Born in Canada asked the following questions, and I offer my version of defiance afterward:
I have only just recently discovered the tax/FBAR obligations of being a USC abroad, and have spent the past few days reading as much as I can about the subject. I echo the feelings of extreme stress and frustration that so many people here have already expressed.
I was born in Canada in the 80′s to a USC (Cdn PR) parent (other was Cdn cit by birth). Fast forward to 2009, when in casual conversation with a US CBP officer into the states, I mentioned my American parentage. He stated that I was considered a US citizen, and should be entering the US on a US passport.
Wanting to comply with the rules, and not fully (or at all) researching the obligations that would come with it, I applied for and received my US passport in 2009. I also checked off the box on the passport application to receive a US social security number.
I entered the US on my US passport perhaps a dozen or so times between 2009-2011. (Shopping day trips and short tourism).
Until last week I was unaware of the specific requirements of the IRS. I had heard that Americans were supposed to file, but also believed (incorrectly) that the FEIE was the limit to file, rather than an exclusion of tax.
Suddenly, I find myself trying to figure out what the best course of action is.
I have no idea how the bureaucracy of the US works. I believe I am completely unknown to the IRS. However, the DoS issued me my passport, and has my details (including former address). I don’t know what the communication is between these departments, and if the DoS would ever furnish a list of US passport holders (particularly those recieved from consulates abroad) to the IRS for compliance checks.
None of my banking information has anything to do with my (late) American citizenship. Again however, I do not know what the full ramifications of FATCA will be. A concern I have is that the DoS gives info to the IRS, who in turns starts flooding banks for info.
I really would prefer to be compliant. I committed an expatriating act by taking a position with the federal gov’t last fall, with the intention of relinquishing my citizenship. I have not yet informed the Embassy or filed a DS 4079. This is complicated by the fact that I worked for the Federal gov’t in a different position prior to (and after) applying for my passport. I obviously cannot say I had intent to relinquish from my initial job years ago (since I didn’t even know I was a USC), but I hope that my recent job (with new letter of offer, movement to Ottawa, different security clearance, etc) could be articulated.
Finally, I note new Streamlined filing compliance procedures: I am below the threshold for the FEIE 2555 exclusion every year. I had 3 mutual funds (total value ~18K) that during the 2009-2011 tax period “made” money, around 3K a year. These were phantom gains, just recooping loses from years previous, but if I understand correctly, they would be considered income, correct? I have no idea how much tax would be owed on this income, and if it would bump me above the $1500 “low risk” threshold. Is there a way for me to discover this without committing to an accountant to file back taxes (and potentially paying thousands only to find out I’m over the streamlined?)
I am really at a loss. I do believe in compliance with law, even when I don’t agree with it. However, part of me really wants to lie low, since my place of birth is Canada, and I’ve lived and worked here all my life. My time in the US can be measured in weeks. It is the uncertainty of not knowing all the variables, or the best course of action that is causing me so much stress!
[A]nother concern which I have not seen addressed online yet.
If I relinquished and decided to take my chances on not filing a 8854 (in the hopes that a CNL alone with no previous activity and a Canadian CoB would not attract too much attention), I would be a “covered expatriate” in the eyes of the US.
Do I read the exit tax correctly that Canadian pensions (ie. Federal gov’t pensions) are taxed at 30% on their distribution? How can this be? I could work for the next 30 years, after having spent 3 knowing I was a USC, and have to pay out of my pension?
This is the main reason why the idea of being over the “low risk” threshold of streamlined compliance stresses me out… it seems like this is the alternative (since I don’t want to criminalize myself into the OVDI).
Any other thoughts on the pension aspect / exit tax?
In regards to the FBAR, I couldn’t find anything specific on my question:
How does it actually work, from a practical standpoint? I realize we are reporting our bank account numbers, and highest balance. Is that based on an honour system report, with potential penalties if something comes out contrary to the info you provided later on, or is a case of the IRS approaching a Canadian bank and saying “Hey, let me take a look at account 12345 for the 2009 tax year.”
I mean this as a separate question related to filing for back taxes, particularly with the streamlined filing compliance process, as opposed to the FATCA requirements which will have some sort of data transmisison to the IRS.
@Born in Canada, Your first mistake was mentioning that you had an American parent to a cross border guard. American cross border guards are neanderthals whose job is to harass Canadians crossing the border to try and find non-compliant “US persons”–their job is not to know the law nor your rights, but to violate your universal human rights whenever it suits the purposes of the United States.. The United States is a desperate country and it is looking across the Canadian border to its North for potential sources of revenue. Expat food: Don’t feed the beast. Never feed a border guard this kind of information–it is irrelevant. You are a Canadian born in Canada. That’s all he needs to know.
Please be careful about consulting a cross border specialist, or the obtaining a US passport will be one of may be one of the most expensive mistakes you’re likely ever to make. I am personally of the opinion that you don’t really have to do anything, except let your US passport expire and never ever mention your US citizenship to anyone ever again. You are Canadian. You drink Canadian beer and you are not an American even though some cave man on at the border decided that you are one. You can of course go to the US Consulate and tell them that you relinquished your citizenship when you took the job at for the Federal government. I would do that. But I would probably never volunteer any tax information to the IRS–not one single thread of information, and certainly nothing about your legal bank accounts in Canada, for heaven’s sake, especially mutual funds–because the cost of compliance on these funds will likely far exceed the savings that you have in them. If you told your Canadian banks that you were American, then close your accounts and open them in a new bank somewhere and fail to mention your US passport. Tell them you are Canadian–the truth. But it sounds like you didn’t tell the banks anything.
You should not be a “covered expatriate” as you have suggested (but now see this comment), because people born with a foreign citizenship and no significant attachment to the United States are not covered and they are not really required to reveal their assets to the United States–to my knowledge. This is despite owning assets over $2 million. I wouldn’t even bother with the Form 8854 or any yearly tax returns. They are irrelevant in your case. You have to understand that this exception of native born foreign nationals is born in diplomacy–the United States can hardly cause these rules to apply to persons born with another citizenship and no substantial ties to the United States and maintain good diplomatic relations with their neighbors. For the IRS to create a scene in your case would be an out and out act of war against Canada by aggressively seeking to obtain tribute from native-born Canadian citizens resident in Canada. Otherwise, the desperate beast would have insisted that there be no such exceptions.
My suggestions if you are unsure about your tax situation vis-a-vis the US is that you seek an impartial consultant and not a cross border specialist, whose job is to get you into compliance with the US and whose perspective is turned towards the needs of the beast. Find someone who knows your rights and if you can’t find anyone, I can make a suggestion or two.
Remember, you are a Canadian citizen living and working in Canada. The US does not have the right to tax you even if you made the mistake of getting one of their passports. The CRA will not collect from you and unless you have assets in the United States or sources of income from the United States, the IRS has no way of collecting from you even if they had sufficient information to assess a tax liability.
Well, this is my opinion. Be sure that you will receive many others here.
I am not sure what you mean that I could be ‘in violation of U.S. law’. What I do know is that I notified the U.S. consulate at Toronto both before and after being naturalized in Canada and at no time did they tell me to apply for a CLN. In fact, I believe at that time it was assumed by DOS that anyone becoming a citizen of another country, INTENDED to relinquish their U.S. citizenship. But as so many of us have discovered, they ‘change the rules’ to best suit themselves.
For the procedure to take 2 appointments and more than six months is absurd!
They have a copy of my ‘renunciatory’ oath and in fact they would be quite aware that all individuals naturalizing in Canada prior to approx. april, would have sworn that oath. Ad still we must ‘jump through their hoops’!
Correction re above post – it should read ‘anyone naturalizing in Canada prior to April, 1973.
They can make all the rules and policies and assumptions they want, but that doesnt change the LAW – the one that says you lose your citizenship under certain conditions. If they want to get their ducks in order then it should be uo to THEM to pay the costs.
I couldn’t agree more. However, if getting my CLN allows me to put this nightmare behind me and allows me to go back to perhaps enjoying my life, then I will attend appts at their consulates and fill out their Forms. None of us should have to go through this mess and quagmire to prove we have not been a citizen of the damn country that thinks of themselves as the GREATEST COUNTRY IN THE WORLD!!!
I agree it would be tempting to just forget about that US passport and never mention it again.
But what happens when, in 2014 your bank sends around a questionnaire asking for a sworn oath saying if you are a US citizen or have US ties. Banks are going to start sending forms asking this and/or including it on all documents for opening accounts, getting loans, etc…. In Europe we are already bombarded by bank mailings threatening to close the account if we do not immediately send in copies of ID cards and the like. If you say “no I’m not a US citizen and I don’t have US ties” and you have that passport hidden away, is that not a serious crime? Fraud, felony?
If one day you decide to change banks or open a new account for any reason, the bank will ask you to state you are not a “US Person”.
Of course you can argue how will they ever find out. But data mining is progressing so fast, how hard would it be for them to go back and track down the holders of passports issued abroad over the last 20 years?
@Eliza The crime in most cases would be committed by the bank asking the question, not the person who answers honestly, “I am Canadian”. We have to get over the idea that breaking a “law” is a crime. Laws are multitudinous, and they now encompass every aspect of our lives. Laws are the means by which government commit crimes against the people. Stealing is a crime. Laws that sanction government theft are immoral. Laws that attempt to apply government theft to people in other countries are acts of war.
eliza, that’s just the problem – data mining. Banks don’t necessarily have to ask us in order to find out things about us. The longer ago one gave up USC the harder it should be to find indicators pointing to it, but the question is, do you feel okay risking it. If you do than do nothing, but if not, you get the CLN.
An update as I’ve done more reading. Petros, you are correct about the expatriation tax exeption for dual-national citizens at birth who have not been present in the US for more than 10 of the last 15 years. However, the draft version of the instructions for the 8854 (the only version I could find, not the finalized one) state quick explicitly that even born dual citizens would be considered “covered expatriates” if they do not meet the compliance to the IRS for 5 years test.
@Born in Canada, thanks for this follow-up comment. I’ve linked it to the post itself so that some attention will be called to it.
My response would be that in your case, from the details I can see, it would be preferable to be a covered expatriate than to pay an exit tax. In the case of a covered expatriate who makes no declaration (Form 8854) the fine, which is un-collectable in Canada, would be, I believe, $10,000. The other problem is that heirs of your estate who live in the United States would be subject to withholding taxes. Are you planning to leave a part of your estate to heirs living in the US?
Here’s what Phil Hodgen had to say about being a covered expatriate due to not filing: http://hodgen.com/expatriates-failing-the-certification-test-create-trouble-for-themselves/
@AJ, that’s a useful discussion by Phil.
Here’s the problem: (1) the Canadian government offers protection to Canadian citizens who cross over into the United States. Have you ever heard of a covered expatriate with an imaginary assessed tax liability who goes into the United States being charge with a criminal tax liability and arrested at the border? I have a yet to hear of such a case, though I am sure no one wants to be the first.
(2) The alleged tax liability that the IRS would assess a covered expatriate, a fiction created by the IRS, is absolutely uncollectable in Canada from a Canadian citizen. Why? Because the CRA says it will not collect taxes for the United States from a Canadian citizen. So therefore, why would the IRS assess a fictional liability to a Canadian resident renunciant from whom they can collect nothing? This would only set off a diplomatic incident. This is why they made the exception clause in the exit tax for people born citizens of other countries. As evil as the United States has become, I do not believe that their main goal is to so piss off their allies to that extent.
Honestly, that the IRS would or could assign a fictional liability on a person who is Born in Canada’s situation. I’d like to see some people in his situation ignore the 8854 rule and see just what kind of contortions the IRS would tie themselves into, and how the Canadian government would protect their people. It would be very instructive. But who wants to go first?
Remember also that Phil Hodgen probably has his view narrowly focussed on residents of the United States who are thinking of leaving the US to avoid future taxation. His advice is much more pertinent to such people. A person with a Canadian passport, uncorrelated to the former US passport, is not likely to be nabbed. At least, I doubt it. And again, it would create major diplomatic incident and should be seen as an aggressive act of war against Canada.
Born in Canada, I feel you’re pain. Pretty much the same situation. Born, lived and worked my whole life in Canada and now potentially face huge consequences for bringing attention from the IRS. I got a US passport once at the urging of my parents, but have been using my Canadian passport for at least the past 15 years. I have tonnes of mutual funds too! The tax specialist that helps with the “streamlined” process of submitting taxes and FBARS insists that it is my only option that they will no doubt find me. Torn in the gut about coming clean or just staying low. Where are you at with it all?
If I was born in Canada, I would be doing the HAPPY DANCE! My recommendation to you, is to find a new financial institution, and move ALL your money out of any financial institution that knows about your US connection. You are Canadian, your Canadian passport shows a Canadian birthplace. You are home free.
Also, ditch the ‘tax specialist’ who insists you come clean. It is in HIS interest that you come clean, not yours. Just my 2 cents, but boy, oh boy, would I love to trade places with you!!!
Born in Canada too. You don’t need to do a thing, you are Canadian forget the rest. the accountant is trying to make a buck from you. Canadian mutual funds are considered PFICs. It is impossible to calculate the taxes supposedly owing on them if you were to foolishly enter the streamlined and file 3 yrs and 6 yrs. of FBARs. There is no way they will come after you. There is no way for your bank to know that you are anything other than Canadian.
The only reason to do streamlined is if you choose to remain a dual citizen. A few of us feel that is a reasonable thing to contemplate.
Ps no need to change banks unless the first one has already on file that you are a dual cit.
BornInCanadaToo: You were born in Canada. Canada Revenue Agency does not and will not collect for IRS for Canadian citizens. Canadian courts have ruled IRS has no jurisdiction in Canada.
You have nothing to “come clean” about. The IRS is not going to “find you,” Get a new accountant or tax specialist. End of story.
Born in canada
I actually have something to add which may be useful but I am sick in bed will try to replying a day
@Born in Canada;
First, US law does not require you to get a CLN if you relinquished.
Having said that, a CLN makes life easier for some.
You should read US Code on what is a relinquishing act; You area 4(B)
A pesky problem is that you have a valid US Passport in your possession. If you look at the draft CRA Guidance to financial institutions there is a section where it provides sample guidance a bank can give to a customer and one of them is if you have a valid US Passport.
Once you take your new job and swear the oath you have some options, partly driven because you have a valid US Passport. If in fact you have relinquished, you really need to do something with it because you are no longer a US Citizen.
1.) You can go through the CLN process at a consulate and turn the passport in.
2.) You can simply mail the passport back to the consulate for destruction by registered post. You can tell them either you relinquished, or you took government employment, or/and you simply want the passport destroyed. You could ask that it be returned cancelled as a momento.
3.) In the USA, if you accept government employment that requires a security employment and have another passport you MUST get rid of it. Does Canada require that? Have you or do you want to ask? If your situation was reversed and you were ditching clinging Canadian citizenship you could turn your Canadian passport into the US Government. Information on the topic is here;
In theory, you could surrender the US passport to the US Consulate and cite the money memorandum in case there is no Canadian counterpart.
It looks like you are relinquishing and you have the opportunity to stay low, get fully documented or just go partway.
But again everyone has a different situation and yours is unique with the security clearance and the oath which allows you you to advise the state department part way without jumping in the deep water.
@Born in Canada; Finally be very upfront with your new employer. Tell them in writing that you currently have US Citizenship, that when you take your Oath that you are relinquishing it under 18 USC 4(B) and that you are turning your US Passport in for destruction. Have that letter witnessed maybe by a lawyer who keeps a record. In your letter you can state the US language from the money memorandum that carrying a US Passport is incompatible with having a security clearance with the Government of Canada.
Be up front with Canada because you have an obligation to them being entrusted with any type of security clearance. Besides being honest with them will also help you in your needs.
There’s two points I don’t agree with you on.
(1) Re: telling the Canadian govt you will be relinquishing your US citizenship
The Canadian govt has hired and does hire dual citizens. You have to tell them what citizenships you have for the security clearance (and quite likely for the job application, can’t remember).
But there’s no reason to inform the Canadian govt that you plan to relinquish your US citizenship by accepting employment (unless, I’d presume, if the job required you be Canadian citizen only – I’m not aware of such jobs, they may well exist but they are not common.) If you inform the Canadian govt that you will be relinquishing your US citizenship by taking the job, I don’t see how it would have an effect on your getting your CLN because it’s not a knock-down drag-out litigation situation — they’ve been taking people’s word regarding their intent. Can’t see it would hurt a CLN application, of course, just don’t see it as necessary.
The Money memorandum, by Arthur Money, US Assistant Secretary of Defence, deals with employment at the US Dept of Defence, stating that “possession and/or use of a foreign passport may be a disqualifying condition” to get a US security clearance to work for US Dept of Defence.
But we’re talking about employment with the Canadian govt, which allows you to have/use a foreign passport and have a security clearance. So where you suggest paraphrasing a line to apply it to Canada, “In your letter you can state the US language from the money memorandum that carrying a US Passport is incompatible with having a security clearance with the Government of Canada,” that is not a true statement here. Probably more accurate to say I wouldn’t feel comfortable working for the government whilst being a citizen of another country, so I chose to relinquish.
(2) Re mailing the passport to the consulate.
I don’t see the point in doing that. Either stay under the radar or apply for a CLN. Giving your passport to the consulate will put you on the radar, but it won’t result in a CLN or any document from the US indicating you’ve terminated your US citizenship. You’ll probably just get a letter from them suggesting you apply for a CLN.
I know two people who attempted to relinquish by mail recently and received letters back from DoS HQ stating that if you want to notify the US govt that you relinquished, you have to go the formal 4079/CLN route. That’s the rules. Congress gave DoS the power to make the rules regarding this in s. 104 of the Immigration and Nationalities Act.
So, I’d say either stay off the radar or go for a CLN.
@whitecat @KalC and @Blaze, thank you for your encouragement! I needed that! It really does seem far fetched that I would be tracked down. I’ve been travelling with my Canadian passport with no issues for the past 10 years or so. It’s true that the scare tactics are extremely effective!
Five years ago I made an investment in a friend’s US company and it’s that is about to be valuated at several times what I put in. I have this fear in me that somehow they could just smell this and it could jeopardize the financial security of me and my family. I have nightmares about my financial advisor who I’ve mentioned this all to, narcing me out to the bank or something (could they do that?). The only reason I can think of to come out in the open, is that it would be taking advantage of the money I’m going to make to pay the cost of filing as an insurance against the US having any legal means to come after me given some unforeseen incident.
I feel fortunate in many ways. It makes my blood boil that people in far less secure situations than my own, like senior citizens are being scared into giving up their life savings! GRRRR!!!