad differently depending on their country of residence. #YouCantMakeThisUp

Part 7. Back to Green Card Holders in Canada and the Canada U.S. Tax Treaty

As always, there is “Good News” and “Bad News”.

First, the “Good News”.

You are being advised (with justification) that you are NOT a “U.S. Person” for the purposes of FATCA reporting. In other words, if your bank asks you the question:

“Are you a “U.S. Person”, the Canada Revenue Agency is advising you to answer in the negative.

Second, the “Bad News”

As a Green Card Holder you are considered to be a “U.S Person” under the Internal Revenue Code. In “people talk” this means that you must file U.S. tax returns. The only question is whether you file as a “U.S. resident – 1040” or if you take advantage of the provisions of the Tax Treaty by treating yourself as a “non-resident” of the U.S. and file as a “non-resident alien” – 1040-NR. This may involve making a formal election under the Tax Treaty to deem yourself to be a non-resident of the U.S. for tax purposes. You should get professional advice before filing as a “non-resident of the United States”. I repeat that you should get professional advice before taking advantage of the tax treaty and filing as a “non-resident” alien!

Why? Because …

1. If you file your U.S. tax return as a “non-resident” you may jeopardize your status as a lawful permanent resident of the United States (you might lose your Green Card); and

2. You may (according to the provision of S. 7701(b)(6) of the Internal Revenue Code have “expatriated yourself” and (are you ready for this?) be subject to the Exit Tax Provisions of the Internal Revenue Code.

So, PLEASE be careful …!

As per S. 7701(b)(6) of the Internal Revenue Code, ALL Green Card Holders are considered to be U.S. taxpayers. This harsh reality has been recently confirmed in the case of Topsnik. I will save you the trouble. Here is the case:

topsnikdiv.halpern.TC.WPD

Part 8. The “Oh My God” moment for Green Card Holders – How to cease being as U.S. tax subject …

I will discuss “Green Card Expatriation” (how to get rid of the Green Card SAFELY and possible tax consequences for so doing) in a future post. This future post will include the question of which Green Card Holders are subject to the S. 877A Exit Tax (a frightening prospect).

John Richardson

One thought on “Are Green Card holders resident outside the USA “US persons” under the #FATCA IGA?

  1. Dash1729

    It might be good to change the topic of this post to “former green card holders”. We are really talking here about former green card holders who have re-established Canadian residency including Canadian tax residency. Such a person is likely not considered–either by themselves or the DHS which issues green cards–to still be a green card holder. They are–in both their own eyes and that of the DHS–merely former green card holders.

    However they may nevertheless still be considered–by the IRS–to be a tax resident of the US and therein lies the problem. The left hand of the US government doesn’t always know what the right hand is doing.

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