Wish list for next tax treaty

Countries on an irregular basis establish or amend  tax treaties with other countries. The Canada US treaty is now in its fifth protocol.

Although I’ll mention a few items for the Canada US treaty, the discussion is open worldwide to treaties between the US and the country of your residence.

For the moment, I’ll assume the US refuses to budge on citizenship based taxation.

For the Canada US treaty, I’d like to see an exemption for Registered Disability Savings Plans ( RDSP), Registered Educational Savings Plans (RESP) and Tax Free Savings Plans (TFSA).

Of course, the IRS would likely develop long and complicated forms for reporting each of these items, but at least there would be a way to exempt them from the US taxman.

14 thoughts on “Wish list for next tax treaty

    1. calgary411

      @bubblebustin,

      Absolutely.

      Additionally, the significant difference in values of real estate in the many locations of the world is anything but fair in dealing with Net Worth and the 8854.

      Etc., etc.

      Your statement,

      “I seek an end to citizenship based taxation, either the US government’s or mine.”

      is the only sane remedy to the absurdity.

  1. Hazy2 Post author

    @ all
    It’s obvious from the comments that an end to US citizen based taxation is the one and only wish everyone has. I’m with you on that.

    In my original post, I was thinking of those who choose to remain compliant, hopefully so that they can renounce without being a covered expatriate.

    Regarding tax treaties, Tim’s comment “The thing to remember is that they cover a lot of topics that have little to do with residency vs. citizenship taxation” is correct as usual.

    My understanding of tax treaties is that they are more about international trade and investments than about personal tax issues. Corporate interests trump.

    The Fifth protocol did have some positives for Canada.

    One protocol, the Third, had such a negative effect on Canadian seniors receiving US Social Security benefits (SSB), that a new protocol, the Fourth, was quickly (for tax treaties) signed. One has to wonder if the Canadian negotiators were awake while working on the Third protocol.

    Without going into much detail, the Third protocol allowed the US to withhold 25.5% tax on SSB paid to Canadian residents. There had been no withholding before that. What made this worse was that most Canadians could not recover the tax by filing a 1040NR, for example. So, their pensions were suddenly reduced by over 25 % in January 1996.

    There was a hue and cry from affected pensioners, which led to the Fourth protocol. I remember seeing stories about this, but haven’t been able to find anything yet to share here.

    Below is an explanation of the Fourth protocol prepared by US Treasury. You may want to start at Article 2, paragraph 2.
    One thing of note is that in the discussion mention is made of the change back to residence based taxation.

    http://www.treasury.gov/resource-center/tax-policy/treaties/Documents/tecanada.pdf

    Reply
    1. recalcitrantexpat

      @Hazy2- I agree that tax treaties relate to more than just individuals. The thing is though that the U.S. will not sign a tax treaty on a point by point basis. Tax treaties must be adopted in their totalilty. And one point that the U.S. is absoultely not going to give up is the right to tax U.S. persons or what is better known as the “reserve clause”.

    2. Hazy2 Post author

      @ recalcitrantexpat

      I believe all treaties must be adopted in their totality. But the Fourth protocol was uniquely short.because it just mostly corrected “mistakes” made in the Third protocol.

      There is an OECD model treaty used as the basis for many international tax treaties. I’m no expert on these matters but I believe many counties use the model and tweak it to suit their unique circumstances.

      Of course, any treaty with the US is skewed by the reserve clause.

  2. OutragedCanadian

    @Calgary411, I’m with you. ‘Exemption’ implies a current state of being a US citizen – that is to be exempt is to be free of having to comply with something that others in the same situation must comply with. That’s not what I want. I don’t want exemption, I want recognition that the US cannot demand anything from me, as a Canadian citizen for 36 years. And, of course, the same for those who were born in Canada, such as your son. He’s a Canadian citizen, therefore the US should not be able to demand anything of him. And then the horrific and outdated policy of not being able to relinquish on his behalf wouldn’t even matter.
    The US govt should recognize we are Canadian and leave us the hell alone.

    Reply
    1. recalcitrantexpat

      I believe that it is more accurate to say that an exemption implies the existence of a taxable right that the U.S. can exercise over another country’s currency.
      I compare the U.S.’s imposition of citizenship based taxation to a local organized crime syndicate that comes through the neighborhood and demands protection money of the local merchants and residents. This is even though those of whom the protection money is demanded are already paying taxes to their local legitimate government for that very purpose.
      Now the local organized crime organisation actually has no legal right to demand anything of the merchants and residents but because the people must protect themselves against the ones who will harm them and not because the payment is owed by legal right.
      The criminals actually generate the danger that necessitates the payment. The fact that the payment is rendered is not proof of any legitimate claim but only that there real fear has been engendered in those who are objects of the threat.

  3. calgary411

    I don’t want to be exempted. I want to be free of US citizenship and I want every Parent / Guardian / Trustee entrusted with making decisions for the well-being of their family member to have the RIGHT to renounce US citizenship on behalf of the person they make those decisions for if they think renunciation of US citizenship is in the BEST INTEREST of the person they make decisions for. Nothing more — anything less is blatant discrimination and can severely affect that person’s well-being, especially in later life.

    The most egregious is for one with a developmental or other mentally incapacitating disability to be denied the benefits of Canada’s (or any other country’s similar) Registered Disability Savings Plan (RDSP). Every citizen, if not every resident, including US persons, of another country should, as well, be able to take equal advantage of the legal tax-savings plans Canada (and other countries) have put in place to encourage our taking responsibility for ourselves and our families through the TFSA (Tax Free Savings Plan) and helping build funds for our childrens’ education through the RESP (Registered Education Savings Plan).

    The RRSP and RRIF are already covered in the US – Canada Tax Treaty, but that doesn’t mean that the US cannot benefit from those Canadian retirement savings. The US is able to appropriate funds from US Persons in Canada (and other countries) as well as appropriate funds from those very countries of our residence. There’s likely a more descriptive word for that process.

    As well, the Exit Tax, is not an equal-opportunity penalty for our freedom from the US as Net Worth and capital gains can be skewed from one region within a country or from one country to another. Seems to me it is like comparing apples and oranges.

    Reply
  4. Tim

    The thing to remember with Tax Treaties is they cover a lot of topics that have little to due with residency vs citizenship taxation and in the case of countries such as the US and Canada they each have longstanding wish lists. One of the arguments I would make in the American context is that you can only have so many non negotiable positions. So to some degree if you want to take the position that citizenship based is non negotiable to the bitter end then at some level you have to cave on concievably everything else. Unfortionately it is very hard to quantify overall whether a treaty benefits one partner over the other or is completely in balance. One thing I will say is historically outside of citizenship based taxation the US has had very strong views on how international taxation should be designed especially in the corporate realm. As the dominant economic power in the second half of 20th century the US’ view typically prevailed at least within the Western World. However, if look at the most recent fifth protocol of the US Canada treaty in several areas the US has had to back away from long held position such as what the definition of a permanent establishment is and certain other isses regarding transfer pricing for example.

    Here are some links below that go into more detail about what I am talking about.

    http://taxpol.blogspot.com/2012/08/sheppard-on-transfer-pricing-clumsy.html

    http://taxpol.blogspot.com/2012/08/fleming-on-us-tax-treaty-shopping.html
    (The question I asked here is actually directly relevant to discussion here at the Sandbox i.e. whether citizen as used in the US Canada tax treaty should use the definition in US law in 1984 when the treaty was ratified or whether it should use the current definition).

    http://hodgen.com/apple-cash-tax-policy/

    Reply
  5. recalcitrantexpat

    I guess that an exemption would be nice but ultimately ememptions are only delayed taxation and the fact that they would still have to be “reported” and therefore involve “expensive” paper worod or else incur severe penalties would reduce the value of these accounts to resident Canadians.

    The only just and intelligent thing for the U.S. to do is to stop taxing the treasury of another sovereign nation.

    Reply
    1. Hazy2 Post author

      @ recalcitrant

      “The only just and intelligent thing for the U.S. to do is to stop taxing the treasury of another sovereign nation”

      Absolutely. What I would really like to see in any treaty is an acknowledgement that the US cannot tax permanent residents/ citizens of the other Contracting State except for possibly withholding taxes on income derived from the US, for which a foreign tax credit could be used.

      But, I’m assuming the US would not budge on this. If it did, it would likely have to change all its tax treaties, thereby removing the punishment inflicted on expats.

      I’m as angry and p***ed off as much as anyone here or at Brock, However I think we should concentrate, at least at this site, on what might be achievable through pressure on our own governments.

    2. recalcitrantexpat

      @Hazy2- What I think would have to happen is if all of the other countries would simply refuse to sign any tax treaty with the U.S. as long as it has citizenship based taxation and has the last in time rule.
      It may seem to be a foolish way to go but I believe that nothing short of that would get the fools in Congress to wake up to their own criminal activity. They have to be taught that the U.S. is NOT any better than any other nation and a tax treaty strike by the other nations of the world would do it.
      Of course it would hurt expats in the short term but it may be the price that will have to be paid in order to get the U.S. to stop its act of international theft and persecution.
      It isn’t as if the current treaties are really worth anything anyway. All that they are is a lot of show without any substance. Basically the U.S. gets to call all of the shots and all that everyone else gets to do is to hope for the best.

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