A reader sent me the following e-mail and eventually gave me the permission to publish it earlier this week. The IRS is hammering Canadian residents who they deem to be US persons. All Canadians should be aware of the hazard–that if we allow the IRS to shake down our people who happened to be “United States persons” it makes all the rest of us poorer because (1) it decreases our taxable base; (2) it reduces the total investment in the Canadian economy (destroying jobs); (3) it will increase the total tax burden on workers who have to pay the Old Age security for people impoverished by United States taxation of Canadians; (4) it is a very real threat to Canadian sovereignty because it is the exaction of tribute from Canadian taxpayers. We should all be very alarmed about United States extraterritorial taxation! We must put pressure on our politicians to nip this in the bud. Here is the story of one Canadian couple who
the Godfather Douglas Shulman Barack Obama is shaking down:
Dear Mr Dunn,
Thank you for responding. This is our story. Any insight and advice you may offer us would be appreciated. I’ve been reading little bits of Isaac Brock for a while, and know a few people who contribute to it. It’s a wealth of information. Thank you for championing US citizens living everywhere.
To tell you a little about my husband and me, I came to Canada in 1968 at the age of 12 with my Canadian mother and 2 siblings. My husband was born in Canada and obtained a US citizenship card at 20 through his American father. I became a Canadian in 1996. Neither of us has ever worked in the US. I’ve voted in a US election once, regrettably to help bring in the individual whose party has brought this hell storm down upon us.
Our adventures in OVDI began last August when we read about it in the press. With only a week or so before the deadline to file for the 90-day extension, our priority was to first seek the advice of a US tax lawyer. We were told that ignorance of the law was no defense. After analogies involving boogey-men with chain saws from our well respected but exhausted lawyer, we decided to enter OVDI in order to become tax compliant at the first opportunity. Any misgivings we had were outweighed by the absolute terror of what our 51 bank accounts we had recklessly opened over the course of eight years would do to our nest egg; accounts we opened for our children, parents, businesses, mortgage providers, etc. Then there was the sale of our ridiculously overpriced house in Vancouver in 2008, netting us a capital gain and the FBAR penalty arising from it (apparently, the IRS has a claim on that nice little tax exemption gift from the CRA on the sale of a principal residence in Canada). For us, there was no consolation in knowing that the Canadian government would not collect penalties on behalf of the IRS against Canadians, we needed to be able to enter the US freely for personal reasons and do business with Americans bringing funds to Canada. Then there was FATCA. We felt it was better to be a low hanging fruit than to have them chase up the tree after us, and being angry with us for having to.
My first indication that something was rotten was when the deadline to apply for the 30-day extension was given another week because of hurricane Irene. I remember saying “there’s a storm blowing from offshore, but it’s not Irene. They’re overwhelmed and don’t want to admit it”. Other indications came just as we signed on to OVDI and were asked to turn over the names of those who helped us in our financial dealings. Also, by then I had done enough research to have an idea that something had changed, that other delinquent filers before us had maybe been given a pass. I asked our lawyer what was different. He said the OVDI’s Q & A. OVDI still looked better than $10,000 x 51. So be it.
Of course, the learning curve being the steepest since then, we began to have misgivings about our decision. We recognize the heavy handedness in how we’ve been dealt with as otherwise law-abiding citizens living in another country. The penny really dropped for us after reading Nina Olson’s report to congress. We’d been duped!
Over the course of this ordeal I’ve written appeals to politicians on both sides of the border, the US ambassador to Canada, the IRS themselves and have met with my MP John Weston. He said he was working hard on the issues facing duals in Canada and finally after many months of silence and my own theories of government media blackouts, I just today received a letter from him bringing me up to date on his efforts. In it he writes: “… The IRS at least acknowledged the unfairness of what it formally proposed to do in enforcing the FBAR…There is still uncertainty how the IRS will enforce the rules. While I am not completely happy with the aggressiveness and unfairness in the way the IRS has gone about its business towards Canadians, Canadians are at least in a better position than they were a few months ago…”
Not completely happy? His way of saying he’s disappointed. Better position? As far as I see, it’s more shifting sands coming from the IRS. There you have it, the MP who’s been designated to report directly to Minister Flaherty on issues effecting duals offering little in the way of encouragement and news of real progress for us.
We’ve been in contact with TAS. Our nice lady from the department that deals with international taxpayers said that she wasn’t able to formally open a file for us, as there hadn’t yet been a response to our submission. She did confirm, in no uncertain terms, that the IRS doesn’t consider ignorance of the law as an excuse for breaking it. Knowing a little about our situation she did give us hope, however, that we may be able to benefit from a first time penalty abatement. And there is the tax. John Weston had told us that Article XXV in Canada US tax treaty might exempt us from a capital gain in this circumstance. Our lawyer does not agree. I asked her if she would have TAS’s legal look into it. So that’s where we are right now. My question is: why is the IRS negotiating within OVDI when they said they wouldn’t?
I don’t know what direction the US is going to take on these issues. The IRS seems like it’s going to collapse under its own weight, and with all the bad policy coming out of congress things don’t look like they’ll get better any time soon. I certainly don’t think an apology is coming soon, either.
For us the whole process has been like going through the five stages of grief: denial, anger, bargaining, depression, and eventual acceptance. As difficult as that’s been, it’s not as bad as it would be if I was hiding without a voice and trying to keep one step ahead of the IRS.
@ bubblebustin who wrote: “It makes me absolutely sick that we have to give them a share in the profit of out house in Canada, when we never asked anything of the US throughout our ownership of it.”
I don’t know what your situation is exactly but since May 1997 any “US person” who sells a primary residence is allowed a fairly generous exemption on capital gains. This ruling came just in the nick of time for us when we sold our US home later that year. You are probably aware of this but just in case anyone else isn’t, here’s the pertinent section from Publication 523 at http://www.irs.gov/publications/p523/ar02.html …
You can exclude up to $250,000 of the gain (other than gain allocated to periods of nonqualified use) on the sale of your main home if all of the following are true.
* You meet the ownership test.
* You meet the use test.
* During the 2-year period ending on the date of the sale, you did not exclude gain from the sale of another home.
For details on gain allocated to periods of nonqualified use, see Nonqualified Use , later.
If you and another person owned the home jointly but file separate returns, each of you can exclude up to $250,000 of gain from the sale of your interest in the home if each of you meets the three conditions just listed.
You may be able to exclude up to $500,000 of the gain (other than gain allocated to periods of nonqualified use) on the sale of your main home if you are married and file a joint return and meet the requirements listed in the discussion of the special rules for joint returns, later, under Married Persons.
@em, you are absolutely correct, but you need to consider that our house was in Vancouver. Suffice it to say that the value of our home tripled over the years we owned it and the
exclusion did not cover all of our net gain. We would have been better off having sold prior to the new exclusion rules, as we plowed everything into building a new home. Under the old rules: “If a taxpayer realized a gain on the sale of his old principal residence, the gain was not taxed if he purchased a new principal residence within a specified replacement period at a cost that equaled or exceeded the adjusted sales price of the old principal residence. If the cost of the new principal residence was less than the adjusted sales price of the old principal residence, all or a portion of the realized gain was taxed.”
Sorry bubblebustin, but maybe the information will help someone else. The 1997 ruling was very welcomed by us for another reason. We paid cash for all the materials for our US house, hauled those materials 50 miles up to our mountain “estate” and built the house with nothing but our own labour. It would have been a nightmare trying to prove a “base amount” for that house with only a large shoebox full of material receipts and in the eyes of the IRS, labour counts for nothing if it is your own labour. As it turned out we didn’t have to go through that because the house sold for less than the exemption, even assuming zero for a “base amount”. Our good luck turned out to be bad luck for you and it should never be a matter of luck, only fairness.
@Steven John Mopsick and all, I just read my story again and am afraid that I may have unintentionally misled some readers by stating:
“we needed to be able to enter the US freely for personal reasons and do business with Americans bringing funds to Canada.”, implying we needed to enter the US to do business with Americans, although that would have required the word “to” before “do business” to have correctly implied that. It would have been less ambiguous to state: “We needed to do business with Americans bringing funds into Canada and to be able to enter the US for personal reasons”.
@bubblebustin: Unfortunately, I followed a very similar path to you in August of 2011. After entering OVDI and spending many thousands of dollars to have 8 full years of back taxes prepared, I found I owed exactly $0 in US tax.
Have you had any updates recently? Last I heard from my overpriced lawyer was that the IRS might recommend I go the “streamlined” route and possibly get my penalty amount back. I’m certainly not getting back the money wasted preparing an extra 5 years of back taxes though.
Best wishes to you and your family.
I have lived in Canada 43 years and from the U.S. I got scared into going for the full disclosure and OVDI routine. In August 2011 I sent them over $120,000 mainly for the failure to send in the FBAR form( legal and accounting fees we’re $30,0000.) To date I’ve heard nothing. back. But I feel like a complete sucker. Since doing this, I found out that in accordance with the US-CANADA tax treaty, neither country will assist in collecting any tax or penalty if the money was earned where you live if you are a citizen of that country. In other words, the CRA will not assist the IRS in collecting any tax on money I earn in Canada, which for me is everything I’ve earned This leaves the IRS SOL.They can do nothing to me except try a Canadian court and they’d be laughed out of there. Remember, only North Korea and the former government of Libya have tax policies that tax its citizens after they leave and become citizens else where. Good company I’d say. So the US gets nothing from me in the future, and doing the OVDI was a complete waste for me.My next move is to give up my US citizenship. The IRS will then hit me with a 50% tax on my net wealth. But how they gonna collect that? I’m done with the US; never plan to go back (although the border people and the tax people don’t coordinate much so getting into the US will likely remain easy); never plan to file income tax again; and I will continue to prosper in a truly decent democratic and fair country that doesn’t involve itself in world terrorism. And that feels good!
Wow…all I can say is wow…: /
Horrible. But perhaps there’s some hope — such as the Taxpayer Advocate or getting transferred into the Streamline Program. I don’t know much about the modalities, but others do and I’m sure they will be commenting here.
Two people who come to mind are Just Me had success using IRS’s Taxpayer Advocate Service, as did Not that Lisa! who used both Taxpayer Advocate and the Streamline Programme, and they’ve written about their experiences on Brock.
This post about Lisa’s experience is very recent, from just a few weeks ago. More on Opting out of OVDI and into the Streamlined Program
Just Me was a real trailblazer in this matter, people have learned a lot from him. He wrote his story (and a lot about OVDI) in this post. His case wrapped up earlier, within OVDI, before the Streamline Program existed but the Taxpayer Advocate Service was very helpful.
Also Roy Berg posted on another thread today,
“Taxes will not be refunded for those who “opt out” of OVDI/OVDP and into Streamlined. We have had many clients pursue this route and receive a refund of all penalties, though.”
If one doesn’t meet the criteria for Streamline, there’s still Standard Opt-Out to consider, where, unlike OVDI, reasonable cause can also be taken into consideration, and in any event there’s the Taxpayer Advocate Service. As I said I don’t know much about this, but there’s other people here who know more and can point you to concrete information. I wish you all the best!
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