When A Foreign Posting Creates Tax Disaster

Michael Catlin recently learned that his suit against the City of New York can proceed. Catlin joined the New York City Police Department in 2001. In 2007 he was accepted to the 13th Precinct Detective Squad and promoted to detective in 2009.  An interesting opportunity arose in 2010. The NYPD Intelligence Division posted a job listing for NYPD Liaisons who would be assigned to police departments around the world in a reciprocal relationship with New York.  Detective Catlin was accepted for the program and sent to Toronto with a two year commitment in 2011.  Everything went great so he continued in the role.  Detective Catlin married a Canadian woman. They had a child and he attained status as a permanent resident in 2018.  Then an accountant suggested that he might need to be paying Canadian taxes and things went from bad to worse. In 2024, when it became clear that NYPD would not be helping him solve his Canadian tax problem, he retired and engaged the Law Office Of John A. Scola, PLLC to sue the department.

A Cautionary Tale

The latest ruling in the case is not the end.  The City argued that the claim were barred by the statute of limitations since Detective Catlin knew there was a problem back in 2018.  Catlin’s argument is that it was not till 2024 that NYPD definitively stated that they were not going to help him with the $500,000 he had already paid and the $245,000, that the Canadian Revenue Agency claims he still owes.  There were also procedural issues about amending the original complaint.  Judge Hasa A.Kingo ruled in favor of the plaintiff on most issues.  There is a settlement conference scheduled for October 28. Attorney Scola texted me that the outcome of the conference is not public. Regardless of the result, this a painful process for both Detective Catlin and the department.  What interests me is how this sort of thing can be avoided.

Attorney Scola told me that the Canadian tax liability had not been litigated,  The City had PKF O’Connor Davies, an accounting firm, prepare a report on it but the results were not shared with the plaintiff. I spoke with Magda Szabo of Berkowitz Pollock Brant, a top 50 accounting firm with offices in Florida and New York City.  She pointed me to Title XIX of the United States – Canada Income Tax Convention.  It provides that:

“Remuneration, other than a pension, paid by a Contracting State or a political subdivision or local authority thereof to a citizen of that State in respect of services rendered in the discharge of functions of a governmental nature shall be taxable only in that State.”

That seems to preclude Canada from taxing what Detective Catlin was getting paid by the City of New York. This might have created an enviable situation.  The US foreign earned income exclusion FEIE is denied to employees of the federal government but not to state and municipal employees.  According to the complaint in the case Catlin started claiming the “foreign tax exclusion” on his US return beginning in 2013.  I don’t know whether that is a reference to the FEIE. That would have exempted all or most of his pay from US income tax.  One of the implications in the complaint in the litigation is that NYPD did not cooperate in informing Canada about Catlin’s status as a government employee.

In the available material there is no breakdown of Catlin’s Canadian liability.  The complaint implies that some of it is interest and penalties.  During the thirteen or so years, he was working in Canada his base pay would have gone from roughly $80,000 to $150,000.  Combined Canadian and provincial income taxes are generally higher than combined US federal and state income taxes.  Just for laughs I ran a computation of total income taxes Toronto versus New York City on $100,000 USD and came up with (round numbers) $26,000 USD versus $21,000 USD.

How Private Companies May Handle Things

Diana Hansen provided a good discussion of the approaches that companies take when assigning worker in this article in The Tax Adviser. There are three common approaches -equalization, protection and lassez-faire.

The point of equalization is to have an employee no worse or better for having been on a foreign assignment.  The company computes a “hypothetical tax” as if the employee were not on a foreign assignment.  The hypothetical tax is then compared to the employee’s actual returns. If the actual tax is higher the employer reimburses.  If it is lower the employee pays the employer.  There might be “hypothetical withholdings” to cover the latter eventuality.

Under protection there is an adjustment only if the employee is coming out behind. In an assignment to a low tax country the employee may come out ahead due to the foreign earned income exclusion.  The employee under that sort of plan would get to keep the difference.

Under the laissez-faire method the employer lets the cards lie where they fall.  That appears to have been the NYPD approach with Detective Catlin.  According to his complaint other liaison officers were treated differently.

The Moral

The litigation highlights the hazard of the lassez-faire approach for employers. On the employee side it illustrates the hazard of relying on your employer to take care of you especially if a short term foreign assignment turns into a much longer one.  We may never know how the case turns out, but it is pretty clear that either side would have been served by more forethought.

Other Coverage

Katherine Boniello and Matthew Sedacca covered the case for the New York Post right after the complaint was filed on January 11, 2025 with NYPD wrongly stuck Canada liaison with $740K tax bill after abroad-work snafu: suit.

Tina Moore of the Post had interviewed Catlin for a story dated May 25, 2024 –  Several NYPD international outposts created to fight terrorism after 9/11 closing after mounting tax troubles.

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Originally published on Forbes.com.

For articles oriented toward tax professionals check out Think Outside The Tax Box.

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