Purpose and summary of this post:

Because Canada’s Underused Housing Tax treats nonresidents of Canada differently, based on their citizenship, the tax may violate the non-discrimination Article in many of Canada’s tax treaties (including the Canada U.S. tax treaty). Nonresidents of Canada are treated differently depending on whether or not they are Canadian citizens. For example a Canadian citizen who is a nonresident of Canada is “excluded” from the tax. But, a U.S. citizen who is a nonresident of Canada is “affected” by the tax. This appears to violate paragraph 1 of Article XXV of the Canada U.S. tax treaty (and other Canadian tax treaties).

Paragraph 1 of Article XXV of the Canada U.S. tax treaty:

1. Nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith that is more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances, particularly with respect to taxation on worldwide income, are or may be subjected. This provision shall also apply to individuals who are not residents of one or both of the Contracting States.

The question is what is meant by “in the same circumstances”. Relevant commentary from the OECD and from U.S. Treasury underscores that the words “particularly with respect to taxation on worldwide income” include whether the individual is taxed as a tax resident of the country or as a nonresident of the country.

Arguably all “nonresidents” of Canada are “in the same circumstances” (in relation to Canada’s tax system). Hence, “nonresidents” should not be treated differently depending on their citizenship.

Discussion and analysis follows.

Introduction – The Hypocrisy Of Representative Brian Higgins Continues

“Good Americans should NOT have a Canadian tax imposed on them!”

This is a recent statement from Congressman Brian Higgins. Click on the following tweet to listen to a recent interview with the Congressman.

https://twitter.com/ExpatriationLaw/status/1719850671501983811

The background …

As discussed here, Canada has a number of “Vacant Home Taxes“. Canada’s Underused Housing Tax is taxation based on citizenship and/or immigration status. (It is NOT based on “tax residency” and “tax residency” is irrelevant.) Notably the United States is the only major country in the world that makes citizenship and/or immigration status a sufficient condition for “tax residency”. In fact the United States imposes worldwide taxation and FATCA compliance on a approximately one million Canadian residents. Nevertheless, Congressman Higgins is certain of the injustice of Canada’s imposition of a citizenship based tax on U.S. residents. (The fact that the tax is based on property located in Canada appears to him to be irrelevant.) Furthermore, he seems intent on NOT acknowledging that:

“Good Canadians should not have an American tax imposed on them”.

Apparently what’s okay for the USA is somehow not okay for Canada.

But, hypocrisy aside …

Congressman Higgins’s objections hopefully will generate a discussion of the injustice of citizenship taxation generally. While ignoring the fact that the U.S. citizenship tax regime imposes direct U.S. taxation on the Canadian source income of millions of Canadian residents, Congressman Higgins is certain that Canada’s tax (which affects at most a few thousand Americans) violates the U.S. Canada tax treaty. In other words, Congressman Higgins’s hypocritical position appears to include:

“Only the United States has the right to impose taxation on the residents of other countries under the principle of citizenship taxation“.

In the spirit of affirming that Canada’s citizenship tax on Americans is in violation of the principle that only the United States has the right to engage in citizenship taxation, Congressman Higgins appeared as a witness before a Canadian Parliamentary Committee to discuss Canada’s Underused Housing Tax. The hearing took place in June 2023. During the hearing he raised the spectre of two possible legal challenges to Canada’s threat to the (presumptive) U.S. monopoly on citizenship taxation. The claim that Canada’s Underused Housing Tax violates the “non-discrimination” Article of the Canada U.S. tax treaty (and other Canadian tax treaties) is the subject of this post.

Food for thought:

The non-discrimination clause in the standard tax treaties suggests that certain kinds of citizenship taxation may be inappropriate. (How this reality bears on the question of U.S. citizenship taxation generally will be the subject of a separate post.)

Outline:

Part A – About Canada’s Underused Housing Tax
Part B – Representative Brian Higgins June 5, 2023 testimony to Canadian Parliamentary Committee – Includes “potential violations”
Part C – Thinking about the “non-discrimination” clause – A basic analysis
Part D – What does U.S. Treasury’s Technical Explanation suggest?
Part E – What about Canadian tax treaties with other countries? – Considering the Canada UK treaty
Part F – Appendixes – Various Tax Treaties

Part A – About Canada’s Underused Housing Tax

The statute and regulations are here. S. 2 of the statute deems certain individuals to be “excluded owners” of residential property. Those “excluded” from the application of the Act are defined to include:

(b) an individual who is a citizen or permanent resident, except to the extent that the individual is an owner of the residential property in their capacity as a trustee of a trust (other than a personal representative in respect of a deceased individual) or as a partner of a partnership;

To put it simply: Canadian “citizens” and those with the legal status of being “permanent residents” of Canada are excluded from the application of the statute. They are not subject to the tax. Those who are NEITHER Canadian citizens NOR permanent residents of Canada are (depending on the occupancy of the property) subject to the tax. This means that (in general) U.S. citizens, living in the United States, are subject (as”affected” owners) to the statute and may (depending on the occupancy of the property) be required to pay the tax.

To simplify the application of the law:

Canadian citizens and permanent resident owners (regardless of whether they are tax residents of Canada) are not subject to the tax.

U.S. citizens (who are neither Canadian citizens nor permanent residents) are subject to the tax.

To simplify the context:

Imagine four neighbors living in Buffalo, New York. They all drive Ford trucks. They all drink Budweisers. They all watch the Buffalo Bills on Sundays. They all work for the same company. They all file taxes jointly with their spouses. They all own seasonal homes (in their names only) located in Fort Erie Ontario, Canada (where they become “neighbours” instead of “neighbors”. Interestingly and completely arbitrarily, Canada’s Underused Housing Tax may or may apply to them. Let’s see how the tax might affect each of them.

Neighbor 1: Neither a Canadian citizen nor permanent resident of Canada – subject to the tax

Neighbor 2: A dual citizen of Canada and the United States – NOT subject to the tax

Neighbor 3: A U.K, citizen who has the legal status of “permanent resident” of Canada, but also a U.S. Green Card holder – NOT subject to the tax

Neighbor 4: A U.K. citizen living in the United States on an L visa – subject to the tax.

Notice that all four of these neighbors live in Buffalo, New York and are NOT tax residents of Canada. Neighbor 2 (Canadian citizen) and Neighbor 3 (permanent resident of Canada) are NOT subject to the tax. Neighbors 1 and 4 (neither Canadian citizens nor permanent residents of Canada are subject to the tax).

Part B – Representative Brian Higgins June 5, 2023 testimony to Canadian Parliamentary Committee – Includes “potential violations”

Excerpt from his testimony:

1. Potential Violations
2. United States – Mexico – Canada Agreement

A bedrock principle of USMCA (or CUSMA) is the requirement for all parties to not discriminate against each other or provide preferential treatment solely to domestic companies or citizens, including with respect to matters of internal taxation. The Underused Housing Tax does not apply equally to Canadian and U.S. citizens and therefore violates these principles.

Provisions that enact this sentiment are found throughout the text of USMCA. One example is below:

Article 15.3: National Treatment

1. Each Party shall accord to services or service suppliers of another Party treatment no less favorable than that it accords, in like circumstances, to its own services and service suppliers. 2. The treatment to be accorded by a Party under paragraph 1 means, with respect to a government other than at the central level, treatment no less favorable than the most favorable treatment accorded, in like circumstances, by that government to services and service suppliers of the Party of which it forms a part. 4

4 Executive Office of the President of the United States. Office of the United States Trade Representative. United States – Mexico – Canada Agreement. https://ustr.gov/sites/default/files/files/agreements/FTA/USMCA/Text/15- Cross-Border-Trade-in-Services.pdf

USMCA includes dispute settlement mechanisms should issues arise between parties to the agreement.

I’ve requested the United States begin the first step in the Chapter 31 dispute settlement process, consultations between the United States and Canada, to examine whether the UHT violates the agreement.

1. United States – Canada Income Tax Convention Tax Treaty of 1984

A plain text reading of the United States – Canada Income Tax Convention, a tax treaty entered into force on August 16, 1984, indicates the UHT is in violation of the non-discrimination article as well. 5

Article XXV: Non-Discrimination

1. Citizens of a Contracting State, who are residents of the other Contracting State, shall not be subjected in that other State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which citizens of that other State in the same circumstances are or may be subjected.

https://higgins.house.gov/uploadedfiles/uht_brief.pdf

In summary, Congressman Higgins’s raises two independent objections to Canada’s Underused Housing Tax. First, an allegation of a violation of the terms of the Canada-United States-Mexico Free Trade Agreement. Second, a violation of the Canada/U.S. tax treaty. (Note that Congressman Higgins includes the text of the original 1984 version. The paragraph was amended as part of the 2007 protocols.) This post will focus ONLY on the tax treaty argument and only in the context of Article XXV in the 2007 protocol.

Part C – Thinking about the “non-discrimination” clause – A basic analysis

Paragraph 1 of Article XXV of the Canada U.S. Tax Treaty – as amended in the 2007 protocol – reads as follows:

1. Nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith that is more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances, particularly with respect to taxation on worldwide income, are or may be subjected. This provision shall also apply to individuals who are not residents of one or both of the Contracting States.

Significantly, similar “non-discrimination” clauses (prohibiting tax discrimination based on nationality) are found in the 2017 OECD Model Tax Convention and a number of other Canadian tax treaties. Both OECD commentary and U.S. Technical explanations of the clause make it clear that the intent of the clause is to prohibit nationality based tax discrimination ONLY in “narrow circumstances”. My interpretation is that “nationality based tax discrimination” will violate the “non-discrimination” clause of treaties ONLY in the most egregious circumstances. In addition, tax differentiation based on residence vs. non-residence will create a presumption that there is no violation of the non-discrimination clause.

Excerpts from OECD commentary in the following thread confirm this point:

https://twitter.com/ExpatriationLaw/status/1720834996733129177

Nevertheless, I believe that Canada’s Underused Housing Tax may violate the treaty non-discrimination clause. Test it this way:

When considering two non-residents of Canada, a Canadian citizen will NOT be subject to the tax, but a U.S. citizen will be subject to the tax. The differing tax treatment is based ONLY on citizenship (or immigration status).

Canada’s Underused Housing Tax and the tax treaty non-discrimination clause

Let’s interpret this from a U.S. perspective with the assumption that a “citizen” is a “national”. A U.S. citizen residing in Buffalo, New York might interpret the clause as follows:

1. Citizens of the United States shall not be subjected in Canada to any taxation or any requirement connected therewith that is more burdensome than the taxation and connected requirements to which Canadian citizens in the same circumstances, particularly with respect to taxation on worldwide income, are or may be subjected. This provision shall also apply to individuals who are not residents of one or both of the Contracting States.
2. Does Canada’s Underused Housing Tax violate Paragraph 1 of Article XXV?
3. Because it treats Canadian citizen nonresidents of Canada differently from U.S. citizen nonresidents of Canada it may violate this treaty provision.

In Canada’s residence based tax system, both the nonresident Canadian and U.S. citizens are in the same circumstances.

Canada employs residence based taxation. U.S. citizens are “affected” and Canadian citizens are “excluded”. Notably from a Canadian perspective both are nonresidents of Canada and therefore “in the same circumstances” with respect to Canadian taxation. Therefore it may be possible to argue that Canada’s Underused Housing Tax violate the U.S. Canada tax treaty (and possibly tax treaties with other countries).

Part D – What does U.S. Treasury’s Technical Explanation suggest?

In a “citizenship taxation” jurisdiction – the USA – a nonresident U.S. citizen is NOT “in the same circumstances” as a nonresident Canadian citizen. This is because and only because the United States employs “citizenship taxation” and Canada employs “residence taxation”. For this reason the U.S. Treasury technical explanation of the 2007 protocol states:

Whether or not the two persons are both taxable on worldwide income is a significant circumstance for this purpose. For this reason, paragraph 1 specifically refers to taxation or any requirement connected therewith, particularly with respect to taxation on worldwide income, as relevant circumstances. This language means that the United States is not obliged to apply the same taxing regime to a national of Canada who is not resident in the United States as it applies to a U.S. national who is not resident in the United States. U.S. citizens who are not resident in the United States but who are, nevertheless, subject to U.S. tax on their worldwide income are not in the same circumstances with respect to U.S. taxation as citizens of Canada who are not U.S. residents. Thus, for example, Article XXV would not entitle a national of Canada residing in a third country to taxation at graduated rates on U.S.-source dividends or other investment income that applies to a U.S. citizen residing in the same third country. Because of the increased coverage of paragraph 1 with respect to the treatment of nationals wherever they are resident, paragraph 2 of this Article no longer has application, and therefore has been omitted.

In other words, this commentary suggests that U.S. Treasury’s position might be that:

1. If Canada discriminates based in citizenship (with respect to nonresidents) it is NOT okay because Canada has a system of residence-based taxation.
2. If the USA discriminates based on citizenship (between U.S. citizen nonresidents and Canadian nonresidents) it IS okay because the U.S. uses citizenship taxation.
3. If the USA discriminates based on citizenship (between U.K. nonresidents and Canadian nonresidents) it IS NOT okay because both Canadian and U.K. citizens are nonresidents with respect to U.S. taxation.

To put it another way:

Because the United States uses citizenship as a criterion for U.S. tax residency, the U.S. cannot violate the non-discrimination clause of the treaty with respect to U.S. citizens!

https://home.treasury.gov/system/files/131/Treaty-Canada-Pr2-TE-9-21-2007.pdf

Part E – What about Canadian tax treaties with other countries? – Considering the Canada UK treaty

The Canada U.K. tax treaty includes the following non-discrimination clause:

“Article 22

Non-Discrimination

1. The nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances are or may be subjected.”

https://www.canada.ca/en/department-finance/programs/tax-policy/tax-treaties/country/united-kingdom-convention-consolidated-1978-1980-1985.html

Conclusion:

Arguably Canada’s Underused Housing Tax violates the “Non-Discrimination” clause in all of Canada’s tax treaties!

Food for thought:

The non-discrimination clause in the standard tax treaties suggests that certain kinds of citizenship taxation may be in appropriate. How this reality bears on the question of U.S. citizenship taxation generally will be the subject of a separate post.

Part F – Appendixes – Various Tax Treaties

Appendix A – 1985 Canada U.S. Tax Treaty

ARTICLE XXV

Non-Discrimination

1. Citizens of a Contracting State, who are residents of the other Contracting State, shall not be
   subjected in that other State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which citizens of that other State in the same circumstances are or may be subjected.
   2. Citizens of a Contracting State, who are not residents of the other Contracting State, shall not be subjected in that other State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which citizens of any third State in the same circumstances (including State of residence) are or may be subjected.

https://www.irs.gov/pub/irs-trty/canada.pdf

1985 Canada U.S. Tax Treaty – Technical Explanation

ARTICLE XXV

Non-discrimination

Paragraphs 1 and 2 of Article XXV protect individual citizens of a Contracting State from discrimination by the other Contracting State in taxation matters. Paragraph 1 provides that a citizen of a Contracting State who is a resident of the other Contacting State may not be subjected in that other State to any taxation or requirement connected with taxation which is other or more burdensome than the taxation and connected requirements imposed on similarly situated citizens of the other State.

Paragraph 2 assures protection in a case where a citizen of a Contracting State is not a resident of the other Contracting State. Such a citizen may not be subjected in the other State to any taxation or requirement connected to taxation which is other or more burdensome than the taxation and connected requirements to which similarly situated citizens of any third State are subjected. The reference to citizens of a third State “in the same circumstances” includes consideration of the State of residence. Thus, pursuant to paragraph 2, the Canadian taxation with respect to a citizen of the United States resident in, for example, the United Kingdom may not be more burdensome than the taxation of a U.K. citizen resident in the United Kingdom. Any benefits available to the U.K. citizen by virtue of an income tax convention between the United Kingdom and Canada would be available to the U.S. citizen resident in the United Kingdom if he is otherwise in the same circumstances as the U.K. citizen.

https://www.irs.gov/pub/irs-trty/canatech.pdf

Appendix B – 2007 Protocol To Canada U.S. Tax Treaty

Article 20

1. Paragraph 1 of Article XXV (Non-Discrimination) of the Convention shall be deleted and replaced by the following:
2. Nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith that is more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances, particularly with respect to taxation on worldwide income, are or may be subjected. This provision shall also apply to individuals who are not residents of one or both of the Contracting States.
3. Paragraph 2 of Article XXV (Non-Discrimination) of the Convention shall be deleted, and paragraphs 3 to 10 of Article XXV shall be renumbered accordingly.

2007 Protocol To Canada U.S. Tax Treaty – Technical Explanation

Article 20

Article 20 of the Protocol revises Article XXV (Non-Discrimination) of the existing Convention to bring that Article into closer conformity to U.S. tax treaty policy.

Paragraphs 1 and 2

Paragraph 1 replaces paragraph 1 of Article XXV of the existing Convention. New paragraph 1 provides that a national of one Contracting State may not be subject totaxation or connected requirements in the other Contracting State that are more burdensome than the taxes and connected requirements imposed upon a national of that other State in the same circumstances. The OECD Model would prohibit taxation that is “other than or more burdensome” than that imposed on U.S. persons. Paragraph 1 omits the words “other than or” because the only relevant question under this provision should be whether the requirement imposed on a national of the other Contracting State is more burdensome. A requirement may be different from the requirements imposed on U.S. nationals without being more burdensome.

The term “national” in relation to a Contracting State is defined in subparagraph 1(k) of Article III (General Definitions). The term includes both individuals and juridical persons. A national of a Contracting State is afforded protection under this paragraph even if the national is not a resident of either Contracting State. Thus, a U.S. citizen who is resident in a third country is entitled, under this paragraph, to the same treatment in Canada as a national of Canada in the same or similar circumstances (i.e., one who is resident in a third State).

Whether or not the two persons are both taxable on worldwide income is a significant circumstance for this purpose. For this reason, paragraph 1 specifically refers to taxation or any requirement connected therewith, particularly with respect to taxation on worldwide income, as relevant circumstances. This language means that the United States is not obliged to apply the same taxing regime to a national of Canada who is not
resident in the United States as it applies to a U.S. national who is not resident in the United States. U.S. citizens who are not resident in the United States but who are, nevertheless, subject to U.S. tax on their worldwide income are not in the same circumstances with respect to U.S. taxation as citizens of Canada who are not U.S. residents. Thus, for example, Article XXV would not entitle a national of Canada residing in a third country to taxation at graduated rates on U.S.-source dividends or other investment income that applies to a U.S. citizen residing in the same third country.

Because of the increased coverage of paragraph 1 with respect to the treatment of nationals wherever they are resident, paragraph 2 of this Article no longer has application, and therefore has been omitted.

https://home.treasury.gov/system/files/131/Treaty-Canada-Pr2-TE-9-21-2007.pdf

Appendix C – 2006 U.S. Model Tax Treaty

Article 24

NON-DISCRIMINATION

1. Nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith that is more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances, in particular with respect to residence, are or may be subjected. This provision shall also apply to persons who are not residents of one or both of the Contracting States. However, for the purposes of United States taxation, United States nationals who are subject to tax on a worldwide basis are not in the same circumstances as nationals of ——— who are not residents of the United States.

https://www.irs.gov/pub/irs-trty/model006.pdf

2006 U.S. Model Tax Treaty – Technical Interpretation

ARTICLE 24 (NON-DISCRIMINATION)

This Article ensures that nationals of a Contracting State, in the case of paragraph 1, and residents of a Contracting State, in the case of paragraphs 2 through 5, will not be subject, directly or indirectly, to discriminatory taxation in the other Contracting State. Not all differences in tax treatment, either as between nationals of the two States, or between residents of the two States, are violations of the prohibition against discrimination. Rather, the nondiscrimination obligations of this Article apply only if the nationals or residents of the two States are comparably situated.

Each of the relevant paragraphs of the Article provides that two persons that are comparably situated must be treated similarly. Although the actual words differ from paragraph to paragraph (e.g., paragraph 1 refers to two nationals “in the same circumstances,” paragraph 2 refers to two enterprises “carrying on the same activities” and paragraph 4 refers to two enterprises that are “similar”), the common underlying premise is that if the difference in treatment is directly related to a tax-relevant difference in the situations of the domestic and foreign persons being compared, that difference is not to be treated as discriminatory (i.e., if one person is taxable in a Contracting State on worldwide income and the other is not, or tax may be collectible from one person at a later stage, but not from the other, distinctions in treatment would be justified under paragraph 1). Other examples of such factors that can lead to nondiscriminatory differences in treatment are noted in the discussions of each paragraph.

The operative paragraphs of the Article also use different language to identify the kinds of differences in taxation treatment that will be considered discriminatory. For example, paragraphs 1 and 4 speak of “any taxation or any requirement connected therewith that is more burdensome,” while paragraph 2 specifies that a tax “shall not be less favorably levied.”

Regardless of these differences in language, only differences in tax treatment that materially disadvantage the foreign person relative to the domestic person are properly the subject of the Article.

Paragraph 1

Paragraph 1 provides that a national of one Contracting State may not be subject to taxation or connected requirements in the other Contracting State that are more burdensome than the taxes and connected requirements imposed upon a national of that other State in the same circumstances. The OECD Model prohibits taxation that is “other than or more burdensome” than that imposed on U.S. persons. This Convention omits the reference to taxation that is “other than” that imposed on U.S. persons because the only relevant question under this provision should be whether the requirement imposed on a national of the other Contracting State is more burdensome. A requirement may be different from the requirements imposed on U.S. nationals without being more burdensome.

The term “national” in relation to a Contracting State is defined in subparagraph 1(j) of Article 3 (General Definitions). The term includes both individuals and juridical persons.

A national of a Contracting State is afforded protection under this paragraph even if the national is not a resident of either Contracting State. Thus, a U.S. citizen who is resident in a third country is entitled, under this paragraph, to the same treatment in the other Contracting State as a national of the other Contracting State who is in similar circumstances (i.e., presumably one who is resident in a third State).

As noted above, whether or not the two persons are both taxable on worldwide income is a significant circumstance for this purpose. For this reason, paragraph 1 specifically states that the United States is not obligated to apply the same taxing regime to a national of the other Contracting State who is not resident in the United States as it applies to a U.S. national who is not resident in the United States. United States citizens who are not residents of the United States but who are, nevertheless, subject to United States tax on their worldwide income are not in the same circumstances with respect to United States taxation as citizens of the other Contracting State who are not United States residents. Thus, for example, Article 24 would not entitle a national of the other Contracting State resident in a third country to taxation at graduated rates on U.S. source dividends or other investment income that applies to a U.S. citizen resident in the same third country.

https://www.irs.gov/pub/irs-trty/temod006.pdf

Appendix D – 2016 Model U.S. Tax Treaty

Article 24

NON-DISCRIMINATION

1. Nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith that is more burdensome than the taxation and connected requirements to which nationals of that other Contracting State in the same circumstances, in particular with respect to residence, are or may be subjected. This provision shall also apply to persons who are not residents of one or both of the Contracting States.

However, for the purposes of United States taxation, United States nationals who are subject to tax on a worldwide basis are not in the same circumstances as nationals of __________ who are not residents of the United States.

https://home.treasury.gov/system/files/131/Treaty-US-Model-2016_1.pdf

Appendix E – OECD Model Tax Convention

https://www.oecd.org/ctp/treaties/articles-model-tax-convention-2017.pdf

A pdf of the 2017 Model Tax Convention is here:

articles-model-tax-convention-2017

https://www.oecd-ilibrary.org/taxation/model-tax-convention-on-income-and-on-capital-condensed-version-2017/commentary-on-article-24_mtc_cond-2017-27-en