Taxing Canadian expats not the silver bullet for generating post-COVID revenue

My latest, in response to Canada needs to start taxing Canadians who live abroad:

Chandra Arya, the Liberal MP for Nepean, Ont., recently argued for changing the current residency-based taxation approach to the U.S. citizenship-based taxation (CBT) approach, understating the complexity involved in making such a change and overstating the potential benefits.

(Similarly, Andrew Caddell argued in his April 22 Hill Times column that “the three million Canadians abroad should contribute, through a 10 per cent tax on income; that could bring in at least $30-billion per year.”)

Some of the arguments are, on the surface, convincing. Why should Canadian expatriates, after not paying Canadian taxes for their years working abroad, return to Canada to benefit from medicare and other benefits on their return as retirees? Ironically, Arya uses similar “Canadians of convenience” arguments as those used by the previous Conservative government under then-immigration minister Jason Kenney. He is part of a Liberal government that extended voting rights to virtually all expatriates, most of whom pay little or no Canadian taxes.

But we have to start with a better understanding of the numbers of Canadian expatriates, whether foreign or Canadian-born. He, like too many, uses the Asia Pacific Foundation estimate of three million, which includes all ages and permanent residents. A more accurate, albeit imperfect estimate, is closer to two million adult Canadian citizens.

But how many of these maintain strong connections to Canada or are likely to return to Canada to take advantage of Canada’s generally strong social safety net? The answer is we do not know and there is limited data available.

However, we have some proxy measures that give an order of magnitude to those keeping their close Canadian ties.

The average annual number of immigrants who left Canada between 1996 and 2011 is about 100,000, according to a Statistics Canada study, with between 25 and 40 per cent being temporary emigrants, depending on the census period. For 2006-11, 35.6 per cent of emigrants move to the USA. There is no data regarding their citizenship status or the length of time they spent in Canada prior to emigrating.

The number of adult Canadian passport holders abroad was about 725,000in 2015. The number of Canadians registered with Global Affairs Canada for consular services is about 346,200, as of April 26, the department said.

In 2017, the number of Canadian expatriates who file Canadian non-resident taxes was about 92,000.

And we also know that some immigrants return to their country of origin upon retirement, and that about 181,000 persons received CPP, according to December 2019 numbers, but there’s no data regarding their citizenship status.

So Arya’s arguments are based on “[a]necdotal evidence [that] suggests citizens are returning to Canada to enjoy these benefits after spending their productive lives elsewhere,” and his assertion “for a small but growing number, the objective is to acquire citizenship and leave again.”

Like all anecdotal evidence, there is some truth, but the extent of that truth, and whether it would warrant such a major and disruptive change in Canadian taxation, is questionable.

The other major flaw lies with citing the U.S. citizenship-based taxation approach as the model to emulate, without asking the necessary questions regarding why the U.S. is the outlier, compared to other Organisation for Economic Co-operation and Development (OECD) countries. Citizenship-based taxation is less appropriate for a world of increased mobility and dual citizenship. Moreover, residency-based taxation is intrinsically easier to administer, including with respect to double taxation issues.

The introduction of the Foreign Account Tax Compliance Act (FATCA) and its assorted implementation difficulties and inconsistencies highlights even more the complexities of CBT, leading a small, but not insignificant, number of Americans to renounce their U.S. citizenship.

This should serve as a major caution to advocating for a major change to our taxation system, one that is out of step with all OECD countries, save the U.S.

Would the alleged benefits of increased tax revenues materialize? If so, would they exceed the expected massive costs of completely revamping our tax system? How effective would expatriate tax compliance be, and what would be the costs of enforcement? And just as the U.S. approach resulted in modest income from “accidental Americans” (citizens of another country unaware of their U.S. citizenship) being caught by FATCA, how could we be sure that such a change might result in “accidental Canadians?”

Clearly, better data on the number of expatriates, permanent and temporary, and the degree to which they return as retirees and take advantage of Canadian medicare and other benefits would be useful. But like so many citizenship and immigration issues, any change aimed at a subset of the population, has to be weighed against the impact on the wider population.

Similarly, a fundamental shift from residency-based to citizenship-based taxation should take place in the context of a broader review of taxation policies, rather than a fundamental, but piecemeal, proposal. Any such review should aim at ensuring that taxation reflects current and anticipated societal needs.

A shift to citizenship-based taxation would have major impact and costs. The flawed U.S. example and anecdotal evidence fail to justify such a change or even a study, given that there are more important taxation and related policy questions.

Source: Taxing Canadian expats not the silver bullet for generating post-COVID revenue

About Andrew
Andrew blogs and tweets public policy issues, particularly the relationship between the political and bureaucratic levels, citizenship and multiculturalism. His latest book, Policy Arrogance or Innocent Bias, recounts his experience as a senior public servant in this area.

4 Responses to Taxing Canadian expats not the silver bullet for generating post-COVID revenue

  1. Tim Smyth says:

    I think it is important to note that being a tax “resident” is far more sticky than many people might imagine. I think the 92,000 non resident filing number is actually reflective of the fact that there are more than few people who might have mailing addresses outside of Canada but are still considered Canadian tax residents under the ITA. Second, there is also a mark to market exit or departure tax for departing residents of Canada(something that I would have to imagine would be repealed in Chandra Arya proposal). Again I suspect the 92,000 number might actually reflect departure tax filings of people who moved earlier in the previous year but submit their departure tax at the normal tax filing date now with an overseas address. Third while it is safe to assume that most of the 92,000 filing are from Canadian citizens there is actually nothing in the CRA’s data to determine this as CRA does not collect citizenship and nationality information other than through the US FATCA program.

  2. Mike says:

    Mr Arya needs to look closely at US citizenship based taxation before suggesting it’s easy money for Canada. Oh we get the attraction – Tax other nations tax residents, free money. Except I would not be the only one to suggest this vile little bit of US exceptionalism has proven to be an unworkable horror that frequently cannot be complied with even if the victims wanted to comply.

    I would go further, I would suggest the USA is now trampling all over the Universal Declaration of Human Rights in its effort to get to US citizens abroad, because it is now impossible to lead a full and secure life abroad as a tax compliant US citizen, something the year long lines to renounce in Toronto would tell you all about.

    FATCA and the US tax code make a complete mockery of US claims to be some sort beacon of freedom and for what? Increased efforts to enforce this have brought in a one off bonanza in massive penalties from abroad but it’s nothing in terms of the US budget, barely a rounding error.

    There’s a hidden cost as well, crippling your residents abroad with ludicrous reporting (and it will become ludicrous) and taxation that other nationalities do not face is crippling your nations ability to compete in a global market place, something shown very graphically by the late Roger Conklin in his presentation to the US congress, but ignored.

    Yes there will always be the short sighted fools who think taxing non-resident citizens is a good idea, but they are wrong and it really is that simple.

    Mr Arya also need to look to the tax treaty with the USA if he thinks his pot of gold lays there, because the USA is not going to allow Canada to tax a US citizen in the USA, Canadian nationality be damned.

    Citizenship based taxation is a fools errand that the US does not come out of well, they look like a human rights abusing tyranny that own citizens who are no longer free to leave. The USA needs to be condemned for this, not emulated.

    As an aside, what happens when all nations do this?

    Complete and utter bedlam with no winner, that’s what.

    Oh, and another thought…How come Canada expelled the Eritrean ambassador for Eritrea’s efforts to tax people on Canadian soil?

    Oh right, because he was not an American.

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