I wanted to post this fact situation and generate some thoughts on how this problem can be solved.
Facts – Altered slightly to protect their identities:
Financial Assets: Last week I met with a couple in their 50s. They have been married about 25 years. They have lived in Canada all of their married lives. They have two children. The older is graduating from University this year. The younger is in her third year of high school (expectation that she will go on to University). It is not clear to me what is the citizenship status of the children. But, I think (since the US born mother lived in the US until the age of 18 and then moved to Canada) that they are both US citizens. If the children are US citizens I don’t think the US has ever been notified that they exist. The couple own (free and clear) a home (in both their names) with an approximate value of 1.4 million. They paid $245,000 for the home when purchased. They each have an RRSP. The husband’s value $450,000 and the wife value $200,000. They also have a brokerage account consisting primarily of Canadian mutual funds. The account is in the husband’s name (but both parties acknowledge that the account is jointly owned). The wife claims that she had some kind of signing authority (power of attorney perhaps) over the brokerage account (not sure whether she still does in view of the husband’s reaction to Mr. FBAR).
Citizenship status: The wife was born in the US She moved to Canada at the age of 18 to attend University where she met her Canadian husband. She has lived in Canada ever since. She became a Canadian citizen around 2000. Both children were born in Canada and have always lived in Canada. The wife has always filed US tax returns and believes that she is up-to-date and accurate with her U.S. taxes (is it possible for a US person to be completely tax compliant?). She always filed as a “married person” and simply noted that her husband was a NRA (Non Resident Alien). (Meaning that the IRS knows that she has an alien husband.) She doesn’t know what an 8891 RRSP form is, but since her taxes have been prepared by a U.S. tax professional I assume that she has filed the 8891. I don’t know whether she filed a form 8938. She had NOT been filing her FBARs. But, upon learning of them she filed 6 years and wrote the usual reasonable cause letter. She is NOT expecting further difficulties over the FBAR issue. But, the family accounts were disclosed to the IRS which enraged the husband. What happened at the point of the FBAR discovery and the fact that she filed the FBARs, was that her husband simply refused to have any more joint accounts with her. (As she put it: “All hell broke loose in my marriage.”) She is nervous about this because it has destabilized a fundamental assumption of their marriage – i.e. that family was run from a family/joint account. This is causing her great anxiety. Her husband will NOT allow her signing authority over any financial account that includes his money. This is a big problem and is related to the next problem.
Both the husband and wife had been employed by separate companies up to a year ago. Each of them lost their job. (Job market is NOT kind to people over 50. This of course has exacerbated the other difficulties.) Although, they are feeling a bit unanchored, they see this as an opportunity to work together to create their own business. (They are thinking of buying a franchise that will require financing.) This is actually a dream that they have had for years. They plan to use the money in the brokerage account to finance the business and to “carry them over” until the business is profitable.
Knowledge of issues caused by U.S. citizenship:
Until recently, (like the rest of the world) they knew nothing about the problems of U.S. citizenship. Their knowledge began whey they were introduced to Mr. FBAR.
They are now concerned that they may not be able to operate a business together.
Here is why:
1. The husband is adamant that he will NOT allow any of his financial information disclosed to the IRS.
2. The wife is scared out of her mind. She is already in the US tax system and is determined to file her tax and information returns according to US law.
3. They want to keep the business as simple as possible. They do NOT (at least at the moment) want the expense of creating a corporation. This means that the only real option is to operate as a partnership.
Now, here are some of the issues they are trying to work around:
A. If they carry on business as a partnership, the wife will have to file the relevant foreign partnership form to the IRS. This is a “deal breaker” for the husband.
B. If they were to create a corporation, then then she would have to file the 5471 and incur the other usual costs associated with the U.S. wife owning part of a CFC (Controlled Foreign Corporation) in Canada. Again, the husband is unwilling to have any of his business information included on an IRS information return.
C. The husband will not enter into any business where the the financial records are disclosed to the IRS. Therefore, he won’t allow the wife to have signing authority over the bank accounts of the business. This is an extension of the family bank account problem and is a real concern to the wife.
The fact of her US citizenship is clearly eroding the “good will” in their marriage. Neither of them is particularly employable (it’s the age thing). Therefore, they must think in terms of running their own business. It appears that the desire of the US wife to be US tax compliant is making it impossible for her to be a business partner with her husband.
Assuming they both want to save their marriage and create a family business, how should they deal with this problem? The husband will have NOTHING to do with the IRS.
If this cannot be solved:
- they may not be able to operate a family business
- each of the husband and wife, if they are to have business partners, will have to find different partners. In the case of the husband a partner who is not a US person. In the case of the wife, a parter who IS a US person
- they may be talking divorce which in addition to all the other problems will force the sale of the family home resulting in a significant reduction in the living standard for each of them individually. Furthermore, the wife will have to pay a US capital gains tax on her share.
Should the wife consider renouncing US citizenship?
Until 2011 the wife had always been a patriotic US citizen. She hates the problems that the U.S. has caused her and might entertain the idea of renouncing. The only thing that holds her back is that (paradoxically) the US tax problems have destabilized her marriage to the point that, should the marriage end, she would want the option of being able to return to be with family in the US
Should the children (assuming they are US citizens) consider renouncing?
The children were born in Canada.
How can these problems be solved?