Crossposted from RenounceUScitizenship
Introduction – The Four Principles Of US Taxation Abroad
The U.S. tax system (at least in relation to U.S. citizens abroad) operates on the following four basic principles:
1. If something is “foreign” it should be punished.
2. The “principle of penalty” – There is no way that somebody can clean up innocent mistakes without paying penalties or the threat of penalties.
3. “No good deed goes unpunished” – Those who have filed (and are in the system) will have greater problems than those who have never filed. (Look at the new Streamlined compliance procedures for US citizens abroad for evidence of this – those who have filed cannot use the procedure to amend returns)
4. U.S. citizens abroad are tax cheats.
Those four principles sum it up.
This morning I came across an article preaching the virtues of the TFSA (“Tax Free Savings Account”) for Canadian residents. The article points out that:
Among the top reasons for the rise in popularity of TFSAs is their flexibility. Money can be pulled out without penalty in case of a financial emergency, TFSAs don’t have to be converted into a RRIF upon retirement, and they can contain a variety of different types of investments. Investors don’t get an immediate tax break the way they do with an RRSP contribution, but investments inside a TFSA grow tax-free
The TFSA is going to become a very significant means of investing and savings for Canadians.
Well, not all Canadians. As you know “Not all Canadians are created equally”. Those Canadians who are also U.S. citizens are, by virtue of “American Exceptionalism”, simply exceptional. They are exceptionally different. They are also targeted for exceptionally harsh tax treatment. For those who just want the bottom line:
Under no circumstances should a U.S. citizen invest in a TFSA. I came across a TFSA video on the Globe web site (it’s only one minute you can view it now) that suggests that TFSAs might be a good investment for U.S. citizens in Canada. The video is full of half truths and IMHO is wrong. As discussed in some of the comments, the reporting costs and potential for penalties for investing in a TFSA (not to mention the LCUs) are so extreme that you should run. This comment is particularly succinct:
As the “Interested Layman” stated below. TFSAs are only recognized as Trusts. As a trust form 3520A is supposed to be filed by March 15. (I know that is before US income filing is due). Then form 3520 when you file your US income tax. Fun, fun, fun! Just adding the income to your income tax is not what they want. My US tax accountant would not do my income tax unless I filed this form and back-filed it for years 2009 and 2010 (TFSA started in 2009). The IRS fine for not filing these forms is $10,000 or 35% of the account.
Next any Dual (like myself) or US citizen living in Canada who has opened a RESP must also file the same forms. Unlike RRSPs an RESP is recognized as a TRUST and also is taxed by the IRS. I know individuals who have paid the accountant more to file the forms then they have in the RESP account. Fun, Fun, Fun!
Now for the rant!
I find it very interesting that the IRS insists on pursuing law abiding citizens as if they are criminals. One of the reasons for the Revolutionary war was to keep King George from taxing the colonies. Very ironic. Canada only taxes by residency. The US taxes by birth. Once a citizen always a citizen. You pay tax no matter where you reside.
If you want to give up your citizenship you have to pay all taxes you are deemed to owe. This means if you own a business or a home, you have to pay the taxes on unrealized capital gains on them to be free.
I left the US 40 years ago. I received no money from the US. I could not write off mortgage interest on my home to pay for it. Now if I sell my home I will be tax liable to the US for taxes on the Capital gains? Damn!
By the way, there are many investments that are prohibited to US citizens in Canada.
That’s the bottom line. For those who did not fully understand the above comment, let me explain:
1. Unless you have been living under a rock you know that U.S. citizens, regardless of where they live must file tax returns and pay tax on their world income. Since at least 2011 U.S. citizens abroad are presumed to be tax cheats. (Principle 4 – All U.S. citizens abroad are tax cheats.)
2. U.S. citizens abroad are taxed in the same way as U.S. residents. They complete the same tax return. They are subject to the same rules. (The only exception is that at least for the moment they have the possible benefit of the Foreign Earned Income Exclusion.)
3. From a U.S. perspective the TFSA is NOT tax free. Hence, you must include the income every year on your U.S. return. But, TFSA is not just any kind of income, it is income from a “Foreign Trust”.
4. The U.S. penalizes and puts special restrictions on anything “Foreign” including “Foreign Trusts”. (Principle 2 – If something is foreign it should be punished.)
5. All Foreign Retirement and Investing Plans are “Foreign Trusts”. TFSAs are “Foreign Trusts”.
6. Form Nation imposes special reporting requirements on Foreign Trusts. There are two forms. The first is Form 3520. The second is Form 3520A.
7. Form 3520 is the form where you as the taxpayer have to report the information on the Foreign Trust. This is complicated, time consuming and expensive to complete. US citizenship has been priced out of the market. It is filed along with your tax return and is due when your tax return is due.
8. Form 3520A is a form that the administrator of the trust/TFSA (for example the CIBC bank is required to complete. This particular form -are you ready for this – is due on March 15. Yes, you got it. Form 3520A is due before your tax return is filed. Do you really think you could get your bank to complete a 3520A for you and file it?
9. What happens if CIBC does not not file the From 3520A by March 15? Answer: as the beneficiary of the Foreign Trust, you will be subjected to draconian, idiotic and unfair penalties. (Principle 2 – The Principle of Penalty)
10. Who could possibly know about Form 3520A? Answer nobody. Well, not quite. Once you file your return with the Form 3520 and they see there was no Form 3520A, they will educate and threaten fines. (Principle 3 – No good deed goes unpunished.)
Conclusion: Stay away from any Canadian investment plan except the RRSP. Although an RRSP is a “Foreign Trust”, they are covered by special arrangements. First, the IRS does not require the 3520 for RRSPs. Second, remember the Form 8891 every year. Form 8891 is required to ensure that the income from your RRSP does not have to be included on your U.S. tax return.
Who could have known all this? Nobody!
Also, US citizens in Canada should NOT purchase Canadian mutual funds (they are PFICs). Furthermore, for US citizens abroad, home ownership can be very taxing. There are many other problems, but I won’t wreck YOUR Thanksgiving weekend. And Homelanders wonder why US citizens expatriate. Now really.
Message to financial planners: Normal principles of financial planning do NOT apply to US citizens abroad!
From the IRS – As of October 5, 2012 – Seeing Is Believing – Note the Principle of Penalty
Form 3520 – This is the information the taxpayer must provide
The U.S. owner is subject to an initial penalty equal to the greater of $10,000 or 5% of the gross value of the portion of the trust’s assets treated as owned by the U.S. person at the close of that tax year, if the foreign trust: (a) fails to file a timely Form 3520-A or (b) does not furnish all of the information required by section 6048(b) or includes incorrect information. See section 6677(b). Additional penalties will be imposed if the noncompliance continues after the IRS mails a notice of failure to comply with the required reporting. For more information, see section 6677.
Criminal penalties may be imposed under sections 7203, 7206, and 7207 for failure to file on time and for filing a false or fraudulent return.
Penalties may also be imposed under section 6662(j) for undisclosed foreign financial asset understatements.
Reasonable cause. No penalties will be imposed if the taxpayer can demonstrate that the failure to comply was due to reasonable cause and not willful neglect.
The fact that a foreign country would impose penalties for disclosing the required information is not reasonable cause. Similarly, reluctance on the part of a foreign fiduciary or provisions in the trust instrument that prevent the disclosure of required information is not reasonable cause.
Form 3520 A -This is the information that your bank must provide – I kid you not!
Purpose of Form
Form 3520-A is the annual information return of a foreign trust with at least one U.S. owner. The form provides information about the foreign trust, its U.S. beneficiaries, and any U.S. person who is treated as an owner of any portion of the foreign trust.
A foreign trust with a U.S. owner must file Form 3520-A in order for the U.S. owner to satisfy its annual information reporting requirements under section 6048(b). Each U.S. person treated as an owner of any portion of a foreign trust under sections 671 through 679 is responsible for ensuring that the foreign trust files Form 3520-A and furnishes the required annual statements to its U.S. owners and U.S. beneficiaries.
Exception. Canadian registered retirement savings plans (RRSPs) and Canadian registered retirement income funds (RRIFs) are not required to file Form 3520-A with respect to a U.S. citizen or resident alien interest holder who is eligible to file Form 8891, U.S. Information Return for Beneficiaries of Certain Canadian Registered Retirement Plans, with respect to the RRSP or RRIF. In addition, other eligible Canadian plans within the meaning of section 3 of Rev. Proc. 2002-23, 2002-15 I.R.B. 744, are relieved of any obligation to file Form 3520-A with respect to a U.S. citizen or resident alien beneficiary who has made an election in accordance with section 4 of Rev. Proc. 2002-23 and has complied with the annual reporting requirements of Rev. Proc. 2002-23.
You said: “They don’t truly want ‘compliance’, they just say that. They want penalties.
They have no interest in making it possible or palatable to comply. If all those abroad tried to become compliant, the IRS wouldn’t be able to cope – as they can’t already.”
So for those who so far have not been ‘compliant’, to change course is pure folly since IRS cannot possibly cope if 100’s of thousands of ‘US persons’ living abroad decide it is time to ‘come clean’ and pay their ‘fair share’ to the government of a country they do not live in.
For those who are feeling guilty that you are not contributing enough to the US, and don’t want to burden the overwhelmed IRS, perhaps a donation – say around 5% of your net worth – to an American based charity of your choice would be a good compromise.
Foreign Trusts — those pesky “foreign” accounts we hold in our country of residence, not the US — accounts like, in Canada, our Tax Free Savings Account (TFSA), Registered Education Savings Plan (RESP), Registered Disability Savings Plan (RDSP) — those registered accounts our Canadian government encourages us to save with! The ones the IRS Help people cannot tell us whether or not to report. Just what are the rules, IRS? Or, shall we continue to be told by you to go to qualified professionals and pay to receive that information since it is beyond your capability to tell us. Even they don’t have the answer for as you haven’t made a ruling — or have you?
Related from Accounting Today: IRS Sees Increasing Foreign Investment by U.S. Taxpayers
Here is a new requirement. I think that this is regarding a mandatory updating of information from those who have EINs (ex. for 3520 reporting of TFSA ‘foreign trust’s). As so many kinds of savings options that we try to use in the non-US countries where we live are called ‘foreign trusts’ by the IRS, and penalized with US double tax or life crushing fines, the IRS decided to add yet another onerous and burdensome requirement.
“RS to Require EIN Holders to Provide Updated Info
Washington, D.C. (May 6, 2013)
By Michael Cohn
“The Internal Revenue Service has issued final regulations requiring any person who has been assigned an Employer Identification Number to provide updated information to the IRS.
The regulations affect people and businesses with EINs and are aimed at enhancing the IRS’s ability to maintain accurate information about persons who have been assigned EINs. The regulations are expected to take effect in 2014.
The final regulations require any person assigned an EIN to provide updated information to the IRS in the manner and frequency prescribed by forms, instructions or other appropriate guidance……………..”
I didn’t check the link to the final regulations to see what the penalty was for this new requirement. I figure I’d just save time and effort by assuming it will be burdensome, in units of $10,000., as well as draconian, extortionate and confiscatory. I’d love to be wrong. If you’re interested and check it, let us know.
Not meant to be tax advice, etc.
And @calgary, I am afraid that if they interpret this as too many resident homeland US people exercising a choice to invest outside the US, they’ll decide to try and stop the homelanders, and thus punish us even more for anything we try to do to save where we live outside the US.
US banks and other financial institutions will no doubt lobby Congress, and the result will be similar to what happened to Canadian mutual funds. In the crusade to control the funds and investments choices of US homelanders, they’ll burden us even more.
Saw this on the ACA site, about the IRS finally deciding that the Mexican fideicomiso isn’t a toxic taxable AND PENALIZABLE ‘foreign trust’, and wondered why the IRS can’t reconsider the usual gratuitously punitive position on our Canadian TFSAs, RESPs, RDSPs, – the so-called ‘foreign trusts’ etc. And make RRSPs and RRIFs an automatic exemption rather than requiring an annual treaty election.
For the update on the fideicomiso,
“Revenue Ruling 2013-14 gives three different fact patterns and says “a fideicomiso isn’t a foreign trust.””
And just how many Mexican-Americans with property in Mexico has the IRS confiscated assets of in penalties for lack of a 3520/3520A report? How many years has the IRS called the fideicomiso a ‘foreign trust’ before some taxpayer paid a lawyer who finally got the IRS to see some reason? Why should that be necessary? How many of those abroad in Mexico, or living in the US with a fideicomiso has the IRS screwed over the years before coming to this conclusion?
Just how much have the collected in penalties for this, and in private letter rulings before reaching this conclusion?
And how much have those abroad had to pay in order to plead reasonable cause, or to obtain a private letter ruling?
Even the eventual treaty exemption of the Canadian RRSP was a torturous path – the history of which those of us previously unaware of all this missed at the time. But we still can’t get an automatic exemption. Still required to file the 8891. Why if the RRSP is exempt by agreement under the treaty?
Because the US and the IRS and Treasury don’t give a rat’s ass about us.
Andrew Mitchel says;
“This ruling should now allow many taxpayers who have been filing Form 3520 for their Mexican fideicomisos to stop filing them. Hurray!
Now if the I.R.S. will only conclude the same for Canadian tax free savings accounts (“TFSAs”).”
from June 06, 2013
‘Fideicomisos/Mexican Land Trusts are Not Trusts (Finally)’
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Some lucky people who received one of the deluge of erroneous 3520 penalty letters will now receive a letter telling them that all the stress, anxiety and anger they experienced was unecessary – oops, we made a mistake. Only a delay of a year or more. And, how to tell if one received the threatening letters erroneously, or not – since the forms are applied to TFSAs and also for estates, etc.
Even some mere applications for an EIN in order to achieve saintly ‘compliant’ status for the TFSAs they had to dissolve, may find that their application is answered by the requested EIN, and also a demand to file forms for an imaginary estate or other scenario – totally unrelated to their tiny TFSA ‘foreign trust’.
Note that this form has its own AICPA committtee “The AICPA Foreign Trust Task Force remains in monthly dialogue with the IRS regarding Form 3520 processing issues relating to prior IRS Form
” Taxpayers Receive Notice That IRS Is Resolving Form 3520 Processing Issues
by Eileen Reichenberg Sherr, CPA, M. Tax.
Published August 01, 2013
From the IRS
The IRS recently notified the AICPA Foreign Trust Task Force that it plans over the next few months to send out letters to taxpayers who filed Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, or Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner, as it attempts to close out outstanding inquiries/correspondence involving Form 3520 prior processing issues.
Most of these new IRS form letters will be going to Form 3520/3520-A taxpayers who already received earlier IRS correspondence, possibly previously mentioning that potential penalties may be assessed.
The letters will be sent from the Philadelphia campus accounts management group. They say, “Dear Taxpayer: We are pleased to tell you that your information return(s) has been processed. No action is needed on your part.” (A sample letter is available here.)
It appears that the intent of the letters is to inform taxpayers that the IRS’s Form 3520 processing issues are now resolved and these filings have now been accepted. AICPA members have started receiving such letters related to 2011 Forms 3520 and 3520-A. The AICPA Foreign Trust Task Force remains in monthly dialogue with the IRS regarding Form 3520 processing issues relating to prior IRS Form 3520 letters. The task force wants to make sure members and their foreign trust and foreign gift taxpayers are aware that these letters are being sent to close out these Form 3520 filings.”
And we are supposed to believe that FATCA won’t create any “unintended” consequences and errors? The IRS can’t handle the 3520s and 3520-As they already demand of us – with the usual confiscatory and draconian terms and penalty structures.
Don’t invest in TFSAs -got it. How does one invest then?
My wife is American and I am Canadian. She has Canadian permanent residency and we live here in Canada.
Is it advisable for her to invest in a Roth IRA, and let it grow tax free down there? Anyone aware of how those monies will be treated if/when they are brought up to Canada?
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