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.
Employment History:
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?
Dive for cover, stop filing, and resolve not to enter the USA. The kids are fine, their passports say born in Canada.
My two cents:
1. I think she should renounce. She is already in the US ‘tax and penalty club’, and supposedly ‘compliant’ to date, so can certify she is compliant at time of renunciation. As for keeping her US citizenship in the case of divorce, so that she has the option to move back, I don’t get this. She has children in Canada and lived here for 25 years – wouldn’t she prefer to stay near her children and the country she is most familiar with? An additional bonus of renunciation is that the US will no longer get in the way of her marriage or financial business, thus reducing risk of divorce, therefore making this option a mute point.
2. I think her children should renounce if it is simple for them to do so (i.e. little money in the bank, compliant so far). However, if they are not currently in the US tax system, and/or have more complicated finances, why bother to wake the sleeping bear? Their birthplace is Canada, so they are not likely to be hassled at the bank nor when they travel on their Canadian passport to the US.
Sounds like the wife remaining a US citizen is guaranteed to lead to failure. I guess she should think hard about how much that “right of return” option is to her — even if they divorce, will she really be happier moving to the US, away from her kids, friends and community? It may be a big uprooting for her at this point.
As for the kids, has she never claimed them as dependents on her taxes? No Social Security numbers issued for them? And, might they want to stake claims to US citizenship…?
Bad situation — I feel sorry for all involved.
They could go into a business together if she was employed by the business and her husband was the only listed owner.
But I don’t understand choosing a country you haven’t lived in since you were basically a child over your husband and your kids. I would never disclose my husband’s info without his knowledge and permission. Seriously? She’s lucky he didn’t consider that breach a dea-lbreaker b/c my husband would.
Her kids are going to have to renounce and soon. Just b/c they have no indicators like a US birthplace or registered births doesn’t mean the US is unaware of them. Their mother has been filing tax returns all along. She outed her husband on them and her kids probably too. It does ask you about children after all. It’s a small world that’s getting smaller and less private. They aren’t going to be able to hide forever and better to renounce while they are young rather than being discovered after they have married, built careers and committed all manner of banking/investment no-no’s in the eyes of the IRS. The only upside for them is that it doesn’t appear that they can pass their USP status to their own children.
She’s appears to be as compliant as anyone can be, so renouncing should be relatively easy though if I were her, I’d make sure to safeguard her husband’s assets before hand so they don’t get caught up and counted as her assets.
I agree with WhiteKat, she (and also her kids) should renounce. Her worry that she won’t be able to get into the US for visits later is unfounded. I renounced last year and visited the US (by plane) just last month as a Canadian. The custom guard didn’t bat an eye.
She’s got some choices to make, and fast I’d say. I can understand her husband’s outrage, but it doesn’t say much for their relationship that this would drive them apart. On the other hand, what’s more important to her — the integrity of her family or her citizenship. Story doesn’t say, but has she been in Canada for 25 years without getting her Canadian citizenship?
In my opinion, there’s no way she should be involved in a private business in Canada while she maintains her status as a US citizen. That would be a recipe for an even bigger disaster than the one she’s already experiencing. Bottom line, what;s more important — the family or the citizenship. Reading between the lines, I sense that the husband thinks that the citizenship is #1, and that pisses him off mightily.
Hope they work it out — just one more example of how the US citizenship-based taxation policy destroys families.
@Arrow
Sorry for the omission. She became a Canadian citizen around 2000.
Of course I voted YES but this situation epitomizes the financial straitjackets and personal dilemmas so many of us find ourselves in because of the Untied Snakes of Arrogance. It’s just so damn sad!
From what is said in the story, I would say she should definitly renounce.
But one thing I have learned from reading stories on the internet is that we never have the whole story, and we generally like to fill in the gaps in a way that appeals to what we want to believe… (Like how homelanders like to believe we’re tax cheats…)
Does she have to be a partner? Could she be an employee? They could still have a family business, without her having to have signature authority or stake in the business. And from a financial point of view, it might be safer anyway. Why does she absolutely want to be a partner?
Isn’t that more risky if both are partners and the business fails?
It’s understandable that the husband does not want to disclose anything to the IRS. It is also understandable that she may want to keep her US citizenship, but then she should accept the separate financial situation. If having joint accounts is more important to her, then she should consider renouncing. It seems that having lived 25 years in Canada, her life is in this country. Even in the worst case scenario of a divorce, her kids being in Canada, she will not want to move. Renouncing will not prevent her from visiting her family back in the US.
As for the kids, the decision is ultimately theirs. Do they want to have the opportunity to be able to work in the US? If not, does the US know about them i.e. have they been registered at the US consulate when they were born? If yes, then renouncing is an option, if not, doing nothing is certainly a valid one as well.
My sympathy to this dual couple. It’s tough.
Actually, having split the accounts might have been a good thing. Otherwise, she might have had to pay the exit tax.
Beyond the particulars of this case, it should be evident by now that ANY U.S. Person who chooses and commits to a life outside the U.S. should renounce or relinquish if they can – while they can. There is now NO circumstance in which it would be advisable to remain a U.S. citizen, in my humble opinion, any more than it would have been advisable, in the instructive world of fiction, for Superman to have held-on to a keepsake piece of Kryptonite. Yes, even Superman had to learn to accept that he could never go home again, and millions of USP’s had better start getting used to the idea that they never will either. Give it a few more years and they’ll just gently laugh in remembrance of how naÏve and silly they once were to have entertained such a ridiculous notion.
I am sorry for this family and the dilemma this woman faces. Whether or not we know every detail of this family’s situation, the fact remains the same: US citizenship and living abroad don’t mix. It is a handicap that requires a great deal of effort to overcome, whether it is in the decision to renounce or the one to comply. I am surprised we don’t hear more anecdotal stories like this, really, and ones where a USP gets in hot water for not disclosing his/her status to marriage and business partners. Will the father insist that the daughters do so, in order to protect unsuspecting suitors from a similar fate as his?
As a sidebar but I’m sure of no real consolation to the couple: a Canadian business’s costs associated with filing US taxes WOULD be tax deductible in Canada.
Renounce or alternatively just go dark and ignore the IRS entirely. It’s called lying, and there’s jack shit they can do about it.
@myself. It’s ‘moot point’, not ‘mute point’. LOL.
@Fred. Is it lying if its done in self defense against an immoral attack?
@bubblebustin,
You are correct of course, when you say: ‘the fact remains the same: US citizenship and living abroad don’t mix’.
This fact also remains the same: USA’s unique policy of citizenship based taxation, does not mix with living anywhere in the world other than the US. As a US citizen abroad, to ‘comply’ is to ‘condone’ citizen-based taxation which is without a doubt, unjust, immoral, and destined to end. It will end sooner, the more people insist on resisting ‘compliance’, rather than spending time, money and CLU’s trying to appease the bully to the south.
@Fred
Re: renounce vs go dark options
If you go dark and are a citizen by birth
1) Your Canadian passport will show the USA as place of birth. US border guards are already telling duals to enter with a US passport. It’s likely just a matter of time until they start refusing entry on a Canadian passport without a CLN. So in all likelihood, there will come a time when you won’t be able to enter the US. For some that’s OK, for others not so much.
2) If/when Canada gets on board the FATCA bandwagon, there is a likelihood that you will either have the US alerted to your existence, whereabouts, and financial situation, or you will be unable to find a Canadian financial institution (bank) to deal with.
3) There is a hopefully negligible, but not zero AFAICT, possibility that you will eventually be unable to fly over US territory if the US is aware of you.
4) You will continue to rack up a tax bill with the IRS. The big concern for most people being selling a principal residence. The US only exempts the first $250K gain and you’re on the hook for the rest as a capital gain. This could come back to bite should an unfortunate turn of events give the US the ability force collection.
That’s what comes to the top of my mind; I imagine there may well be additional issues with going dark.
What a horrible situation. It seems to me that unless she wants to financially separate herself from her husband, she should be renouncing asap & her kids too. Seems silly to me for the kids not to renounce just in case they want to go live in the US. What do you think will happen in years down the road if they have not been filing & change their mind & go to the US consulate to say, oh by the way, now I want in? If they really want to retain it they should start filing. If not, then get out as soon as you can while it’s the least painful time to do it.
Renounce. The US media currently gives me the impression that the US is currently enjoying the hype of a witch hunt against the so-called tax cheat. All the papers talk about how evil expats are and all the millions the inquisition is collecting. Yet, there is little or no mention of the innocent people who are getting harmed in the process. Nobody cares as long as the witch is burned on the stake and the fire is big and beautiful.
Renounce, and the kids too. I cannot imagine choosing the US over spouse and children. But I do feel very, very sorry for this family and am outraged that no one at IRS, Treasury, etc, seems to care a hoot that this is happening because they won’t use common sense and stop applying it outside the Homelanders. GRRRRRRRR
The Embassy in Ottawa told me that if kids born to one US parent outside of the US have never claimed US citizenship (ie no record of birth abroad, etc.) there is no need to renounce. They only have a potential claim – they would still need to prove their parent lived in the US the required amount of time. Anyone else told this?
I can understand her concerns and I have read of similar martial problems here in Switzerland over disclosing joint bank details. However, as she is tax compliant the easiest way is to renounce as soon as possible. Having the option to move back to the US wouldn’t be needed if she renounces and it saves her marriage. If it doesn’t there are other ways (green card, etc) for her to be able to move back. I can’t really see why she would want to though, her immediate family and friends would be in Canada. Visits back to the US to see other relatives is still possible.
As for the children, they must make up their own minds, but seeing how this has caused so much distress to their family, I’d say they should renounce too.
This does not sound like a tax or information return problem.
It sounds more like a domestic relations problem.
This marriage is coming unglued: both are unemployed; kids nearing completion of primary schooling; approaching the 26 years of marriage mark – a point where many marriages with young adult college bound children break up.
The husband’s fulminations against the USA sound to me like a pretext to avoid a commitment to an economic partnership based on a marriage in whose continued existence he is not confident or whose termination he is already contemplating.
Kids should be registering with Selective Service (draft).
http://en.wikipedia.org/wiki/Selective_Service_System
Of course she and her children should renounce. It’s a no-brainer, really. This is just one of the countless tragedies of US citizens resulting from US legislation. It’s repugnant.
It seems that many expats are just starting to wake up to the situation they’ve been put into by the USA. I think that if the USA continues with their policy of persecuting expats, in a few years time it will be common knowledge – even amongst the so-called homelanders – that it’s not possible for a US citizen to lead a normal life abroad.