A few weeks ago, I mentioned that the Fifth Amendment is supposed to protect Americans from the the Federal government confiscating their property without due process. Yet the capital gains tax is exactly that: a seizure tax which actually impoverishes Americans. The Cato Institute has done an excellent video explaining why capital gains taxes is theft, pure and simple:
So first the central bank robs savers blind by devaluing the dollar. Then government taxes the nominal capital gains (that are actually losses when inflation is considered). “Nominal” means the dollar figure goes up but the actual buying power of the sale price remains consistent with the earlier purchase price. The house owner hasn’t made any real gains at all.
Now this is one good reason that Canadians enjoy zero capital gains tax on their primary residence. Moreover, housing tends to go up everywhere at once, and when Canadians sell a house, there is no actual extra money anywhere because they often just go out and buy another house which has been subject to the same nominal gains.
Let’s say that an American in Canada bought a house at CDN $500,000 in 1999 which is now worth CDN $1,000,000. If he sells it, it would have a nominal capital gain of CDN $500,000; now the CRA says the gains are all exempt because it is his primary dwelling, but the United States says he owes 20% on the $250,000 because only the first $250,000 is exempt; and so now he must pay the IRS $50,000 in taxes. But of course if you take the exchange rate into consideration, the tax owing would be higher–since the exchange rate when he bought the house was around 1.50 CDN/US; now it is one to one. So the initial purchase price was CDN $500,000/1.5=US $333,333; capital gains= US $1,000,000 (sale price) – US$ 333,333 (Original purchase price)=US $666,667-$250,000= 416667*20%(Obama’s capital gains tax rate)= $83,333 in taxes.
But of course, the IRS knows nothing about real estate transactions in Canada so you have to hand over this information voluntarily and then voluntarily write the cheque to them, because if you are a Canadian citizen, the CRA will not collect these capital gain taxes for the IRS. But now, if that man turns around and buys a new house, he will find that he needs all $83,333 in taxes that the IRS received even just to be able to access a house similar to the one he sold. I.e., the gains were all nominal, since the house didn’t really go up in real value during the 13 years that he lived in it.
Well, this should make you want to go out and renounce your citizenship. Or not. For how would the IRS ever find out that you sold your home–or that you even own a home in Canada–unless you tell them? Our worst enemy is the IRS. It is the greatest threat to our prosperity. The second worst enemy we have is ourselves, because of our voluntarily ratting on ourselves to our worst enemy by giving them information that they wouldn’t otherwise have, whereby they can assess us huge tax liabilities.
@Roger, if your nonresident alien spouse has no income isn’t it an advantage to file Married Filing Jointly so you can two exemptions instead of one?
I agree with you Petro–relinquishing is the only way to freedom.
No, No, No. Simply avoid the USA!
@johnDoe, The tax information I can find does not clarify it with respect to an alien non-citizen spouse, but in the case of claming non-US citizen children as dependents for US tax purposes you can only do so if the child is a US citizen or a US resident alien. Although a child born abroad to a US citizen is automatically a US citizen, it get murky in the case of adopted children born aroad who are not US citizens. It would seem to that filing jointly would indeed be an advantrage if the non-resident alien spouse has no income. But what I am not sure of is if you can claim the spouse as a dependent. This is where I suggest you seek the professional advice of an expert to be sure. I am just an engineer who has learned some things about US taxes the hard way, but there are many things for which I don’t have the answer. This is one of them. And of course if your non-resident alien spouse does not have income today, can you be assured that this will always be the case? Once you decide to file a joint return I am not sure if, later when the spouse has income, whether or not you can change to filing as a single.
George, you are right. I have dual citizenship and I am living in working in Brazil for the last 10 years. I am finding it impossible to do continue living and working here and every year going to the haslle of trying to comply with the IRS demands. I am not exaggerating if I tell you that it becoming impossibe to do it. This is affecting my health and my work, not to speak of expenses. It is true that I am coming to the conclusion that once a became an USA citizen it is impossible for me to come back and work in Brazil. I can not live under threats, forms, translations and all. As I see things now I either will be forced to stop working, renounce the USA citizenship ( I can´t do because I have family and investments in the USA) or return to the USA at my age (78 years old) where it will be very difficult for me to go back to work. Talking abouy human rights. I don´t have representation and if I try to contact by e-mail the representatives of the last place I lived in the USA I can´t di because I am not living in their district, Regards to all.
@markpinetree, What you may be able to do is telephone the office the US senator or Congressman who is in the state or district where you last lived in the US and where you have the right as a US citizen resident abroad to vote by absentee ballot, and ask them tto provide you with an email address, perhaps of a member of the legislator’s staff, to send an email message for delivery to the legislator. This I know is a method some US citizens resident abroad have been able to utilize to get around the barrier set up in the Capitol Hill websites which prevents persons who do not have an address within the district from sending emails to that legislator. Tem que achar o jetinho brasileiro.
Don’t just speculate about married filing jointly versus married filing separately. The place to start is page 6 of
Publication 501
Cat. No. 15000U
Exemptions, Standard Deduction, and Filing Information
http://www.irs.gov/pub/irs-pdf/p501.pdf
File jointly for a year and then no option (one special case if filer is dead) to revise to separate: “Once you file a joint return, you cannot choose to file separate returns for that year after the due date of the return.” Not true for separate to joint.
Yet more discrimination: See all the advantages lost in separate filing in order to have the larger advantage of no US taxation of spouse.
A full-column list of special rules to rub it in your face.
Petros – Good work in making a case study out of mismatch number seven. Don’t overlook those other eleven mismatches at
http://www.moodystax.com/blog/33-us-taxation-services/170-us-citizens-resident-in-canada-common-circumstances-where-us-tax-may-be-payable.html
@roger The quote you gave makes a case against “married filing jointly” , but not for “single” since there is also the (apparently undesirable) “married filing seperately” category.
@usxcanada I can’t find anything about my situation in the IRS instructions you pointed out. Although there was a lot about who is considered married I also looked in the instructions of nonresidents. Lots about how you can file jointly with your “non resident alien spouse”. But as has been said before, who in their right mind would do that. (although apparently it’s set up to be advantageous for you to do it, tax wise)
I would love to be filing singly. The tax rates are lower.. That’s what I’ve done in the past, but 2 accountants have told me otherwise. So if anyone finds anything definitive I would love to see it. If I can find one instance in the IRS code that says .i can file single, I will write it down, save it or whatever, so I have proof if anyone ever audits me
Canuck Doc Re March 8 2012. PUT YOUR HOUSE IN YOUR SPOUSE’S NAME.
@Kalc, I was thinking of doing the same but I believe there is an annual exemption amount you can give to a non-citizen non-resident spouse (NRA) of around $130,000. I understand this to mean that I would wind up owing gift taxes to the IRS if I were to transfer our home into just his name….it seems they have us ‘by the balls’ if we want to do everything honestly.
@DocCanuk, I agree it is very complicated, but I think I may have found the correct answer, which is indeed different that what I indicated in my prior response.
IRS Pub 17 states “:”Nonresident alien or dual-status alien. A joint return generally cannot be filed if either spouse is a nonresident alien at any time during the tax year.” This makes it clear by the words “cannot file” that you absolutly sould not file a joint return of any kind.
The filing categories, according to the Form 1040 Instructions are;
1. Single (see instructions for line 1)
2. Married, filing jointly (see instructiohns for line 2)
3. Married, filing separately (see instructions for line 3)
3. Head of Household (see instructions for line 4.
The instructions for Head of Household, line 4, state that this is the filing status you are to use ” If you are married to a non-resident alien at any time during the year and you do NOT chose to treat him or her as a resident alien.” This makes it crystal clear, as I read it, that the correct filing status for the person whose spouse is a non-US resident alien citizen.
There is one other filing category (which I quote below, just to make this complete)
4. Qualified widow (widower) with dependent child (see instructions for line 5,
I hope this helps.
@Canuck Doc, pardon my prior mixup in your proper identity.
I just checked the tax tables and it appears that the tax is lower as well if you file as Head of Household rather than Single or Married filing separatey. Married filing jointly results in a lower tax rate but of course you must also include your spouses income which, unless it is a very small amount of income, would likely result in a higher total tax.
As always, it is good to do the math to select the alternative which is best for you.
Mona –
Find a good professional, find that professional now (third time, last time, won’t say it again). You have a slowly closing 2012 window to gift to your non-US spouse, including your interest in the house.
http://www.reuters.com/article/2011/02/28/us-tax-gifts-idUSTRE71R4SU20110228
http://www.mycgfinancial.com/2012/02/2012-the-year-for-tax-free-gifting/
@Canuck Doc,
There are some additional notes in the Form 1040 filing instructions on Head of Household, which conceivably could modify the validity of selecting this category as the proper filing status for a US citizen married to a non-resident foregin national. That non-resident foreign national spouse must comply with certain conditions which are very difficult to understand. My impression is that such a person meets this qualification, but you might need to consult a highly qualified professional who really understands US tax law as it applies to non-resident citizens in order to be absolutely sure. I suspect that even tax professionals might be confused by this language.
Rather than describing these additional conditions in this posting, I suggest you go on-line to read them directly from the IRS instructions for form 1040 for 2011, so there are no inadvertent copying errors.
The basic problem that so many in the U.S. have is simple: most of the world still relies on ethnicity as the basis for citizenship. In the U.S., few have an ethnicity – America is and always was a land of laws not ”tribal” relations but this is more an exception than the rule in this world.
For those Americans that still have a non-American ethnicity intact, make sure that you keep close ties to your foreign ethnic group. You should be fine then.
For the rest of you, do your best to get your laws in the U.S. changed. Just as bad laws come, they can go.
Ethnicity? My Canadian citizenship has nothing to do with ethnicity. Neither does my husbands UK citizenship? Canadian or UK citizenship are no more about ethnicity then US citizenship. But neither of those pose these kind of problem.
It is citizenship based taxation – the attempt to tax people as if they live in the “home” country even while they are living and paying taxes somewhere else that is the problem.
You don’t have to be super-rich for this to apply to you. This same analysis applies to any US citizen in Canada who hasn’t lived in their home for 2 out of the last 5 years, regardless of the value. For example, if after living in your home for many years, you are transferred elsewhere by your employer but chose to keep the home and possibly rent it out. If you sell the house more than 3 years later, you will have limited or no capital gains in Canada because you don’t have to pay capital gains for the years you lived in it plus up to 4 additional years. But you will pay capital gains on the full increase in the value of the house to the US (and yes, the gain could be quite high depending on the value of the US dollar when you buy and sell the house). So, for example, if you work for the Canadian government and are transferred overseas for three years, and then want to sell your home because you are transferred back to Canada but to a different city, you will owe nothing on the sale of your home in Canada, but will owe taxes on the entire “gain” (as calculated in US dollars at the time of purchase and sale) to the IRS. In this scenario, even a $250,000 house can create quite a tax liability: using your numbers above, it would be $83,333. Plus, there is the issue of recaptured “allowable depreciation” that you must pay tax on in the US even if you never deducted depreciation in the US and even though you are not allowed to deduct CCA in Canada on your principal residence. Who wants to pay over $90,000 to the US on a $250,000 gain that would be tax free in Canada?
To add to the unfairness: US diplomats (but not Canadian) are exempt from these taxes.
Hi Roger, I was wondering if my US citizen spouse were to ‘gift’ our principal residence in Canada to me (a non-US person, a Canadian Citizen) this year 2012, I wanted to know when he report his tax return to the IRS:-
1) Is the Gift value of the house the current market value, i.e. year 2012 price, or is it the value when he bought the house in year 2003, owned by himself solely?
2) Is the capital gain calculated as: year 2012 price – year 2003 price (the year that he purchased the house solely by himself)? Let’s say the gain is $500k.
3) Does he need to file Principal residence capital gain tax? If he has to, if this year he file his tax return as “head of household”, can he get $500k tax exemption as a married couple?
Many thanks, if anyone has any invaluable insights into this!
@M,
I’ll just jump in with an answer, but not the one you are looking for.
Regarding your query on your husband, a US citizen, gifting your principal residence to you (a non-US, person / Canadian citizen) before the year is over: that is a question that needs to be taken up with a very competent US tax lawyer. I would say you need specific legal advice before you make a drastic move like that. It could have other undue consequences than just the US taxation aspect.
We at Isaac Brock are not lawyers. We do not and cannot give legal advice. We have varying opinions and experiences that may assist others to make their specific decisions on many aspects pertaining to the being a US Person Abroad. Although this may have been mentioned somewhere in our posts and comments, I don’t recall the subject being discussed in any great detail.
Someone may jump in with their opinion for you, but that (as is mine here) would be just that — opinion.
Good luck in obtaining the information you need — the 2012 clock is ticking away (and what you may be thinking of — US tax changes that may or may not take place by the end of the year under the continuing Obama administration).
Further to my comment above, I have received this message anonymously — it is an opinion of another here / not legal advice that Isaac Brock Society is giving:
Many, many thanks for the very valuable information provided by anonymous, and thanks Calgary411. So the Gifting of the principal residence will not affect the personal income tax. Just wonder if the principal residence has a mortgage attached to it, how does it work? Would my husband need to pay off the mortgage and then I get a new mortgage? Or can my husband don’t do anything to the mortgage despite he gifts the house to me?
Hope anonymous won’t mind if I ask how much did it cost you for the Lawyer’s paperwork fees, how much time did the process take, and if you know any good lawyer(s) that could recommend? I am in the Toronto area. If anyone has any invaluable information/experience that could share with me I would very much appreciate it!
@M I am considering doing the same thing. There are two lawyers that have said they can help me with this: Phil Hodgen, who blogged about Property Transfers Between Spouses: Gift Tax at http://hodgen.com/blog/page/2/, and Will Todd http://www.davis.ca/en/lawyer/Will-Todd/ , who describes a similar plan in an article at http://www.leithwheeler.com/docs/q3_2011_planning_matters.pdf. I don’t know anyone in Toronto. Will quoted me $500 to do the transfer and the required IRS paperwork (this may be out of date). Land transfer fees will be more for you in Ontario. I don’t know how a mortgage would affect this. Good luck.
My problem is I need someone who can (for a reasonable fee) explain Canadian attribution laws to me. Simply put, I understand that there are tax implications in Canada if I give income earning property to my spouse. My understanding is that future income generated from the proceeds of our home will be attributed back to me. However, I don’t understand how this should be reported on my Canadian tax returns. It sounds like an accounting nightmare, and I have been warned that we are likely to be audited if we try to file our returns ourselves. Any advice on this related issue would be appreciated.
@aaa. @M,
I have no advice for you, but have gotten another comment for you anonymously, below:
@M, aaa, I am pretty sure that I wouldn’t go to the trouble of transferring assets to another person to avoid taxes in the US. I would prefer (1) to renounce/relinquish citizenship; (2) under-report my assets in Canada if I would be a covered expatriate — (this is going to get me in the slammer in the US).
The issue is this: The IRS can’t know what your house is worth or weather you live in a house that you own, or whether you sold your house, or whether you own other financial assets (e.g., financial accounts) unless you tell them. At this point, Canadian banks may begin to inform the IRS about your assets–but that is a few months away. Do your banks even know that you are considered a US person by the United States?
What I am saying of course applies to Canadians who have no assets in the United States or hope for some appreciable income in the states. Sure, get advice, but not only is transferring assets into a spouse’s name a major hassle which will be accompanied by large legal fees and land transfer fees, it may also reduce their financial protection in case of divorce (has anyone seen the film “Casino” lately?). Really, why should the IRS be able to screw up your life here in Canada. I’m also saying that one should take the road which has the least amount of risk, and that may mean omitting to tell the IRS every last detail of your private life here in Canada–we are living in Canada outside the jurisdiction of the United States and why should we give a damn about their laws. Congress could pass a law that I can’t breath on Mondays. But I will disobey it. I have no choice but to live as a free person in Canada and to protect myself and the interests of my family and my country.
In other words, many feel the need to be absolutely scrupulously honest with the IRS. But this will only get you into trouble. The IRS is a criminal organization. When dealing with a criminal organization you have to have a certain level of disrespect for their so-called rules, and use a bit of common sense. The first rule is of thumb is that the IRS is not looking to help you but to fleece you. So be careful what you tell them about what you have, because that is nothing more them than a steak is to lion.
Ok, this is what the Finance Minister Jim Flaherty has said: The Canadian government will not collect US taxes from a Canadian citizen, and they will not collect FBAR fines. Thus, I would be very reticent to do things that cost actual legal and accounting fees, when disobeying the rules of the IRS would incur less risk of loss of capital. Don’t you think that Flaherty is telling US citizens resident in Canada to say to the IRS, “F… off”? Here is what I wrote on the subject of civil disobedience several months ago: http://isaacbrocksociety.ca/tag/civil-disobedience/