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Tax Collection Across International Boundaries

Subject: Tax Collection Number: 13-06 Date: 5/17/2013

Your assets or earnings may be seized to pay the Canadian debt

Can the Canada Revenue Agency (CRA) "get you" if you leave Canada owing tax, and don't leave any assets here?

Maybe.

The traditional rule is that "revenue claims" of one government will not be enforced by another jurisdiction, even though most countries have legislation permitting the enforcement of foreign judgments. A "revenue claim" is a tax debt. This court-created rule applies in Canada (1963 Supreme Court of Canada decision in USA v. Harden) as well as in most other countries.

However, some of Canada's tax treaties have a section that overrides this traditional rule. It is called "Assistance in Collection", and it appears in Canada's tax treaties with:

• The United States
• Germany
• Norway
• New Zealand — in a treaty signed on May 3, 2012, and not yet in force, but which will apply retroactively back for five years once it is ratified by both countries

In all of these countries, if you leave Canada owing money to the CRA, the CRA can ask that country to collect the Canadian tax using that country's own tax collection system. So if you have assets in those countries, or are earning income there, your assets or earnings may be seized to pay the Canadian debt.

There is one exception, in the Canada-U.S. tax treaty only. It does not allow the IRS to collect Canadian tax from a person who was a U.S. citizen at the time the tax became payable. Similarly, the CRA cannot collect U.S. tax from a person who was a Canadian citizen at the time the tax became payable.

The tax collection agreements apply in the other direction as well. If you owe tax to the U.S., Germany, Norwegian or New Zealand government, the CRA will be able to use its own collection procedures to seize funds from you and remit them to that government (subject to the Canada – U.S. restrictions noted above).

Finally, there is one more way in which your Canadian tax debt can come back to haunt you. If you leave Canada, but later transfer money or property to relatives or friends in Canada (including by leaving them money or property when you die), they can be assessed under section 160 of the Income Tax Act, which catches non-arm's length transfers of property by a "tax debtor". This happened in the 1994 Tax Court case of Montreuil. An individual left Canada for the Bahamas with a large tax debt. He died 10 years later, left his money to his children in Canada, and the Canadian government assessed them for his tax debt — including 10 years of interest!

Canada may add the "assistance in collection" provision to more tax treaties in the future. So don't assume that you can escape your tax obligations by leaving Canada.

TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.