Expat Canadians should pay income tax, argues reader

USA and Eritrea are the only countries that have citizenship-based, rather than residency-based taxation. Superficially attractive but as the US experience indicates, implementation not as simple as Auerbach presents.

Funny how advocates always have confidence that “we can do this in a way that is just as fair, but less complex, than the American system:”

By all means we should be encouraging expats to exercise their rights as citizens to vote in Canadian elections. This includes of course the well-off expats whom the Conservatives are reaching out to.  

However, with rights come responsibilities, including the responsibility to pay income taxes on one’s world-wide income. The U.S.A. recognizes this fact by imposing income tax on all its citizens, including expats who live abroad.  

The principle is simple: if you are a citizen you owe taxes on your income, no matter where you live. 

In practical terms, U.S. expats living in higher-tax countries get a credit for these foreign taxes and do not owe additional U.S. taxes, but those living in low-tax countries or tax havens do owe more. 

Needless to say, this means that thousands of American expats have given up their citizenship to avoid paying taxes to the country where they no longer live. However, they are no longer entitled to vote in American elections.  

Canada should do the same. It’s only fair. We Canadian citizens should be obligated to pay income taxes on our world-wide income (with a credit, of course, for taxes paid to other jurisdictions), no matter where we live. 

I am confident that we can do this in a way that is just as fair, but less complex, than the American system. 

It will be interesting to see what our political parties say about the fairness of linking the rights of citizenship to its responsibilities, and what the Parliamentary Budget Officer would estimate would be the amount of taxes that could be collected. 

Lewis Auerbach
Ottawa, Ont.

Source: https://www.hilltimes.com/2021/08/11/expat-canadians-should-pay-income-tax-argues-reader/310084

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

Canada needs to start taxing Canadians who live abroad

Working on a piece analyzing the issue of citizenship-based versus residency-based taxation, given this opinion piece by Chandra Arya, Liberal MP for Nepean.

His arguments are largely based on anecdote rather than available evidence, he fails to question by the USA is an outlier on citizenship-based taxation compared to other OECD countries, and understates the policy and administrative complexities involved in making such a change.

As always, people cite the Asia Pacific Foundation number of three million expatriates without controlling for age and citizenship. Doing so results in about two million expatriates:

It is time for Canada to adopt citizenship-based taxation (CBT).

While we don’t have complete information on where Canadians have taken up long-term residence abroad, there are reports of about 300,000 Canadian citizens in Hong Kong and tens of thousands in each of several countries in the Middle East. From Asia to Africa, from Europe to the Caribbean and South America and, of course, the US, significant numbers of Canadians have made their permanent home away from Canada. There were about 3 million Canadians abroad, including tourists, at the start of the COVID-19 crisis, according to the Prime Minister.

Currently, Canadian income tax obligations are based on residency status and not on citizenship or immigration status, so non-resident Canadians do not pay taxes. However, expatriate Canadians enjoy the same rights as Canadians who are resident here. They should face the same obligations as resident Canadians, including paying taxes, so that they share the responsibility of contributing, at least financially, to our country.

The United States is the only developed country that taxes its citizens on their global income irrespective of where they live or how long they have lived outside of the US. The constitutional validity of CBT has not been tested in Canada, but the 1924 US Supreme Court decision in the case of Cook v. Tait offers cogent reasoning about CBT that shows its validity under the US constitution. The decision relied on the inherent benefits received by US citizens and their property from the US government, regardless of where the citizens made their home or where their property was located.

Michael S. Kirsch of  the University of Notre Dame, in his seminal 2007 article “Taxing Citizens in a Global Economy,” argues for the same principle. Kirsch suggests that recent globalization trends strengthen, rather than weaken, the case for taxing US citizens living abroad. He concludes that modern advances in transportation and communication weaken the case for giving preferential treatment to income earned by citizens working abroad, in that these developments afford the expatriate US citizen virtually the same rights as that of a resident US citizen, such as personal protection, property protection, the right to vote and the right to enter.

The same can be said of expatriate Canadians. They are assured of guaranteed access to a safe, secure and stable society, virtually free world-class health care and education systems and, depending on income levels, affordable housing, irrespective of their length of stay (or lack thereof) in Canada. In addition, depending on the time spent in Canada, financial supports like Old Age Security and the Guaranteed Income Supplement are available to them. Anecdotal evidence suggests citizens are returning to Canada to enjoy these benefits after spending their productive lives elsewhere. This is a significant contingent liability for Canada, because citizenship — not contribution (or lack thereof) to our society — is the criterion for benefits and support.

Kirsch also discusses the need to maintain the cohesion of a society. In the absence of citizenship-based taxation, there is a strong tax-driven incentive for a not insignificant number of high-income and high-net-worth individuals to establish tax residence abroad in order to avoid income taxes. The creation of a separate class of citizens could have corrosive effects on broader society, just as it has done in other countries that rely only on residence-based taxation.

A Canadian passport facilitates visa-free travel and increased international mobility — and serves as a plan B, allowing these global citizens to return here when things get rough elsewhere.

There was a time when most immigrants to Canada came here to become citizens and settle permanently. Now, for a small but growing number, the objective is to acquire citizenship and leave again. A Canadian passport facilitates visa-free travel and increased international mobility — and serves as a plan B, allowing these global citizens to return here when things get rough elsewhere. But without CBT, they don’t help to finance the society they are counting on as a safe harbour.

There are also budgetary considerations underlying the adoption of a CBT system. Before the COVID-19 crisis, our economy was in great shape and able to generate sufficient government revenues to maintain a comfortable federal debt-to-GDP ratio of about 30 percent. Now we are in another world altogether. We are going to have the biggest budget deficit in the history of Canada, thanks to the biggest bailout packages ever for millions of Canadians and businesses. The public debt may exceed all previous peaks. While it is always optimal for a country to have an expanding tax base that is able to fund social programs and services or investments in infrastructure, defence and economic development, it has now become a necessity. With CBT, the tax base would include many more new taxpayers.

Changes to demographics, particularly the greying of our society, will only accentuate the need for higher government revenues, as these changes will result in substantial growth in demand for social services. Volatile global situations will increase the number of Canadians returning to safety (financial, health and/or physical) in Canada, also boosting the demand for government services.

One revenue option to meet these demands is to increase direct or indirect tax rates. The alternative is to shrink spending. Canadians seem to have no appetite for either of these options, especially in the current crisis. The Liberals in the recent past have raised taxes on the wealthy. But there is a limit to this approach.

The only viable alternative for enlarging the revenue stream in order to maintain adequate service delivery to citizens is to expand the taxpayer base. This is why the idea of CBT is so appealing. The government should examine CBT’s feasibility, including the potential contingent liability and revenue, plus enforcement and international tax agreement issues. The financial burden and responsibility of meeting the needs of all Canadians should be shared by all citizens. It is the equitable thing to do.

Source: Canada needs to start taxing Canadians who live abroad

Andrew Caddell, in his overview Opinion: The post-COVID Canada faces many challenges The post-COVID Canada faces many challenge includes a throwaway line which is completely silent on these complexities:

Governments will have to get out of debt without crushing the economy, or Canadians. This will require creative ways of raising taxes. One possibility would be a two per cent increase in the GST to seven per cent: that would generate $90-billion over five years. Second, 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. Third, tax havens for Canada’s wealthiest have to be closed, and that money taxed.