Saving clause

Because of the saving clause, the IRS says, a US citizen living in Canada still files a Form 1040 reporting worldwide income. It is Article 1(4) in the 2016 US Model and the US-UK treaty, and Article XXIX(2) in the US-Canada treaty. In most treaties the clause works both ways, since the other country keeps the right to tax its own residents too. The US-South Africa and US-Switzerland treaties apply it to the US alone.

Each clause lists exceptions, and only those articles still protect US citizens. They include non-discrimination, the mutual agreement procedure between the two tax authorities, and some pension and social security rules. A second, shorter list protects only people who are neither US citizens nor green card holders.

For a citizen abroad, the most useful exception is the double tax article. It credits foreign tax against US tax. The foreign earned income exclusion is US law, so the saving clause leaves it in place. The pension exceptions let US tax on growth in an RRSP or a UK pension scheme wait until you draw on it.

The usual mistake is to read a treaty as ending US tax for a citizen who lives abroad. A residence tie-breaker, the treaty rule that picks one country for someone both claim as a resident, does not change that. The clause keeps citizens taxable wherever the treaty places their residence. A green card holder can use a tie-breaker to be treated as a resident of the other country. That claim must be disclosed on Form 8833.