Tax fairness for citizens residing in other countries

I have been watching the situation wherein the US is threatening to tighten demands on its citizens to file a US tax return pay US taxes, even when they reside in other countries.

This morning, there is an interesting article in the Globe and Mail that proposes that the Canadian government retaliates and forces the millions of Canadians living in the US to do the same. That would hurt those Canadians, but the idea is that US banks, who would have to report income to Canada, would lobby against the whole silly situation.

This issue interests me for two reasons: The first is that I am a dual UK-Canadian citizen. I long ago filed relatively simple papers with the UK stating that I am a resident of Canada, allowing my small UK income (book royalties) not to be taxed at source. This required certification by the Canada Revenue Agency that I have been paying taxes to Canada that include my foreign income. I certainly don't have to file a tax return there and I don't have to repeat that non-residency filing – it was a one-time matter. I would be very concerned if even small aspects of the US model of citizen-taxation were to be adopted by the UK. The likelihood of this happening is small, but it gives me the shivers to think about it. Going through the paperwork of filing one country's complex tax return is a necessary chore; but doing two forms in order to actually be double-taxed would be horrendous. Even if a tax treaty allowed me to deduct the taxes paid in the country of residence, the multiplication of paperwork is just a nasty thought. To increase everybody's productivity, all countries should seek to minimize the amount of paperwork its residents or citizens have to file.

My second interest is that I have fastidiously avoided anything that will end up forcing me to file a US tax return or even get a US Social Security Number simply because situations like this make me ultra-wary of any involvement with the IRS. The Canada Revenue Agency and the Canadian tax system seem so much friendlier. I have on various occasions been offered small US contracts, or honoraria. Some of these would have resulted in tax deduction at source, or would have required a US Social Security Number. I want to maintain my privacy and only reveal data to the government in the country where I live and obtain services. I see the US's desire to have non-residents file complex forms to be excessive. Before accepting any US source of funds (e.g. being paid to review a book), I ensure that there will be no requirement for a SSN or taxation at source. As a result I have repeatedly turned down such offers. I have even turned down volunteer tasks because the agency in question has had a requirement for an SSN in its registration process. Two of my daughters were given a single share each in entertainment companies as gifts when they were born. The minuscule dividends are taxed at source, and I am threatened that unless I file IRS paperwork, I may be considered (as guardian) to have abandoned the shares; so be it (I am told the solution is to transfer the shares to a US brokerage account, something I intend to investigate).

One can imagine the motivations the US has to force its citizens to file a tax return: It is concerned about its wealthy citizens ostensibly living and earning income in tax havens like the Cayman Islands, yet 'visiting' the US for a large portion of the year. Maybe it also feels that even if they are non-residents, they still are entitled to such costly benefits as consular assistance, defence of their freedom, the right to vote and the maintenance of the US political system on their behalf, etc.

These are legitimate concerns. Offshore tax havens should, however, be tackled in other ways (diplomacy, banning domestic banks from dealing with banks in countries that don't reasonably tax their residents, taxing transfers of funds to those countries, etc.). I would be fine to require a citizen to file taxes to their home country if they live in a designated tax haven, and to make agreeing to this part of the process of obtaining a passport. A designated tax haven could be, for example, a country that has little or no personal income tax.

Consular services and the right to vote while a non-resident, if allowed, could be paid for by fees for passports or non-resident voter registration. Perhaps if people want to go to risky countries they should have to declare this in their passport application and pay a significantly higher fee (a form of insurance), or else agree in advance to lower-priority help if they run into trouble in such countries.

As a resident of Canada, I have to declare my foreign income, and would have to declare substantial foreign assets, if I had any. I am fine with this. I would also be fine filing a US tax return in any year I lived there, even for a couple of months. US citizens living abroad should essentially be treated the same way as I would be if I lived in the US, or the way I am treated by the UK. A simple declaration of non-residence (with evidence of paying foreign taxes) should be enough. I actually think that if the IRS were friendlier, they might in fact find that people are more willing to pay taxes to them.

Strikes over pensions: Surely there is a middle ground between defined benefit and defined contribution

A lot of labour disputes in Canada centre around the desire of some corporations to move away from defined-benefit (DB) pension plans, and towards defined-contribution (DC) plans.

DB plans pay an amount during retirement that can be calculated in advance, and depends on the employee's years of service and salary. The problem is, that corporations have a problem when the market turns down, since they rely on investment returns being at predicted levels (averaged over many years) in order to have enough money for the anticipated retirements. They rely on actuaries to tell them how much money they need to have in their fund; actuaries make actuarial assumptions. Some of these assumptions, such as the amount of time people will live, can be calculated with reasonable confidence using statistics and demographic data. However nobody can predict market performance, so corporations have a lot of difficulty in the years after each recession, since their plans go into 'deficit', meaning there is a need to contribute more for a while, and this affects the corporation's profitability, or even its solvency. Sometimes pension plans have a surplus (more than is expected to be needed), in which case the corporation can take a breather, making lower payments for a while, but this situation seems to rarely last.

The DC plans get rid of all this complexity by simply setting aside a defined amount of money each month the employee works. Employees then get a pension at retirement that depends on how well the investments have done over the years. Sometimes employees can get really great pensions with a DC plan, but after a recession is not a good time to retire, as the expected pension would be considerably lower. And that is the crux of the problem with DC plans: They transfer the uncertainty of retirement planning from employer to employee. If an employee has to retire, e.g. due to disability, when the plan has lost value, then the employee loses out. Similarly, this means that corporations are likely to lose a lot of good employees in times when the market is doing really well.

In the recent Air Canada settlement, we are told that current employees get to keep their DB plan, but new employees will get a plan that is to be determined by an arbitrator – most likely a DC plan. This will create different economic classes of employees, which it seems to me will be divisive.

It seems to me that negotiators could find ways to better split the burden: If a DB plan is in deficit, they could make an agreement that says employees who retire in future will have benefits reduced by X% while the deficit is above a certain level, with those benefits coming back to normal when the deficit goes down below a threshold, and with a commitment to increase the promised benefits above the current level by Y% if and when a surplus occurs at some point in the future.

It is unfortunate that few new DB plans are being created. It is good for society for pensioners to have come confidence in their retirement income. However I also think that splitting the burden of deficits between the employees and employer makes a lot of sense, as long as the benefits of surplus are also shared. In some sense this is blending the notions of DB and DC. I also don't mind if corporations put new employees on a plan that has a higher portion of DC than current employees. Just don't get rid of DB element entirely. Perhaps the plan could be 50% DB and 50% DC.

I have heard news reports that call DB plans 'generous'. This entirely misses the point. The two plan types simply put the risks on different parties; conceptually, the same amount of money is contributed and received, if the actuarial assumptions end up being accurate.

Some people also think that retirement savings should be left to individuals (e.g. using RRSP's in Canada). The trouble with that is that the risk is then transferred not just to the employees, but to society at large: A considerable portion of people won't have the self-discipline to save enough, so will end up needing various forms of taxpayer-funded assistance when they retire.