It is well established that, as a general rule, a country cannot collect a liability for income tax in a foreign jurisdiction. Thus, a government will only be able to seize assets located within its borders to satisfy an outstanding tax liability.
This, in part, is the reason that the Canadian income tax system depends heavily on withholding of tax at source, and obligations placed on payers, in connection with certain amounts paid to non-residents.
However, as a result of tax treaties, there are important exceptions to this general rule.
The most important exception to this rule is found in Article XXVI-A of the Canada-U.S. Tax Convention. Under this article, the Canada Revenue Agency (“CRA”) may ask the U.S. Internal Revenue Service (“IRS”) for assistance in collecting an outstanding Canadian income tax liability (including penalties and interest). In order for the CRA to enlist the assistance of the IRS, the CRA must certify that the tax liability has been finally determined and any rights that the taxpayer has to restrain collection have either been exhausted or lapsed.
The IRS is under no legal obligation to accept a request by the CRA for assistance; however, that “cuts both ways” if a similar request is made by the IRS, so, one would assume that each country will assist the other where they can.
If the IRS accepts the claim made by the CRA, it will be treated, for the purposes of U.S. law, as being like a claim for U.S. tax that is made by the IRS. Thus, the IRS may use the U.S. court system and all of its collection powers to collect the outstanding tax liability.
However, it is import to note that under Article XXVI-A(8), no assistance may be provided by the IRS in the following circumstances:
- The relevant taxpayer is an individual, and the claim for taxes relates to a period during which that individual was a U.S. citizen. However, if the individual became a U.S. citizen before November 9, 1995, and is still a U.S. citizen at the time that the CRA makes the claim for assistance, the IRS may not provide assistance in collection with a claim that relates to a period ending before November 9, 1995, even if the individual was not a U.S. citizen during that period, or
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- The taxpayer is a corporation, estate or trust that, during the relevant period, derived its status as an entity under U.S. law.
Therefore, it is significant to note that this article will not allow the CRA to look at the IRS for assistance in collecting Canadian taxes in the following common situations:
- The tax debtor was a U.S. citizen during the relevant period(s). This limitation can apply even if that individual was a Canadian resident during that period, and
- The tax debtor was a corporate entity formed in the US. Thus, it would appear that the CRA could not look to the IRS to collect Canadian taxes payable by a U.S. LLC. This limitation would apply even if the LLC were resident in Canada by virtue of its “central management and control”.
In addition, analogous provisions for mutual assistance in tax collection matters are found in Article 26A of Canada’s tax treaty with the Netherlands, Article 28 of the tax treaty with Norway, Article 27 of the tax treaty with Germany. However, in those cases there are no limitations analogous to the ones in Article XXVI-A (8) of the U.S. treaty.
With the prospect co-operation between countries aimed at curtailing international tax evasion and avoidance only increasing, it is a pretty safe bet that more and more of Canada’s tax treaties will be modified to include similar provisions.
ABOUT THE AUTHOR OF THIS ARTICLE
Michael I. Atlas, CPA,CA,CPA(ILL),TEP
Michael Atlas is one of the most prominent international tax experts in Canada. He advises accounting and law firms all across Canada, as well as select private clients (corporate and personal) worldwide. He can be reached by phone (416.860.9175) or email (matlas@TaxCA.com).
