2. International comparisons
The Committee considers it helpful to set Canada's rules for the taxation of migrants, as described in the previous chapter, in an international context. Comparing Canada's system to the systems in place elsewhere, particularly among other countries with developed, open economies, can provide useful insight into the direction Canadian policy ought to take. This chapter surveys the small number of other countries with tax migration rules. (8)
8 - In preparing these descriptions the Committee has relied extensively on research carried out by the United States Congress Joint Committee on Taxation. In particular, a report by that committee's staff entitled Issues Presented by Proposals to Modify the Tax Treatment of Expatriation (U.S.G.P.O., June 1, 1995) provided helpful background on other countries' tax systems.
(a) The United States
A key difference between the Canadian and United States tax systems is the taxation of non-resident citizens. Canada taxes Canadian residents on their worldwide income, and non-residents on their income from Canadian sources. Under United States law, both residents and citizens are subject to income tax on their worldwide income. An annual $70,000 exemption protects many non-resident citizens from US tax; in addition, non-resident citizens are generally allowed to credit foreign taxes paid against their US income tax.
Non-resident aliens (non-citizens) are taxable in the US only to the extent their income is from sources in the US or is effectively connected with the conduct of a trade or business within the US. Non-resident aliens are also subject to US tax on any capital gain realized on the disposition of an interest in US real property.
The United States has no comprehensive system for the taxation of emigrants. Until recently, an alien individual who ceased to be resident in the US did not face any particular tax consequence as a result. A citizen who renounced US citizenship could be subjected to special rules, essentially replicating the taxation of citizens, if the renunciation were found to have been tax-motivated. There was no attempt to force a measurement of accrued gains on either emigration or a change of citizenship.
The present United States Administration proposed significant changes to these rules as part of its fiscal year 1996 budget. Among other things, the Administration's proposals would have treated US citizens who renounced their citizenship, and certain long-term resident aliens who left the US, as having disposed of their property for fair market value proceeds. US real property and some retirement interests would be exempted from this deemed disposition. Any resulting net gain over $600,000 (or $1.2 million in the case of an expatriate couple) would be subject to US tax, the payment of which could be deferred with appropriate security.
This proposal was not endorsed by Congress. After a number of alternatives were canvassed and rejected, a more modest set of changes was enacted. The new rules do not apply any deemed disposition. Instead, they expand the application of the existing expatriation tax, deeming high-income and wealthier migrants (including some aliens) to have renounced citizenship for tax reasons. The deeming rule applies where a migrant either has had a US federal income tax liability greater than $100,000 for each of the five previous years, or has a net worth of $500,000 or more.
(b) The United Kingdom
The United Kingdom does not tax the accrued gains of emigrant individuals other than trusts. Emigrant corporations are subject to comprehensive deemed disposition rules, and trusts are (since 1991) treated as having disposed of all property leaving the UK tax base.
(c) Australia
The Australian income tax system is in many respects very similar to the Canadian system. As in Canada, emigrants are treated as having disposed of and reacquired all their capital property immediately before ceasing to be resident in Australia. Excluded from the deemed disposition are "taxable Australian assets," a category of property that is almost exactly analogous to taxable Canadian property. Australia also provides a fair-market valuation of non-Australian capital property held by an immigrant.
(d) Denmark
Since 1987, Denmark has imposed a departure tax on accrued capital gains on bonds, some shares and certain financial instruments. By providing security, an emigrant may defer this tax liability until the property is disposed of (or until death). If the actual gain realized is less than the accrued gain on which the tax was paid, the departure tax may be recalculated. Since 1994, Denmark has also provided a write-up in the tax value of an immigrant's property.
(e) Other countries
No other countries in the world, to the Committee's knowledge, tax emigrants' accrued gains. A small number of countries have other rules relating to former residents and immigrants. Some make specific provision for taxing former residents' worldwide income under certain limited conditions: Eritrea, Finland, France (for residents of Monaco only), Germany, the Netherlands, Norway, the Philippines and Sweden. In several cases, these provisions amount to deemed residence rules. Israel allows an immigrant to dispose of, free of Israeli tax, assets owned before becoming resident, provided the disposition takes place within seven years of immigration to Israel.
(f) Summary
Despite some recent tightening in a few other countries, such as Denmark and the United States, Canada's remains among the most restrictive tax systems in the world in its treatment of emigrating individuals. To some extent, other countries' failure to enact deemed realization rules like Canada's may be attributable to their greater reliance on wealth taxation: if individuals are regularly subjected to significant wealth taxes, there is less need to tax their accrued gains when they leave the country. It may also be the case that few other countries have traditionally experienced the same degree of individual cross-border mobility. Canada's physical and cultural proximity to the United States and, to a lesser degree, the Caribbean region make it perhaps uniquely easy for Canadians to leave their domestic tax system. In any event, the Committee concludes that Canada already has in place a tighter, more comprehensive regime for taxing emigrants than most other countries.