updated 2:11 PM CET, Oct 31, 2023

Opponents of U.S. 'extraterritorial taxation' flag up Canada plan to tax U.S. owners of Canadian homes

American expatriate campaigners against the U.S. system of citizenship-based taxation, which enables the U.S. to tax Americans who live in other countries – often as tax-paying dual citizens of these other countries – are calling attention to a campaign by a New York State congressman who is calling for the U.S. to retaliate against a planned tax by Canada on American residents who own Canadian properties.

The Congressman is Rep. Brian Higgins, a Democrat who represents a district in New York State that includes Buffalo and Niagara Falls, and borders Canada on its northern edge.

The tax, which would be levied on certain vacant property owned by non-residents of Canada who are not Canadian citizens, was included in the Trudeau government's 2022 budget, is explained in a government summary of the budget  as representing Ottawa's effort to "take steps to ensure that foreign, non-residents, who simply use Canada as a place to passively store their wealth in housing, pay their fair share."

In a letter he wrote in May to the Canadian ambassador to the U.S., Kirsten Hillman, Rep. Higgins said that if Canada were to implement a 1% property tax that is currently planned to take effect on Jan. 1, 2022, "without a categorical exemption for American property owners, as a member of the U.S. House of Representatives Committee on Ways and Means, I would be forced to contemplate reciprocal measures on Canadian owners of real property in the United States...

"But I sincerely hope we do not have to get to a point of escalation and retaliation."

Later, in the same letter, he noted: "Our country welcomes 'snowbirds' and other Canadian guests, who own property here for both personal and investment purposes. We value their financial contributions and their contribution to our culture."

In an interview with a Politico.com journalist earlier this week, headlined "Congressman fires warning shot at Trudeau over tax on U.S.-owned homes in Canada," Rep. Higgins said Canada "would be wise to just re-evaluate" its so-called "Tax on Unproductive Use of Canadian Housing by Foreign Non-resident Owners," and noted that imposing property taxes on people who have owned property in Canada for decades would be "punitive" and could eventually hurt the respective local economies that depend heavily on cross-border visitors.

Immigrant Investor Program 

The planned Canadian tax on non-Canadian owners of Canadian properties comes after years of steadily-rising house prices in certain Canadian markets in particular, driven in part by an influx of investors from Hong Kong and China, who poured into Canada after the country launched its Immigrant Investor Program in 1986.

The Immigrant Investor Program was one of the first such initiatives anywhere to be introduced, with the aim of boosting economic investment and activity by attracting affluent individuals and their families from other countries with the promise of a passport. But because it ended up coinciding with an uncertain period in Hong Kong's history, ahead of its "handover" on July 1, 1997, it ended up being unexpectedly popular with Hong Kong and Mainland Chinese in particular, who tended to settle in specific cities, like Vancouver, rather than evenly around the country. 

Canada finally suspended its immigrant investor program in July 2012 and ended it for good in 2014, saying that it was poor value for money, and undervalued Canadian residency, but by that time the pressure on house prices, particularly in the Vancouver area, was making life difficult for those attempting to get onto the housing ladder.

Vancouver, in fact, introduced  its own 1% "Empty Homes Tax" in 2017.

The point about the difficulties those trying to get on the housing ladder in Canada at the moment are struggling with is included in the government's explanation of its planned 1% property tax on non-Canadians, which notes that "high housing costs, especially in urban centers, continue to place middle class and low-income Canadians under huge financial pressure.

"A long-term plan for a faster-growing Canadian economy must include housing that is affordable for working Canadians, especially young families."

Canadian Deputy Prime Minister Chrystia Freeland echoed this view in an April speech to the Greater Vancouver Board of Trade, according to press reports. "Houses in Canada are for Canadian families to live in," she was quoted as saying, not to serve as "vehicles for storing offshore wealth." 

She noted that a public consultation on the matter is planned (a fact that's mentioned in the government's outline of the tax), and that it would pay particular attention to specific concerns related to vacation destinations and smaller communities, a fact echoed by one of her spokespeople, Politico said.  

Border closure issue

In addition to his displeasure over the property tax, Rep. Higgins has also been campaigning for the border between Canada and the U.S. to be re-opened to fully-vaccinated individuals. It has been closed to all non-essential travel for months, to prevent the  spread of the Covid-19 virus, and at the moment isn't due to open until at least July 21, which has been hurting tourism and other businesses on both sides.

                               John Richardson, pictured left, is a Toronto-based lawyer who advocates on behalf of the causes of Americans living overseas, when he's not helping clients with their U.S. citizenship issues. As reported, he was also one of the founders of a new organization called SEAT (Stop Extraterritorial American Taxation). 

He noted that imposing taxes on vacant properties isn't exactly new, citing the one in Vancouver, which he notes was also met with opposition when it was introduced.

New Zealand, meanwhile – which has also been feeling pressure from interest on the part of foreign house-buyers – in 2018 passed a law that bans most foreigners from being able to buy "existing" residential property in New Zealand, although they are able to buy new-build properties, Richardson pointed out. 

He added that Rep. Higgins's arguments are "inconsistent" on a number of fronts, and argues that U.S. lawmakers need to meet sooner rather than later to review the entire idea of cross-border taxation of individuals, including a review of the "dysfunctional" U.S. system of citizenship-based taxation (CBT).

"What Rep. Higgins appears to assume in his letter is that Canada should not be able to impose tax on Canadian property owned by American individuals, even though it's okay, under the U.S. system of CBT, for the U.S. to tax the rental income and capital gains realized by dual U.S./Canadian citizens, as well as U.S. citizens who simply live and work in Canada. 

"This suggests that Rep. Higgins has little or no understanding of the U.S.'s extraterritorial tax system. Because the bottom line is that the U.S. is imposing tax on the Canadian-sourced income earned by dual Canada/U.S. citizens who currently live in Canada. 

"Meanwhile, we have Sen. Elizabeth Warren (D-MA) proposing a wealth tax that would apply to property owned in Canada by dual Canadian/U.S. citizens, as well as U.S. citizens resident in Canada as well as the U.S.

"Finally, what's interesting about Rep. Higgins's objection is that he's not objecting to the Canadian tax in principle, but rather, to the fact that there's no exemption for U.S. citizens. Perhaps he should suggest that Elizabeth Warren's wealth tax, similarly, should not apply to Canadian property.

"What he really should be doing, I believe, is lobbying for a Canadian exemption to the U.S. extraterritorial tax system – inluding a Canada country exemption to FATCA." 

Editor's note: The American Expat Financial News Journal thanks John Richardson for his help in researching this article.