Double Taxation in US Health Care Reform

A recent Tax Court of Canada decision raises concerns of double taxation in proposed US health care reforms.  The case is Niemeijer v. The Queen, 2009 TCC 624.

Mr. Niemeijer was a commercial airline pilot with KLM Royal Dutch Airlines.  He was a resident of Canada, but KLM is based in Amsterdam and Mr. Niemeijer had his paycheques issued in The Netherlands.  KLM made several deductions from Mr. Niemeijer’s pay including an amount for Dutch Health Insurance premiums. The deductions were compulsory and variable depending on income. 

The court held that this kind of fee is not a tax as defined by Article 2 of the Canada-Netherlands Income Tax Convention:

1.      This Convention shall apply to taxes on income imposed on behalf of each of the States, irrespective of the manner in which they are levied.

2.      There shall be regarded as taxes on income all taxes imposed on total income, or on elements of income, including taxes on gains from the alienation of movable or immovable property, taxes on the total amounts of wages or salaries paid by enterprises, as well as taxes on capital appreciation.

4.      The Convention shall apply also to any identical or substantially similar taxes which are imposed after the date of signature of the Convention in addition to, or in place of, the existing taxes. The States or the competent authorities of the States shall notify each other of any substantial changes which have been made in their respective taxation laws.

The court then distinguished between taxes and social security charges, adopting Asscher v. Staatssecretaris van Finacikn, [1996] All ER (EC) 757.  That court held that there is a fundamental difference between a tax, which does not give rise to an entitlement to a specific benefit, and a social security contribution which does.

The applicability of this decision to US-Canadian taxes is questionable because Article 2(iii) of the Canada-US Tax Convention provides that social security taxes are taxes under the treaty.  However, the proposed US health care reform would require purchase of private insurance plans on penalty of a fine.  Under the Income Tax Act (Canada) fines do not typically qualify for tax relief. Would the private insurance premiums qualify as a social security tax under article 2(iii) of the treaty?  If they do, would the fines also qualify for treaty relief?  Can payments made to private companies even be thought of as taxes let alone social security taxes?

The court in Niemeijer took a narrow view of what is a “tax” despite the broad wording of Article 2 of the Dutch treaty.  Given the similarity of Article 2 in the Dutch and US treaties, the case is informative in the Canada/US context.  The court’s narrow reading seems to indicate a disinclination to grant tax relief in this type of situation, which in the Canada/US context, depending on the structure of the health reform legislation, could lead to double taxation or potentially unequal tax treatment for premiums vs. fines.

1 thought on “Double Taxation in US Health Care Reform

  1. Welcome Nathan!
    The result in Niemeijer is what I would have expected.
    The Canada-US treaty is really just the exception to a well established rule.
    It seems to me that private health insurance premiums will not qualify as social security taxes just because they are mandated but that they will qualify as a medical expense for Canadian income tax purposes.
    I can’t imagine that the associated penalties would qualify for any tax relief in Canada.
    I wonder if US citizens resident in Canada (and elsewhere outside of the US) will be obliged under US law to purchase US medical insurance that they probably would never use.

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