The case for citizenship-based taxation has been building for years, but with huge budget deficits to come, fairer taxation is all the more needed.
(This article has been translated into French.)
It is time for Canada to adopt citizenship-based taxation (CBT).
While we don’t have complete information on where Canadians have taken up long-term residence abroad, there are reports of about 300,000 Canadian citizens in Hong Kong and tens of thousands in each of several countries in the Middle East. From Asia to Africa, from Europe to the Caribbean and South America and, of course, the US, significant numbers of Canadians have made their permanent home away from Canada. There were about 3 million Canadians abroad, including tourists, at the start of the COVID-19 crisis, according to the Prime Minister.
Currently, Canadian income tax obligations are based on residency status and not on citizenship or immigration status, so non-resident Canadians do not pay taxes. However, expatriate Canadians enjoy the same rights as Canadians who are resident here. They should face the same obligations as resident Canadians, including paying taxes, so that they share the responsibility of contributing, at least financially, to our country.
The United States is the only developed country that taxes its citizens on their global income irrespective of where they live or how long they have lived outside of the US. The constitutional validity of CBT has not been tested in Canada, but the 1924 US Supreme Court decision in the case of Cook v. Tait offers cogent reasoning about CBT that shows its validity under the US constitution. The decision relied on the inherent benefits received by US citizens and their property from the US government, regardless of where the citizens made their home or where their property was located.
Michael S. Kirsch of the University of Notre Dame, in his seminal 2007 article “Taxing Citizens in a Global Economy,” argues for the same principle. Kirsch suggests that recent globalization trends strengthen, rather than weaken, the case for taxing US citizens living abroad. He concludes that modern advances in transportation and communication weaken the case for giving preferential treatment to income earned by citizens working abroad, in that these developments afford the expatriate US citizen virtually the same rights as that of a resident US citizen, such as personal protection, property protection, the right to vote and the right to enter.
The same can be said of expatriate Canadians. They are assured of guaranteed access to a safe, secure and stable society, virtually free world-class health care and education systems and, depending on income levels, affordable housing, irrespective of their length of stay (or lack thereof) in Canada. In addition, depending on the time spent in Canada, financial supports like Old Age Security and the Guaranteed Income Supplement are available to them. Anecdotal evidence suggests citizens are returning to Canada to enjoy these benefits after spending their productive lives elsewhere. This is a significant contingent liability for Canada, because citizenship — not contribution (or lack thereof) to our society — is the criterion for benefits and support.
Kirsch also discusses the need to maintain the cohesion of a society. In the absence of citizenship-based taxation, there is a strong tax-driven incentive for a not insignificant number of high-income and high-net-worth individuals to establish tax residence abroad in order to avoid income taxes. The creation of a separate class of citizens could have corrosive effects on broader society, just as it has done in other countries that rely only on residence-based taxation.
A Canadian passport facilitates visa-free travel and increased international mobility — and serves as a plan B, allowing these global citizens to return here when things get rough elsewhere.
There was a time when most immigrants to Canada came here to become citizens and settle permanently. Now, for a small but growing number, the objective is to acquire citizenship and leave again. A Canadian passport facilitates visa-free travel and increased international mobility — and serves as a plan B, allowing these global citizens to return here when things get rough elsewhere. But without CBT, they don’t help to finance the society they are counting on as a safe harbour.
There are also budgetary considerations underlying the adoption of a CBT system. Before the COVID-19 crisis, our economy was in great shape and able to generate sufficient government revenues to maintain a comfortable federal debt-to-GDP ratio of about 30 percent. Now we are in another world altogether. We are going to have the biggest budget deficit in the history of Canada, thanks to the biggest bailout packages ever for millions of Canadians and businesses. The public debt may exceed all previous peaks. While it is always optimal for a country to have an expanding tax base that is able to fund social programs and services or investments in infrastructure, defence and economic development, it has now become a necessity. With CBT, the tax base would include many more new taxpayers.
Changes to demographics, particularly the greying of our society, will only accentuate the need for higher government revenues, as these changes will result in substantial growth in demand for social services. Volatile global situations will increase the number of Canadians returning to safety (financial, health and/or physical) in Canada, also boosting the demand for government services.
One revenue option to meet these demands is to increase direct or indirect tax rates. The alternative is to shrink spending. Canadians seem to have no appetite for either of these options, especially in the current crisis. The Liberals in the recent past have raised taxes on the wealthy. But there is a limit to this approach.
The only viable alternative for enlarging the revenue stream in order to maintain adequate service delivery to citizens is to expand the taxpayer base. This is why the idea of CBT is so appealing. The government should examine CBT’s feasibility, including the potential contingent liability and revenue, plus enforcement and international tax agreement issues. The financial burden and responsibility of meeting the needs of all Canadians should be shared by all citizens. It is the equitable thing to do.