The long arm of the IRS
One million American citizens in Canada face double tax troubles. Max Reed explores these challenges in a spring series.
If you’re a U.S. citizen living in Canada, you might be frantic about the IRS tax crackdown and hefty fines if you haven’t been tax compliant. What power does the IRS have? Turns out, Canadian law has a firewall to help U.S. citizens in Canada.
Say George is a dual Canadian and U.S. citizen who lives in Calgary. He’s not up to date on his U.S. taxes. In 2014, George sold his Canadian house for a large gain. Thanks to FATCA, George’s bank reported his financial information to the IRS, which analyzed it and saw a spike in his account, so they decided to investigate. After an audit, the IRS determined that he owed US$100,000 in U.S. taxes for tax year 2014 as a result of the house sale.
Under the Canada-U.S. Tax Treaty, the Canada Revenue Agency will not help the IRS collect taxes owed by a person who was a Canadian citizen at the time that the tax debt arose. This is half of the firewall that protects George: The IRS says he owes U.S. taxes from tax year 2014, at which
The IRS , which analyzed it … saw a spike and decided to investigate
time he was a Canadian citizen. The CRA will not help the IRS collect the tax he owes.
With Canada out of the picture, the IRS would have to act on its own to collect taxes. It can get a judgment from a U.S. court stating that George owes the U.S. government US$100,000, which can be easily enforced against any assets he has in the U.S.. But the IRS may have a hard time enforcing this tax debt against George’s Canadian assets – because of the other half of the firewall that protects George.
Overly simplified, a foreign creditor such as the IRS has to get the permission of a Canadian court before it can enforce a foreign judgment against assets in Canada. In a 1967 case called United States v. Harden, the Supreme Court of Canada ruled that Canadian courts will not enforce judgments for U.S. taxes owed. This precedent still applies.
Laws can and do change. Simply relying on the firewall might be risky for George. Further, intentionally refusing to pay a U.S. tax debt is a criminal offence in the U.S. So it is possible, although perhaps unlikely, that the U.S. government would eventually pursue criminal charges. It might be more prudent for George to catch up on his U.S. taxes using the Streamlined Procedure (the IRS’ amnesty program).