Category Archives: U.S. Canada Tax Treaty

Green card holders: the “tax treaty tiebreaker” and eligibility for Streamlined Offshore

Before you read this post!! Warning!! Warning!!

Before a “Green Card” holder uses the “Treaty Tiebreaker” provision of a U.S. Tax Treaty, he/she must consider what is the effect of using the “Treaty Tiebreaker” on:

A. His/her immigration status under Title 8 (will he/she risk losing the Green Card?)

B. His/her status under Title 26 (will he expatriate himself under Internal Revenue Code S. 7701(b)) and subject himself to the S. 877A “Exit Tax” provisions?

This is another in a series of posts on the “tax treaty tiebreaker” (which is a standard provision in most U.S. tax treaties). “Tax treaty tiebreakers” are rules that are used to assign a person’s “tax residency” to one country when an individual is a “tax resident” of both countries. In the context of U.S. tax treaties, “treaty tie breaker” rules are used when an individual is both:

1. A “U.S. person” for tax purposes (U.S. citizen or U.S. resident); and

2. A “tax resident” of another country.

It is very common to use tax treaties to assign “tax residency” to a country when an individual is  a tax resident of more than one country.

For example, Article IV of the Canada U.S. tax treaty provides for a rule to assign an individual’s “tax residency” to either Canada or the United States when an individual is a “tax resident” of Canada and and a tax resident of the the United States.

The “savings clause” prohibits U.S. citizens from using the “tax treaty tiebreaker” from avoiding being a “tax resident” of the United States.

Article IV of the Canada U.S. tax treaty 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.

It is clear that the “tax treaty tiebreaker” provision does NOT exclude Green Card Holders from it’s application. In fact, the impact of the “tax treaty tie breaker” may be the reason why the Canada Revenue Agency advises that “Green Card Holders” are NOT U.S. residents for FATCA reporting purposes.

The application of the “tax treaty tiebreaker” makes one a “nonresident alien, WITH RESPECT TO INCOME TAXATION, for U.S. tax purposes but NOT for other purposes (including FBAR and other information returns).

The “nonresident alien” and the 1040NR

Nonresident aliens file a 1040NR. A “nonresident alien” filing a 1040NR is filing to report and pay tax on income connected to the United States. A 1040NR is NOT used to report “non-U.S. income”. General information for the 1040NR is here. IRS Publication 519 – The U.S. Tax Guide For Aliens” is here.

Possible advantages for a “Green Card Holder” using the “tax treaty tiebreaker” to file the 1040NR

1. A Green Card Holder, by virtue of the “tax treaty tiebreaker”, would NOT be subject to U.S. taxation on “foreign income” which includes Subpart F income and PFIC income.

2. A Green Card Holder, by virtue of the “tax treaty tiebreaker”, would NOT be required to file Form 8938, Form 8621 and is subject to modified reporting requirements for Form 5471.

A reminder …

A Green Card Holder, using the “tax treaty tiebreaker” IS still a “U.S. Person”. He is a “U.S. Person” who is deemed to NOT be a U.S. person for the limited purposes of the “tax treaty tiebreaker”. He is a “U.S. Person”, who is NOT treated as a “U.S. Person” and  who is therefore able to file a 1040NR.

There are millions of “U.S. persons” (citizens and Green Card Holders) abroad who have not been filing U.S. taxes

Many of them are “coming into compliance” using the IRS Streamlined Foreign Offshore Program. As a general principle, “streamlined” is NOT available to “nonresident” aliens. This makes sense. After all, a “nonresident alien” is NOT a “U.S. person” for tax purposes.

Is “streamlined” available to a “U.S. Person”, who is filing a 1040NR, because he is treated as a “nonresident” pursuant to the “tax treaty tiebreaker”?

I suggest the answer comes from the instructions for streamlined which include:

“Eligibility for the Streamlined Foreign Offshore Procedures

In addition to having to meet the general eligibility criteria, individual U.S. taxpayers, or estates of individual U.S. taxpayers, seeking to use the Streamlined Foreign Offshore Procedures described in this section must: (1) meet the applicable non-residency requirement described below (for joint return filers, both spouses must meet the applicable non-residency requirement described below) and (2) have failed to report the income from a foreign financial asset and pay tax as required by U.S. law, and may have failed to file an FBAR (FinCEN Form 114, previously Form TD F 90-22.1) with respect to a foreign financial account, and such failures resulted from non-willful conduct. Non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.”

Let’s focus specifically on this part of the requirements:

“(2) have failed to report the income from a foreign financial asset and pay tax as required by U.S. law,”

If one is filing a 1040NR, then one is reporting ONLY U.S. source income. The whole point of the 1040NR would be to NOT have to report income from foreign financial assets. Think of the specific examples of Subpart F income and PFIC income.

Therefore, (although I will confess to never having analyzed this in terms of the streamlined rules) I suggest that one could NOT use the Foreign Offshore streamlined program to file the 1040NR.

It’s NOT that Green Card Holders who use the “tax treaty tiebreaker are NOT “U.S. Persons”. It’s that filing a 1040NR means that there is no reason to report income from a foreign financial asset (meaning that one fails the eligibility test for streamlined)!

John Richardson

Green card holders, the “tax treaty tiebreaker” and reporting: Forms 8938, 8621 and 5471

Before you read this post!! Warning!! Warning!!

Before a “Green Card” holder uses the “Treaty Tiebreaker” provision of a U.S. Tax Treaty, he/she must consider what is the effect of using the “Treaty Tiebreaker” on:

A. His/her immigration status under Title 8 (will he/she risk losing the Green Card?)

B. His/her status under Title 26 (will he expatriate himself under Internal Revenue Code S. 7701(b)) and subject himself to the S. 877A “Exit Tax” provisions?

Now, on to the post.

The “Treaty Tiebreaker” and information reporting …

The Internal Revenue Code imposes on “U.S. Persons” (citizens or “residents”):

1. The requirement to pay U.S. taxes; and

2. The requirement to file U.S.forms.

All “U.S. Persons” (citizens or residents) are aware of the importance of “Information Returns” AKA “Forms” in their lives.

What is a U.S. resident for the purposes of taxation?

This question is answered by analyzing Internal Revenue Code S. 7701(b). If one is NOT a U.S. citizen, a physical connection to the United States (at some time or another) is normally required for one to be a “tax resident” of the United States..

What happens if one is a “tax resident” of more than one country?

The “savings clause” ensures that U.S. citizens are the only people in the world who have no defence to being deemed a tax resident of multiple countries. U.S. citizens (“membership has its privileges”) are ALWAYS tax residents of the United States. U.S. citizens who reside in other nations, may also be “tax residents” of their country of residence.

In some cases, a U.S. “resident” (which includes a Green Card holder) may be deemed to be a “nonresident” pursuant to the terms of a U.S. Tax Treaty. A Green Card holder “may” be able to use a “Treaty Tiebreaker” provision to be treated as a “nonresident”.

Warning!! Warning!!

Before a “Green Card” holder uses the “Treaty Tiebreaker” provision of a U.S. Tax Treaty, he/she must consider what is the effect of using the “Treaty Tiebreaker” on:

A. His/her immigration status under Title 8 (will he/she risk losing the Green Card?)

B. His/her status under Title 26 (will he expatriate himself under Internal Revenue Code S. 7701(b)) and subject himself to the S. 877A “Exit Tax” provisions?
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Green card holders: the “tax treaty tiebreaker” rules and taxation of Subpart F and PFIC income

Before you read this post!! Warning!! Warning!!

Before a “Green Card” holder uses the “Treaty Tiebreaker” provision of a U.S. Tax Treaty, he/she must consider what is the effect of using the “Treaty Tiebreaker” on:

A. His/her immigration status under Title 8 (will he/she risk losing the Green Card?)

B. His/her status under Title 26 (will he expatriate himself under Internal Revenue Code S. 7701(b)) and subject himself to the S. 877A “Exit Tax” provisions?

Now, on to the post …

The Internal Revenue Code of the United States imposes (1) requirements for taxation (determining how much tax is payable by various individuals) and (2) requirements for information reporting returns. For “U.S. Persons Abroad” the “information reporting requirements” are far more onerous.
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Determining Tax Residency in Canada: Deemed resident vs. factual resident

Let’s begin with the law as stated in the Income Tax Act of Canada …

Taxation in Canada is governed by the Income Tax Act of Canada. Sections 1 and 2 of the Act read in part as follows:

Short Title

1 This Act may be cited as the Income Tax Act.

PART I Income Tax

DIVISION A Liability for Tax

2 (1) An income tax shall be paid, as required by this Act, on the taxable income for each taxation year of every person resident in Canada at any time in the year.

(This does NOT say that ONLY those “resident in Canada” are required to pay Canadian tax. In fact there are circumstances under which nonresidents of Canada are also required to pay different kinds of Canadian tax.)

Searching for the meaning of “resident in Canada” …

Tax Residency” is becoming an increasingly important topic. Every country has its own rules for determining who is and who is not a “tax resident” of that country. The advent of the OCED CRS (“Common Reporting Standard”) has made the determination of “tax residence” increasingly important.

At the risk of oversimplification, a determination of “tax residency” can be based on a “deeming provision” or decided by a determination “based on the facts”. Some countries base “tax residency” on both “deeming provisions” and a “facts and circumstances” test.

Tax Residency in Canada – “Deemed residence” or “ordinary residence based on the facts” …

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Citizenship-based reporting: Russia’s “citizenship reporting” requirements – will the United States be next?

Prologue – A law firm perspective …

As reported by Chelco Vat:

The law does not make dual citizenship illegal; it is merely a reporting requirement.

Federal Law No. 142-FZ on Amendment of Articles 6 and 30 of the Federal Law on Russian Federation Citizenship and Individual Regulations of the Russian Federation, which took effect on 4 August 2014, makes it a criminal offence for Russian nationals to conceal dual citizenship or long-term residence abroad.

Hmmmm … ONLY a reporting requirement you say …

The perspective of an individual subject to the citizenship-reporting requirement …

The above tweet references an article in the New York Times discussing Russia’s law that requires all Russians with a second foreign citizenship report that foreign citizenship to the Government.
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Is Form 8938 required by “Green Card Holders” who are nonresidents by “treaty tie breaker”? – Any exemption is the result of “IRS grace”

Summary:

The context: Form 8938 was created by the IRS to meet the reporting requirements mandated by Internal Revenue Code S. 6038D. S. 6038D was mandated by S. 511 of the HIRE Act.

On March 18, 2010 President Obama signed the HIRE Act into law. The HIRE Act had two targets. The first target was the Foreign Financial Institutions that were willing to do business with U.S. citizens. The second target was Americans citizens who attempted to do business with any “non-U.S. bank or other financial institution.

The first target – Foreign Financial Institutions: The HIRE Act introduced Chapter 4 of Subtitle A – AKA FATCA – into the Internal Revenue Code. Pursuant to Chapter 4 Foreign Financial Institutions are threatened with a 30% sanction for failing to “Review, Identify and Report” those who the U.S. claims as “U.S. persons“. The Canadian FATCA lawsuit, launched by the Alliance For The Defence of Canadian Sovereignty, is related to the reporting requirements imposed on the banks.

The second target – American citizens attempting to use Foreign Financial Institutions outside the United States: The second group is composed of “individuals” who are required to disclose information to the IRS. The HIRE Act imposed extraordinary reporting requirements on Americans abroad. The most visible – Form 8938 – is an intrusive form that is aimed at targeting “individuals”. The term “individuals” means every human life form on the planet.  The U.S. based “FATCA Legal Action” lawsuit (which was condemned by Democrats abroad), is a lawsuit that is primarily intended to attack the requirements imposed on individual Americans abroad.

Internal Revenue Code Section 6038D and “Foreign Asset Disclosure”

A previous post discussed the interaction among: the Internal Revenue Code, tax treaty tie breaker rules and whether a Green Card Holder is a U.S. resident for FATCA purposes. This post is to discuss the form 8938 requirement and how it applies to Green Card Holders (resident aliens) who are deemed by treaty to be “nonresidents” under a treaty “Tie Breaker” rule.

The statute – Internal Revenue Code Section 6038D – gives the “Secretary” (meaning IRS) the right to create specific exemptions. “Nonresident aliens” is one group that the IRS is allowed to specifically exempt from the form 8938 requirement. Green Card Holders are statutory “resident aliens” under S. 7701(b) of the Internal Revenue Code. Yet, in some cases “Green Card Holders” can be treated as “nonresident aliens” pursuant to a tax treaty.

What is a “Treaty Tie Breaker” rule?

It’s possible for a person to be treated as a “tax resident” of two countries. In this case a Tax Treaty can be used to determine in which country the person is a “tax resident”. For example Section 2 of Article IV of the Canada U.S. Tax Treaty says:

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.

(Note that the “Treaty Tie Breaker” rules are available to “Green Card” holders. The treaty “savings clause” prevents U.S. citizens from being treated solely as a resident of Canada.)

So, what do the IRS regulations say?

On December 29, 2014 the IRS removed the temporary regulations (which are described here) and issued final Form 8938 reporting rules. The final regulations, which took effect on December 29, 2014 (making them applicable for years 2014 and onward), make it clear that Green Card Holders, who pursuant to a treaty tie-breaker provision, are treated as “nonresidents” (nonresident aliens) are NOT required to file Form 8938.

Specifically, the IRS confirms that:

1. Dual resident taxpayers

A comment recommended an exemption from the section 6038D reporting requirements be included for an individual who is a dual resident taxpayer and who, pursuant to a provision of a treaty that provides for resolution of conflicting claims of residence by the United States and the treaty partner, claims to be treated as a resident of the treaty partner. In such a case, a dual resident taxpayer may claim a treaty benefit as a resident of the treaty partner and will be taxed as a nonresident for U.S. tax purposes for the taxable year (or portion of the taxable year) that the individual is treated as a nonresident. The final rule adopts this recommendation for a dual resident taxpayer who determines his or her U.S. tax liability as if he or she were a nonresident alien and claims a treaty benefit as a nonresident of the United States as provided in § 301.7701(b)–7 by timely filing a Form 1040NR, “Nonresident Alien Income Tax Return,” (or such other appropriate form under that section) and attaching a Form 8833, “Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b).” The Treasury Department and the IRS have concluded that reporting under section 6038D is closely associated with the determination of an individual’s income tax liability. Because the taxpayer’s filing of a Form 8833 with his or her Form 1040NR (or other appropriate form) will permit the IRS to identify individuals in this category and take follow-up tax enforcement actions when considered appropriate, reporting on Form 8938, “Statement of Specified Foreign Financial Assets,” is not essential to effective IRS tax enforcement efforts relating to this category of U.S. residents.

Why this makes sense …

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“A Proposal for Fair US Tax Treatment of Foreign Pensions” from @JackieBugnion and Paula Singer

Even in retirement Jackie Bugion writes the best arguments against citizenship taxation ever“. Other references to Ms. Bugnion’s work are here.

In this new post published on May 30, 2016 at Tax Analysts, Ms. Bugnion collaborates with U.S. tax lawyer Paula N. Singer to explain the problems experienced by Americans abroad who have pensions in their country of residence.

This new article explains:

1. The problem – how U.S. tax laws destroy the value of the “foreign pension” as a “pension” at all

2. The treatment of non-U.S. pensions under various U.S. tax treaties (underscoring now tax treaties are very different)

3. The proposal – how the Internal Revenue Code can be simply amended to fix this simple but painful problem.

Below you will find the PDF of this must read article. Please note that this article appears on CitizenshipSolutions.ca under the following conditions:

Permission is for this one use and is contingent on properly crediting the article to the respective authors and to Tax Analysts as the original publisher. Using the PDF attached above covers proper attribution. Any other requests would need to be addressed separately.

Bugnion-Singer (05-30-2016)

John Richardson

Analyze the new 2016 US Treasury Model Tax Treaty – What does it mean for your country?

The post referenced in the above tweet appeared at the Isaac Brock Society. You can read the post directly on their site. I am (with their kind permission) reproducing the post here. The primary value of the post is in the comments. I strongly suggest that you read the comments and add to this “treasure chest” of thoughts.

____________________________________________________________________________________________

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Exception to the “savings clause” – How the Canada U.S. Tax Treaty prevents “double taxation” of certain self-employment income

Those responsible for negotiating tax treaties with the United States should remember that:

It’s worth remembering that:

1. The contents of the “savings clause” will vary from treaty to treaty; a
2. Not all sections of the treaty will be subject to the “savings clause”.

Example of the Canada U.S. Tax Treaty used to PREVENT Double Taxation …

The following example comes from Olivier Wagner of “1040 Abroad” (reproduced with permission). It is a very interesting example because it involves an analysis of the interaction among:

(1) The savings clause in Article XXIX

(2) the principle against double taxation in Article XXIV

(3) the “Foreign Tax Credit” provisions in S. 904 of the Internal Revenue Code.

The basic  factual scenario involves a U.S. citizen living outside the United States who receives payment for consulting work inside the United States. I will let Oliver pick it up from here:

 

Now, being a tax geek, the question that comes to mind is: if a Canadian tax accountant (Canadian resident, US citizen) prepares tax returns in the US, will he have tax owing for that US sourced income?

Foreign Earned Income Exclusion (FEIE):

No luck here. IRC 911(a) excludes from taxation “foreign earned income” whereas IRC 911(b)(1)(A)  states “The term “foreign earned income” with respect to any individual means the amount received by such individual from sources within a foreign country or countries which constitute earned income attributable to services performed by such individual during the period described in subparagraph (A) or (B) of subsection (d)(1), whichever is applicable.” As such, income earned in the United States is not to be excluded under the FEIE

Foreign Tax Credit (FTC):

The foreign tax credit can only offset taxes arising from foreign sourced income, so at first look, no luck.

But then, as we note, we have several categories of income, to subdivide how the foreign tax cedit is allocated: General, passive and resourced by treaty – IRC 904(d)(6)(a) bingo !!!

Income resourced by treaty …

(6) Separate application to items resourced under treaties

(A) In general

If—

(i) without regard to any treaty obligation of the United States, any item of income would be treated as derived from sources within the United States,

(ii) under a treaty obligation of the United States, such item would be treated as arising from sources outside the United States, and

(iii) the taxpayer chooses the benefits of such treaty obligation,

subsections (a), (b), and (c) of this section and sections 902907, and 960 shall be applied separately with respect to each such item.

Hence we have the “resourced by treaty” FTC basket. In this case, we’ll use the US-Canada tax treaty. The analysis is a little lengthy so I put it in another post here.

So far so good. But, now we need to understand how the Canada U.S. Tax Treaty actually works to “resource” the U.S. income.

Olivier continues on with his analysis of the Canada U.S. Tax Treaty:

Article XXIX – (Keeping the Savings Clause in mind)

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);

This is the savings clause in which they’re saying that if you’re a US citizen, much of the tax treaty might as well not exist, except for a few articles mentioned in paragraph 3(a), which includes article XXIV (Elimination of Double Taxation), so article XXIV still applies to US citizens.

Article XXIV – (Exempt from the Savings Clause)

Elimination of Double Taxation

1. In the case of the United States, subject to the provisions of paragraphs 4, 5 and 6, double taxation shall be avoided as follows: In accordance with the provisions and subject to the limitations of the law of the United States (as it may be amended from time to time without changing the general principle hereof), the United States shall allow to a citizen or resident of the United States, or to a company electing to be treated as a domestic corporation, as a credit against the United States tax on income the appropriate amount of income tax paid or accrued to Canada; and, in the case of a company which is a resident of the United States owning at least 10 per cent of the voting stock of a company which is a resident of Canada from which it receives dividends in any taxable year, the United States shall allow as a credit against the United States tax on income the appropriate amount of income tax paid or accrued to Canada by that company with respect to the profits out of which such dividends are paid.

2. In the case of Canada, subject to the provisions of paragraphs 4, 5 and 6, double taxation shall be avoided as follows:

(a) subject to the provisions of the law of Canada regarding the deduction from tax payable in Canada of tax paid in a territory outside Canada and to any subsequent modification of those provisions (which shall not affect the general principle hereof)

(i) income tax paid or accrued to the United States on profits, income or gains arising in the United States, and

(ii) in the case of an individual, any social security taxes paid to the United States (other than taxes relating to unemployment insurance benefits) by the individual on such profits, income or gains

shall be deducted from any Canadian tax payable in respect of such profits, income or gains;

(b) subject to the existing provisions of the law of Canada regarding the taxation of income from a foreign affiliate and to any subsequent modification of those provisions – which shall not affect the general principle hereof – for the purpose of computing Canadian tax, a company which is a resident of Canada shall be allowed to deduct in computing its taxable income any dividend received by it out of the exempt surplus of a foreign affiliate which is a resident of the United States; and

(c) notwithstanding the provisions of subparagraph (a), where Canada imposes a tax on gains from the alienation of property that, but for the provisions of paragraph 5 of Article XIII (Gains), would not be taxable in Canada, income tax paid or accrued to the United States on such gains shall be deducted from any Canadian tax payable in respect of such gains.

3. For the purposes of this Article:

(a) profits, income or gains (other than gains to which paragraph 5 of Article XIII (Gains) applies) of a resident of a Contracting State which may be taxed in the other Contracting State in accordance with the Convention (without regard to paragraph 2 of Article XXIX (Miscellaneous Rules)) shall be deemed to arise in that other State; and

(b) profits, income or gains of a resident of a Contracting State which may not be taxed in the other Contracting State in accordance with the Convention (without regard to paragraph 2 of Article XXIX (Miscellaneous Rules)) or to which paragraph 5 of Article XIII (Gains) applies shall be deemed to arise in the first-mentioned State.

4. Where a United States citizen is a resident of Canada, the following rules shall apply:

(a) Canada shall allow a deduction from the Canadian tax in respect of income tax paid or accrued to the United States in respect of profits, income or gains which arise (within the meaning of paragraph 3) in the United States, except that such deduction need not exceed the amount of the tax that would be paid to the United States if the resident were not a United States citizen; and

(b) for the purposes of computing the United States tax, the United States shall allow as a credit against United States tax the income tax paid or accrued to Canada after the deduction referred to in subparagraph (a). The credit so allowed shall not reduce that portion of the United States tax that is deductible from Canadian tax in accordance with subparagraph (a). …

Getting to the conclusion …

A. Here the paragraph 4(a) says that Canada should allow a credit for “income tax paid in respect of profits, income or gains which arise (within the meaning of paragraph 3) in the United States”

B. Paragraph 3 says that we can disregard the savings clause for this purpose and that if we have profits, income or gains of a resident of a contracting state (Canada) which may not be taxed in the other contracting state (United Sates) in accordance with the Convention (without regard to paragraph 2 of Article XXIX (Miscellaneous Rules) “savings clause”), such profits, income or gains shall be deemed to arise in the first-mentioned State (Canada).

C. By virtue of “Article VII – Business Profits”, business profits from an individual or corporation resident of Canada which does not have a permanent establishment in the United States shall indeed not be taxed in the United States and are taxed in Canada.

(Article VII

Business Profits

1. The business profits of a resident of a Contracting State shall be taxable only in that State unless the resident carries on business in the other Contracting State through a permanent establishment situated therein. If the resident carries on, or has carried on, business as aforesaid, the business profits of the resident may be taxed in the other State but only so much of them as are attributable to that permanent establishment.)

D. As such, going back to paragraph 4(a), Canada should not allow any foreign tax credit with respect to such income (the business profits are deemed to be taxable only in Canada).

E. Going to paragraph 4(b), the United States shall allow a tax credit for the Canadian taxes with respect to such income.

Conclusion: Practically speaking as long as taxpayer remains a resident of Canada (as defined by Article IV), the actual location where work is performed doesn’t matter, income will be sourced to Canada, taxes will be paid to Canada and the US will allow a foreign tax credit against taxes arising from such income – meaning that in most cases there wouldn’t be any US tax owed.

“Coming Into Tax Compliance Book” – How Americans can come into U.S. tax compliance in a FATCA world

Are you “Coming To America” by entering the U.S. tax system as an American Abroad?

The “How To Come Into U.S. Tax Compliance” book for Americans abroad

John Richardson, LL.B, J.D.

I have contributed to establishing the new “Citizenship Taxation” site. As part of launching that site, I have written a series of posts providing relevant information (in a broad sense) about how Americans abroad, who did not know about their U.S. tax obligations, can come into U.S. tax compliance.

Sooner or later, it’s likely that many people will receive a FATCA letter. In your panic, you should be careful. There are a number of things Americans abroad should consider before consulting a lawyer or tax professional.

This series of posts developed from my “Educational Outreach” program for Americans abroad. It is an effort to respond in a practical way to the questions that people have.

The chapters of “Coming Into Compliance Book” are:

Chapter 1 – “Accepting Cleanliness – Understanding U.S. Citizenship Taxation – To remain a U.S. citizen or to renounce U.S. citizenship

Chapter 2 – “But wait, I can’t renounce U.S. citizenship if I’m not a U.S. citizen. How do I know if I am a U.S. citizen?”

Chapter 3 – “No matter what, I must come into U.S. tax compliance – Coming into U.S. tax compliance for those who have NOT been filing U.S. taxes

Chapter4 – “Oh no, I have attempted U.S. tax compliance by filing tax returns. I have just learned that I have made mistakes. How do I fix those mistakes?”

Chapter 5 – “I don’t want to renounce U.S. citizenship. How to live outside the United States as a U.S. tax compliant person

Chapter 6 – “I do want to renounce U.S. citizenship. This is too much for me. How the U.S. “Exit Tax” rules might apply to me if I renounce

Chapter 7 – “I really wish I could do retirement planning like a “normal” person. But, I’m an American abroad. I hear I can’t invest in mutual funds in my country of residence. The problem of Americans Abroad and non-U.S. mutual funds explained.

Chapter 8 – “We all have to live somewhere. Five issues – “The problem of Americans Abroad and non-U.S. real estate explained

Chapter 9 – “Receiving U.S. Social Security – #Americansabroad and entitlement to Social Security

Chapter 10 – “Paying into Social Security – #Americansabroad, double taxation and the payment of “Self-employment” taxes

Chapter 11 – “Saving the children – INA S. 301 – “Residence” vs. “Physical Presence” and transmission of US citizenship abroad

Chapter 12 – “Relinquishing citizenship and your IRA – bringing your IRA home

Chapter 13 – “Married filing separately” and the “Alien Spouse” – the “hidden tax” on #Americansabroad

Chapter 14 – “The Obamacare “Net Investment Income Tax” – Pure double taxation of #Americansabroad

Chapter 15 – “To be “FORMWarned is to be “FORMArmed” – It’s “FORM Crime” stupid!!

Chapter 16 – “Most “Form Crime” penalties can be abated if there is “reasonable cause”

Chapter 17 – “How to get “credit” for taxes (foreign) paid to your country of residence

Chapter 18 – “I don’t pay taxes in the country where I live. Can I “exclude” my foreign income from the U.S. tax return?

Chapter 19 – “Is it better to take the “Foreign Tax Credit” or the “Foreign Earned Income Exclusion” – a discussion

Chapter 20
– “The child tax credit: take it, leave it or how to take it

Chapter 21 – “How #Americansabroad can continue to use the #IRA as a retirement planning vehicle

Chapter 22 – “To share or not to share” – Should a U.S. citizen share a bank account with a “non-citizen AKA alien spouse?

The “Coming Into Compliance Book” is designed to provide an overview of how to bring some sanity to your life.

 Coming to America

You may remember the old Eddie Murphy movie about “Coming To America”.

Welcome to the confusing and high stakes rules for U.S. taxation and Americans abroad.

The United States has the most complex, confusing, most penalty ridden and most difficult anti-deferral regime in the world. McGill Professor Allison Christians has noted that Americans abroad are both:

“deemed to be permanently resident in the United States for tax compliance and financial reporting purposes” …

and are

“subject to the most complex aspects of the U.S. tax code regardless of any activity in the United States, and facing extraordinary compliance costs and disclosure risks even for nil returns”

Although Americans abroad are deemed to be resident in the United States, their assets are treated as “offshore”. In addition Americans abroad are subject to taxation in their country of residence.

All of this means that:

1. Americans abroad are subject to the worst and most punitive aspects of the U.S. tax system (there is no Homelander who is treated as badly as an American abroad); and

2. Denied most benefits of the tax systems of their country of residence.

To put it simply, Americans abroad get the worst of all possible tax systems.

The most horrific aspects of the U.S. tax system are saved for Americans abroad. Prepare to be shocked. As one commenter at the Isaac Brock Society site recently said:

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