This is a post that I have been meaning to write for some time. Lest you think that this is going to be a boring treatise on cross border taxation let me remind you that, given the extreme mobility of families, there is hardly a person who is not connected, either by birth, marriage or lineage to someone living in the United States. In many cases these persons can be US citizens, born in the United States or a grandchild born in the US living with parents who may not be US citizens.
Until recently the Internal Revenue Service (IRS) has been more interested in domestic tax cheats. But the IRS is trying to wring more revenue out of existing legislation and has been more aggressive in collecting tax from foreign resident US citizens. Also, Canadian companies selling into the US are coming under fire of the IRS who can now claim that they have a "permanent establishment" in the US and are subject to US and state taxes. There is an increased interested in vacationers who spend more than 183 days in the US (as determined by a complicated 3 year moving average of time spent in the US). Add to that parents or grandparents who set up family trusts where US based children or grandchildren are beneficiaries. Arcane US trust rules could impose deemed income or capital gains on beneficiaries who are years away from getting any benefits from the trusts. Needless to say, professional advice is required.
At some point in time in the past these rules made little difference to US citizens living in Canada. Canadian taxes where, on average, higher than in the US so that net liability for tax was usually nil. However, Canadian tax rates have been coming down and the difference may have been reversed. That is US tax could be higher than Canadian tax leaving the taxpayer with net tax owing to Uncle Sam. This is particularly true of Canadian companies doing business in the US. Canada has been consistently reducing corporate tax rates so that they are significantly lower than US corporate tax.
Even being onside of the US tax authorities is not easy or inexpensive. Canadian companies are required to file a IRS tax form 1120F. This is identical to the tax return filed by US corporations except that there is no tax owing. However, significant disclosures are required about US operations that leave the Canadian companies open to a high level of scrutiny in the US. The filing of a form 1120F is expensive. It is estimated that the average cost of filing--an annual commitment--is about CAD $10,000.
The Swiss have tried (all but in vain) to battle the IRS when internal bank records were requisitioned in order to flush out tax cheats. The US had all the cards. They threatened to impose fines on US subsidiaries of Swiss banks. For the most part these threats worked. Many bank records were turned over to the IRS. US citizens living in Canada can renounce their US citizenship but tax filing are required for 10 years thereafter. US citizens living in Canada are flagged at the border and my be prohibited from visiting the US--or worse. Canadian companies may have US bank accounts seized; possession is nine tenths of the law.
This leaves us with a matter of sovereignty. It appears that whenever there is a confrontation with US, whether over agricultural products, trade issues, Buy America, border security, Canada comes out second best. Or even last. We are a small country many of whose businesses are owned by Americans. We have little clout either political or economic. Would American cancel the auto pact? NAFTA? Try them. There is also little organized opposition (other than the occassional op ed piece) by the IRS intrusions into Canadian sovereignty. Most of us are not concerned--until it affects us.
Bernie.
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