How far-reaching is the IRS’ power to collect taxes from Canada? (2024)

One million American citizens in Canada face double tax troubles. Max Reed explores these challenges in a spring series

If you’re a U.S. citizen living in Canada, you might be frantic about the IRS tax crackdown and hefty fines if you haven’t been tax compliant. How fast can the IRS come after you? What are its enforcement powers in Canada, anyway?

Turns out, Canadian law has a trick up its sleeve: a firewall to help U.S. citizens in Canada.

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Here’s how it works. Say George is a dual Canadian and U.S. citizen who lives in Calgary. He’s not up to date on his U.S. taxes. In 2014, George sold his Canadian house for a large gain. Thanks to FATCA, George’s bank reported his financial information to the IRS. The IRS analyzed George’s financial information and saw a spike in his account, so they decided to investigate. After an audit, the IRS determined that he owed US$100,000 in U.S. taxes for tax year 2014 as a result of the house sale.

Under the Canada-U.S. Tax Treaty, the Canada Revenue Agency will not help the IRS collect taxes owed by a person who was a Canadian citizen at the time that the tax debt arose. This is half of the firewall that protects George: The IRS says he owes U.S. taxes from tax year 2014, at which time he was a Canadian citizen. So the CRA will not help the IRS collect the tax he owes.

So, with Canada out of the picture, the IRS would have to act on its own to collect taxes. It can get a judgment from a U.S. court stating that George owes the U.S. government US$100,000, which can be easily enforced against any assets he has in the United States. But the IRS may have a hard time enforcing this tax debt against George’s Canadian assets. This is because of the other half of the firewall that protects George.

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Overly simplified, a foreign creditor such as the IRS has to get the permission of a Canadian court before it can enforce a foreign judgment against assets in Canada. In a 1967 case called United States v. Harden, the Supreme Court of Canada ruled that Canadian courts will not enforce judgements for U.S. taxes owed. This precedent still applies.

A couple of caveats are in order. Laws can and do change. Simply relying on the firewall might be risky and stressful for our U.S. citizen north of the 49th. Further, intentionally refusing to pay a U.S. tax debt is a criminal offense in the United States. So it is possible, although perhaps unlikely, that the U.S. government would eventually pursue criminal charges. A more prudent approach for George might be to catch up on his U.S. taxes using the Streamlined Procedure (the IRS’ amnesty program) before the IRS finds him through FATCA, if only to ultimately renounce his U.S. citizenship.

Max Reed is a cross-border tax lawyer at SKL Tax (www.skltax.com) in Vancouver and the co-author (with Dick Pound) of A Tax Guide for American Citizens in Canada. max@skltax.com

Note: The March 7 instalment of this column, about FATCA, stated that “most U.S. citizens in Canada won’t owe U.S. tax.” To be clearer, those U.S. citizens in Canada who have no American source income will probably not owe any U.S. tax.

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