Hello from the Amtrak Cascades,
This is Olivier Wagner from 1040 Abroad. I am on my way Pioneer Nation in Portland, OR. If you are going to Pioneer Nation, let me know, I’ll buy you a drink, also I’ll be in DCBKK (Dynamite Circle conference in Bangkok), same deal, let’s meet up.
This post is a continuation of the post On my way to Portland, OR – and sourcing under the US-Canada tax treaty
- The provisions of this Convention shall not restrict in any manner any exclusion, exemption, deduction, credit or other allowance now or hereafter accorded by the laws of a Contracting State in the determination of the tax imposed by that State.
- Except as provided in paragraph 3, nothing in the Convention shall be construed as preventing a Contracting State from taxing its residents (as determined under Article IV (Residence)) and, in the case of the United States, its citizens (including a former citizen whose loss of citizenship had as one of its principal purposes the avoidance of tax, but only for a period of ten years following such loss) and companies electing to be treated as domestic corporations, as if there were no convention between the United States and Canada with respect to taxes on income and on capital.
- The provisions of paragraph 2 shall not affect the obligations undertaken by a Contracting State:
(a) under paragraphs 3 and 4 of Article IX (Related Persons), paragraphs 6 and 7 of Article XIII (Gains), paragraphs 1, 3, 4, 5, 6(b) and 7 of Article XVIII (Pensions and Annuities), paragraph 5 of Article XXIX (Miscellaneous Rules), paragraphs 1, 5 and 6 of Article XXIX B (Taxes Imposed by Reason of Death), paragraphs 2, 3, 4 and 7 of Article XXIX B (Taxes Imposed by Reason of Death) as applied to the estates of persons other than former citizens referred to in paragraph 2 of this Article, paragraphs 3 and 5 of Article XXX (Entry into Force), and Articles XIX (Government Service), XXI (Exempt Organizations), XXIV (Elimination of Double Taxation), XXV (Non-Discrimination) and XXVI (Mutual Agreement Procedure);
(b) under Article XX (Students), toward individuals who are neither citizens of, nor have immigrant status in, that State.
This is the savings clause in which they’re saying that if you’re a US citizen, a bunch of the tax treaty might as well not exist, except for a few articles mentioned in paragraph 3(a), which includes article XXIV (Elimination of Double Taxation), so article XXIV still applies to US citizens (detail on next page).
Elimination of Double Taxation
- In the case of the United States, subject to the provisions of paragraphs 4, 5 and 6, double taxation shall be avoided as follows: In accordance with the provisions and subject to the limitations of the law of the United States (as it may be amended from time to time without changing the general principle hereof), the United States shall allow to a citizen or resident of the United States, or to a company electing to be treated as a domestic corporation, as a credit against the United States tax on income the appropriate amount of income tax paid or accrued to Canada; and, in the case of a company which is a resident of the United States owning at least 10 per cent of the voting stock of a company which is a resident of Canada from which it receives dividends in any taxable year, the United States shall allow as a credit against the United States tax on income the appropriate amount of income tax paid or accrued to Canada by that company with respect to the profits out of which such dividends are paid.
- For the purposes of this Article:
(a) profits, income or gains (other than gains to which paragraph 5 of Article XIII (Gains) applies) of a resident of a Contracting State which may be taxed in the other Contracting State in accordance with the Convention (without regard to paragraph 2 of Article XXIX (Miscellaneous Rules)) shall be deemed to arise in that other State; and
(b) profits, income or gains of a resident of a Contracting State which may not be taxed in the other Contracting State in accordance with the Convention (without regard to paragraph 2 of Article XXIX (Miscellaneous Rules)) or to which paragraph 5 of Article XIII (Gains) applies shall be deemed to arise in the first-mentioned State.
- Where a United States citizen is a resident of Canada, the following rules shall apply:
(a) Canada shall allow a deduction from the Canadian tax in respect of income tax paid or accrued to the United States in respect of profits, income or gains which arise (within the meaning of paragraph 3) in the United States, except that such deduction need not exceed the amount of the tax that would be paid to the United States if the resident were not a United States citizen; and
(b) for the purposes of computing the United States tax, the United States shall allow as a credit against United States tax the income tax paid or accrued to Canada after the deduction referred to in subparagraph (a). The credit so allowed shall not reduce that portion of the United States tax that is deductible from Canadian tax in accordance with subparagraph (a).
Here the paragraph 4(a) says that Canada should allow a credit for “income tax paid in respect of profits, income or gains which arise (within the meaning of paragraph 3) in the United States”
Paragraph 3 says that we can disregard the savings clause for this purpose and that if we have profits, income or gains of a resident of a contracting state (Canada) which may not be taxed in the other contracting state (United Sates) in accordance with the Convention (without regard to paragraph 2 of Article XXIX (Miscellaneous Rules) “savings clause”), such profits, income or gains shall be deemed to arise in the first-mentioned State (Canada).
By virtue of article VII – Business Profits, business profits from an individual or corporation resident of Canada which does not have a permanent establishment in the United States shall indeed not be taxed in the United Sates.
As such, going back to paragraph 4(a), Canada should not allow any foreign tax credit with respect to such income.
Going to paragraph 4(b), the United States shall allow a tax credit for the Canadian taxes with respect to such income.
Practically speaking as long as taxpayer remains a resident of Canada (as defined by Article IV), the actual location where work is performed doesn’t matter, income will be sourced to Canada, taxes will be paid to Canada and the US will allow a foreign tax credit against taxes arising from such income – meaning that in most cases there wouldn’t be any US tax owed.