New bill could lessen tax woes for Canadian residents with U.S. citizenship

Thousands of Canadian residents forced to pay income tax in both Canada and the United States could be about to get some respite.

Legislation has been tabled in the U.S. House of Representatives that would exempt Americans living in countries like Canada from having to pay tax on income earned outside the United States.

North Carolina Republican Congressman George Holding said he tabled the Tax Fairness for Americans Abroad Act because the current system imposes an unfair burden on those with American citizenship outside the U.S.

"Not only does our archaic citizenship-based tax system impose a costly burden on Americans living abroad, but it also discourages businesses from hiring U.S. citizens for jobs in foreign jurisdictions," Holding wrote in a statement.

"This common-sense bill takes a huge step towards ending the outdated, backwards policy of double-taxation of American citizens living abroad."

Even under Holding's bill, U.S. citizens living in Canada would still have to pay tax on any income from U.S. sources.

The United States is one of only two countries in the world (Eritrea is the other)that taxes its residents based on citizenship. Most other countries, like Canada, tax according to where someone lives.

That means that Canadian residents with U.S. or dual Canadian-U.S. citizenship are supposed to file income tax returns each year to both Canada and the United States. In most cases, tax credits in each country can cancel each other out and reduce the risk of double taxation.

There are believed to be hundreds of thousands of people with U.S. citizenship living and working across Canada. They include "accidental Americans" who didn't realize until recently that the fact they were born in a hospital across the border, or to an American parent, meant that they were also supposed to file U.S. tax returns.

That started to change in 2010 when the U.S adopted the Foreign Account Tax Compliance Act (FATCA). The legislation, adopted to crack down on offshore tax evasion, requires banks and financial institutions around the world to reportto the U.S. government the assets of customers who may be Americansfor tax purposes.

In Canada, the banks report that information to the Canada Revenue Agency, which then transfers it to the U.S. The Canadian government has defended the banking record-sharing deal, saying it avoids the prospect of Washington trying to enforce American law in Canada.

In late January, the Federal Court of Canada is scheduled to hear a challenge of the constitutionality of that agreement.

Holding's bill, if it passes, could make life easier for many Canadian residents with U.S. citizenship in the future. But it would do little to help thousands of Canadian residents with U.S. or dual citizenship and a company incorporated in Canada who were hit with massive tax bills as a result of the sweeping tax reform U.S. President Donald Trump signed into law a year ago.

Buried in the 1,097-page Tax Cuts and Jobs Act was a"repatriation tax" intended to stop big U.S. multinationals like Google and Apple from parking profits in foreign subsidiaries to avoid paying billions in U.S. tax.

However, it also created a legal and accounting nightmare for thousands of Canadian residents, such as small business owners, farmers, doctors, dentists, lawyers and others with incorporated companies. The one-time retroactive tax was levied on all of the retained earnings in companies going back to 1986.

Some of those particularly hard-hit had been using their companies to save for retirement. Many have spent the past year grappling with tax bills that total hundreds of thousands of dollars.

Because Trump signed it into law in the dying days of 2017, the bill applied to the 2017 tax year even though the IRS and the Treasury Department had not yet issued guidelines on how the tax was to be applied.

Many of those affected are also facing a second tax going forward:the Global Intangible Low-Taxed Income (GILTI) tax. The tax, which will start in the 2018 tax year, will apply to profits made each year by a corporation outside the U.S. owned by someone with American citizenship.

Many accountants and tax professionals advised their clients to delay filing until the last momentDec. 15 in the hopes that the U.S. would change the rules or lobbying attempts would be successful.

"We have a lot of unhappy clients out there," said Kevyn Nightingale, a partner with MNP's tax services group in Toronto.

Monte Silver, a Canadian-born U.S. tax lawyer based in Israel, has been helping lobby the U.S. government and raise money to fund a U.S. court challenge of the tax reform.

However, he said U.S. officials appear focused on the impact of the repatriation tax on big corporations, and indifferent to the situation of Americans living outside the U.S.

"The issue here is not expats," he said. "We're just an insignificant little fly to them."

To date, there has been little sign of the Canadian government doing very much to help people caught in the cross-border predicament.

In August, Finance Minister Bill Morneau told reporters that the Canadian government had raised the issue of the impact the retroactive repatriation tax was having on Canadian residents.

Finance department documents, obtained by CBC News through Canada's access to information law, show that a top Finance official, Brian Ernewein, did raise the issue on May 11, 2018 in a call with Chip Harter of the U.S. Treasury Department

"I took the opportunity of a call this morning with U.S. Treasury's Chip Harter to raise the point that we're hearing a lot about the issue of the repatriation tax applying to U.S. citizens residing in Canada,"Ernewein wrote in a heavily redacted document.

"This is where we left it, with plans to discuss a bit further when we see each other next week in Vancouver."

The Finance department records also reveal that at least one provincial government has raised the issue with the federal Department of Finance.

In a letter dated March 7, New Brunswick's deputy finance minister wrote to federal deputy Finance minister Paul Rochon outlining her concerns.

"Allowing the recent U.S. tax reform rules to deplete the financial resources of Canadian corporations owned by Canadian residents, even those who are also American citizens, will greatly impact both the short term and long term investment plans of Canadian businesses," Nicole Picotwrote.

Reached this week, Pierre-Olivier Herbert, spokesman for Morneau, said "Finance officials will continue to engage with their U.S. counterparts to ensure they are aware of the negative impact on U.S. citizens abroad."

Elizabeth Thompson can be reached at elizabeth.thompson@cbc.ca