Canada and the United States have had a civilized, wide-ranging tax treaty since 1942, with the fair-minded purpose of preventing double taxation. But in the past few years, the Internal Revenue Service has violated this long-standing relationship, by treating Canadians who may also be American citizens as if they were criminal tax evaders trying to conceal ill-gotten gains, and by claiming penalties that would amount to confiscation of large portions of people's life savings.
The United States government takes the unusual position that its citizens should pay tax on all their income, no matter in what country they earn it. That is tolerable, because treaties can remove the crushing burden of double taxation. Thanks to the Canada-U.S. Tax Convention, Canadians with U.S. citizenship are in little danger of having to pay years' worth of income tax.
The trouble arises mainly from the IRS's requirement that dual citizens provide filings, every year, about their bank accounts and investment portfolios, including the most humdrum savings accounts and RRSPs – if they all add up to more than $10,000. The penalties for not filing are oppressive. And people who live in Canada have no congressmen to appeal to.
The IRS began to change for the worse in the 1970s, when Washington began to feel the pressure of accumulated deficits. Rather than continuing to be a reasonable agency that administered the tax system, the IRS came to be viewed as a profit centre for the federal government. The culture that resulted is vividly – or rather, depressingly – portrayed in The Pale King, the last novel of the late David Foster Wallace, published this year.
The U.S. has in recent years made great progress in dealing with deliberately concealed offshore accounts in such countries as Switzerland and Liechtenstein – and rightly so. The hundred of thousands of U.S. citizens in Canada are a very different matter. The Obama administration and the Congress should legislate forthwith to eliminate all heavy penalties against residents of Canada who have taken no special steps to hide their assets, who have simply built up their family's savings in the ordinary course of life, and who have paid their taxes where they earned their income – in Cana da.
Editor's Note: The U.S. Internal Revenue Service requires the filing of an annual report by Americans who own accounts outside the U.S. worth more than $10,000 in the aggregate. Incorrect information appeared in an earlier version of this editorial. This version has been corrected.