Need help getting out of a financial fix? Email andrewallentuck@mts.net for a free Family Finance analysis…
Linked below is the January 25th advice he gives this family.
Financial Post says Dual Canadian-US Citizens Can Conquer Tax Challenges
Off the top, I don’t see any line item for accountng / US tax compliance expenses, nor does Mr. Allentuck consider their family RESP with a $115,000 balance — but the US citizen Canadian resident wife may not have her name on that account. Are their children “Accidental Americans”?
I don’t know if it’s just that I am extremely tired but I can’t really follow this. I also see no figures for accounting costs and with all those 3520’s……I don’t know where I got this idea but I’ve been under the impression you can’t claim both the FEIE and the foreign tax credit. I have never heard of any Ontario portion of the foreign tax credit prior to this. If they are making $218,000 per year in earned income, it would seem to me they are going to owe taxes. And god forbid they miss listing any of their accounts on FBAR or 8938. I do see the RESP monthly cost of $208 and the $115k listed in their assets.
And it really bugs me that this guy thinks it’s no big deal to owe capital gains on the sale of their home, given they’ve lived most of their adult lives in Canada and intend to remain here. What is that? Why wouldn’t he question it?
*@noble
In their anxiety to paint the US in the darkest colors possible, too many people on this site prefer to remain ignorant of those technicalities that actually make it unlikely that a Canadian dual citizen who does careful planning would actually owe the US anything other than a stack of pointless forms every year.
The FEIE and foreign tax credit are not mutually exclusive. To the extent earned income exceeds the exclusion amount a prorata portion of foreign taxes paid on the excess are available as a foreign tax credit. The excess foreign taxes – and there usually is an excess in high tax Canada – are available to be carried forward for the next TEN years and can be applied against other forms of “general limitation” income to include distributions from RRSPs.
While everyone at IBS enjoys working themselves into a fit of righteous indignation against the US imposition of capital gains taxes on the sale of a principle residence, they tend to ignore the fact mentioned in the article that the first $500,000 of that gain (if any) is tax-exempt.
Is US insistance on citizenship-based taxation stupid and wasteful of everyone’s economic resources?
Of course it is.
But if your polemics go beyond the very good, rational reasons for opposing it and drift into the fantastical or merely ignorant, you’re not likely to pursuade many that your cause is just.
This is my first comment and I’d like to give an additional perspective to the above remark from TodundSteuer. I live in Switzerland and like a Canadian I also didn’t have any tax liability for the first 20 years; however, that changed overnight. Since 4 years, my average liability is now USD 5k per year and I think it will only go up. I’m a middle class earner; however, as I get older my pension contributions increase and this is not respected as tax deferred. I see this whole concept of citizenship based taxation as wiping out 100’s of thousands from me by the time I retire. If you compared ALL taxes we don’t pay less here (i.e., gas tax, VAT, garbage tax, dog tax, etc); however, the differences in the tax codes can really get you and the changes Washington keep coming up with.
Forgot to mention that the change in the exchange rate also really got me. This could also hit me if one day I sell my house due to the ‘phantom gains’. Also you only get 500k exclusion if you’re married; otherwise, it is only the half.
*@Todundsteuer (“too many people on this site prefer to remain ignorant
of those technicalities that actually make it unlikely that a Canadian dual
citizen who does careful planning would actually owe the US anything other than
a stack of pointless forms every year.”)
For those of us who can’t afford professional help, ‘careful planning’
becomes incredibly challenging. To dismiss the anxiety that tax time causes is
patronizing, especially given the complexities of filing.
Some of the polemic on this site may seem strident, but it is often warranted. Most critical thinkers take everything with a grain of salt anyway…
.
*@Suki
You are absolutely correct.
The careful tax planning a US person living abroad must engage in in order to minimize his obligations to two sovereigns rather than one is enormously complicated, exceedingly difficult, very expensive, time-consuming and cause for inconsiderable anxiety.
But my point is that it is just this needless expense and effort rather than the comparatively insignificant amounts of taxes ultimately involved that is the true gravamen of the harm caused by citizenship-based taxation.
*I would guess that the absolute minimum for professional help would be $1000 per year and that would be just for a very simple, basic tax return with straightforward investments like a saving’s account. As soon as you start looking at any form of private pension plan, FATCA forms, you’re now looking at $2000 minimum; and with any sort of non-UK mutual funds, $3000 minimum.
I instinctively feel that the only sorts of people who could rely on an ultra cheap outfit are students or missionaries abroad. Of course, many of these tax preparers sound inexpensive but then tack on extra charges for extra forms, thus bringing their clients up to the $1000 de facto minimum…
I say this because many Canadians will have unintentionally opened up complicated ‘foreign grantor trusts’ with their locally tax-efficient investments and personal pension plans. It’s a stealthy way for the IRS to devise a means of double taxing expats. Foreign Trust forms and PFIC forms furthermore ensure the tax compliance industry are kept in plenty of blood-sucking work!! 🙁
I have found another accountant who would charge me a lot less but the problem is that they wouldn’t be so familiar with my situation, etc. And as I’m seriously now considering expatriating, I’m inclined to stick with them as it would only be another couple years of filing, so better the Devil I know, me thinks…
@todundsteuer, I guess I have to explain this to you. Canada taxes the hell out of its residents. Tax freedom day is in June. Now a typical single family dwelling in Vancouver, Calgary, and Toronto can easily exceed 1 million in price thanks to the Real Estate bubble. Most of that will be capital gains, if the house was bought 35-40 years ago.
Now consider that if a widower or widow sells her house the exemption is $250K only.
The folks here sometimes need perspective, but please don’t suggest that it is ever remotely justified to tax the sale of Canadian home in any country except Canada. Anything else is a casus belli.
Here’s my response:
*@Petros, I agree, it’s been a real eye-opener how the media have effectively been gagged due to their own agendas as advertising vehicles. The whole situation reeks of hypocrisy.
Here’s my response:
In 2012 this Canadian renounced US citizenship – and all the oppression for which it stands. I have never felt so free. Goodbye at last to over three decades of attempting to stay “compliant” with two separate tax systems. The cost of exit was $450 for the US fee imposed on exercise of my human right, plus into mid-four-figures for associated legalities and accounting. At a guesstimate, only about 5% of up to one million US persons in Canada are in any current position to effectively renounce. Those few who are will find themselves launched into a tortuous years-long process. This article fails to reflect the uncertainties, pitfalls, and mismatches of continuing to appease the United States. Consider only the US money harvesting directed at phantom currency “gains,” or US refusal to recognize substantial Canadian taxes paid through GST/HST/PST. In 2013 a new mismatch emerges with the nondeductible Obamacare surtax for medical care never to be received by persons who remain in Canada. The future? Absolutely uncertain. Now is the time to renounce.
Andrew Allentuck would like to see that cross-border tax specialists have plenty to feast on for years to come, either as appetizers, main courses, or desserts.
Well, that was embarrasing. I posted a post that was intended for my other blog (Carbs are poison). Apologies to everyone.
PS I noticed that Saddened123 and Tom Bennedict already commented. Thanks for your feedback! And you can now see your comments at the correct blog.
IMO it is better to renounce US citizenship now rather than later. Who knows what legal acrobatics the US will use to permanently trap ex-pats into the peculiar institution of citizenship-based taxation.
@ Petros
Never mind the misplaced posting. It’s all food for thought. It’s also a great example in taking charge of one’s life situation and a great lesson for all of us. Thanks for briefly (inadvertently) sharing that with us. I must admit I opened up Brock this morning and for a minute or two thought I was in the wrong place. I
wish you ever more increasing wellness.
@Em, well you were in the right place, but not the blog post. Thanks for your charitable attitude. For those interested, this will be my first of what I hope will be several blog posts on the subject of “carbs are poison“–i.e., the benefits of low carb dieting and the iatrogenic effects of the prevailing medical/nutritional advice (i.e., low fat, low cholesterol, low calorie dieting).
@Tudundsteur
Thanks for your perspective. It is correct when you are a wage/salary earner without any “Foreign trusts” or other “entities” (example controlled foreign corporations).
The people described in the article are unlikely to owe tax. Furthermore, their relatively simple lives will ensure compliance costs that are relatively minimal. The problem is that they will never be able to do more than than they are doing. They are excluded from most forms of retirement planning in Canada (including corporations). Their “principal residence” is NOT a tax free retirement planning vehicle. The compliance costs alone are too much for most people to bear.
Don’t you think that if the U.S. is to continue “citizenship-based taxation” that it must find a different way to tax U.S. citizens abroad. Perhaps a “poll tax” – just an annual fee – would work better all around. There would no professional compliance costs. Furthermore, people would be free from being unable to do things – just because they were American.
@Mona
I would be very surprised if you could get competent tax help for as little as $1000.
@UScitizenabroad, a poll tax? Isn’t that what the renunciation fee of $450 is? A one-time poll tax to get yourself free?
A poll tax of about $10+ per year already exists: it’s called a US passport.
For 2011, I paid about $1,350 for a US based preparer with MBA/CPA and Big 4 experience to do my taxes which included 5 8621s and an 8938 with many continuation pages. The preparation of the return including review and comment and final review took 7 days in total after I submitted all the info, albeit this occurred outside the “peak” tax prep period. Using a US based preparer generally will require you to fill out their Excel file in which you basically do all the calculations yourself and they slot the numbers in the right place.
I was pretty pleased with the service I got especially after having had a nightmare experience with a very reputable UK based firm whose “normal” charge was £2,000 + 20% VAT = $3,840 per 1040 and who took 13 months and several miserably poor attempts to get the return right.
On the wider point of tax planning, I think it’s possible to minimise your US tax liability but it requires very expensive advice or local tax and US tax omniscience so it’s not really an option for most. The problem is compounded for many because they learn of their US tax liability after they already have made sub-optimal choices vis a vis the US tax code.
I invested in UK mutual funds which I now know are PFICs. Having not made a timely election, I am stuck with the excess distribution regime. No amount of tax credits will do me any good here. I face combined marginal rates of 84%+ (now, but increasing every year I hold the investments) on excess distributions and capital gains, if I sell. Bizarrely, renunciation would cleanse me of this PFIC mess and eliminate the double taxation of the unrealised gains and thus, this is the path that I will have to take. With the gun of PFIC double taxation pointing at my head and the sword of FBAR hanging over my throat, I don’t feel I have an alternative.
Southerner in Exile’s point I thought was interesting. The US recognises very few foreign pension systems, the UK being one of them, thankfully. For some reason, the point got me to thinking about the basket system for foreign tax credits. I’ve always found this very unfair. Conceptually, you are supposed to pay the higher of US income tax or local. The problem is that the US interprets this as being for each separate class of income and not in totality. So, while I pay for the UK’s £9,600 annual capital gains exemption through a higher marginal tax rate on other classes of income, the US looks at this as untaxed income. So I pay both the higher marginal rate in the UK and also the capital gains tax to the US even though I have boatloads of general limitation foreign tax credits which, sadly, are likely to expire worthless.
*Edelweiss, I’m surprised they wouldn’t let you calculate the PFIC taxation via mark to market.