US-Canada Tax Treaty: Beware of Income Exemption Traps
Are you a US taxpayer earning income in Canada? Do you rely upon the US-Canada tax treaty (officially known as, The Convention with Respect to Taxes on Income and on Capital, U.S.-Can., Sept. 26, 1980, T.I.A.S. No. 11,087) exemptions to claim deductions or limit reporting of income for US tax purposes?
If so, then you need to be aware that the tax treaty between the US and Canada does not always provide protections for US taxpayers- even if the treaty specifically states so. A recent example is the Jamieson v. Commissioner case.
In Jamieson v. Commissioner, 08-1253, the taxpayers were US citizens living, and earning income, in Canada in 2003. After paying their Canadian taxes, they claimed the foreign tax credit on their US tax returns, resulting in a net liability. They did not compute any AMT liability under the provisions of Internal Revenue Code (IRC) Section 55, taking the position that the Article XXIV of The US-Canada Treaty, limiting double taxation, precluded such a liability.
However, the IRS argued that under IRC Section 59(a)(2), enacted as part of the Tax Reform Act of 1986, which reduced the foreign tax for AMT purposes to 90% of a taxpayer’s AMT liability, an AMT liability existed. (Section 59(a)(2) was repealed in relevant part by the American Jobs Creation Act of 2004).
The US Tax Court ruled for the IRS. A Federal District Appeals Court affirmed, determining that Section 59(a)(2) superseded the US-Canadian Tax Treaty. The court held that the US Supreme Court case Whitney v. Robertson “last-in-time” rule governed in the case, in examining conflicts between treaties and statutes. The rule provides that when an inconsistency exists, whichever enactments came later in time will prevail over earlier ones.
Thus, the court determined that Section 59(a)(2) superseded the treaty, and was thus the last expression of the sovereign will. Furthermore, the court cited a DC Court of Appeals case in which it was determined that the IRS Technical and Miscellaneous Revenue Act of 1988, specifying that Section 59(a)(2) and other applicable sections was intended by Congress to supersede any conflicting treaty provisions.
This article is intended to give a brief summary of these issues, and should not be construed as legal or tax advice. Reporting foreign-earned income often necessitates an experienced understanding of complex regulations, IRC statutes, and case law, especially since the IRS penalties for failure to comply can be substantial.
If you have further questions regarding your own tax circumstances, Sherayzen Law Office offers professional advice for all of your cross-border, international, and other tax needs. Call (952) 500-8159 for a consultation today.