This post appeared on the RenounceUScitizenship blog.
#americansabroad in Canada: The sale of your principal residence is a US taxable capital gain http://t.co/SQaSzY0Rgg
— U.S. Citizen Abroad (@USCitizenAbroad) July 12, 2013
If you sell a #PFIC (mutual fund) you have held for many years, you can"basically say goodbye to that investment" http://t.co/mu5k07xAv2
— U.S. Citizen Abroad (@USCitizenAbroad) July 11, 2013
For those who do not want to read this post. Here is the bottom line:
If you are a tax compliant U.S. citizen abroad, with a net worth of less than two million U.S. dollars, with investments (including mutual funds, pensions, and a principal residence in your country of residence), you should renounce your U.S. citizenship at the earliest possible moment. To the extent that your investments are in non-U.S. mutual funds, other kinds of PFICs or your principal residence, the U.S will confiscate large amounts of the proceeds of sale. (And you thought you were solving your problems be being tax compliant.)
Many Canadians are using their principal residence as their retirement plan. Their plan is to sell, downsize and live of the balance of the proceeds. This is NOT possible if you are a tax compliant U.S. citizen! You must NOT be a U.S. citizen at the time the investments are sold.
If you want to preserve your investments you must relinquish your U.S. citizenship to protect your access to your investments!
For those who want to understand why, read on …
Tax compliance and the U.S. citizen abroad
It has become clear for U.S. citizens abroad that the only thing worse than NOT being tax compliant is BEING tax compliant.
The cost of U.S. tax compliance is that your U.S. citizenship will disable you from effective financial and retirement planning. The reason is that the U.S. considers most non-U.S. investment vehicles to be PFICs. The sale of your principal residence will be subject to a capital gains tax. Furthermore, the additional “Obamacare taxes” imposed on investment income will make the situation worse.) The above tweet references a very good article explaining why, for U.S. citizens abroad, retirement planning is hazardous to your financial health.
The main point is this:
If you you own a principal residence or a non-U.S. mutual fund and you sell it (you will want to do this at some point) all the gains (and possibly more will be confiscated). Since some of you may think I am sounding “alarmist” I will quote from the above article by tax lawyer Virginia La Torre Jecker (yes, somebody else thinks so too):
Don’t Mind Losing Your Investment ? PFIC Means Very Harsh Tax Consequences
The harsh bite of the PFIC tax rules will make itself known in either of two events: 1) when the fund makes a distribution (called an “excess distribution”) to the investor or, 2) when the investor disposes of his PFIC shares (a “disposition” of PFIC shares can occur by redeeming them, selling them, gifting them away, or even by giving up one’s US resident status or citizenship). When taxation occurs, the amounts will be taxed at the highest ordinary income tax rate for the investor without regard to other income or expenses (currently the highest individual rate is 39.6% plus, don’t forget the 3.8% Medicaid Surcharge). Long-term capital gains treatment does NOT apply.
To add insult to injury, the amounts on which the PFIC tax is to be calculated are “thrown back” evenly over each of the tax years that the investor held his shares. Tax is then assessed for each prior year at the highest possible tax rate that was in effect at such time. Then, interest is compounded on the deferred tax deemed due for each year. These high rates can very easily eat up the investment by removing the benefit of any tax deferral. If an investor has held his PFIC shares for many years, he can basically say goodbye to that investment. By way of example, assume Taxpayer redeems his PFIC shares at a gain of $10,000 in 2013. Assume he held the shares commencing 2009. In this case, $2,000 of gain will be deemed to have been earned in each of the five years 2009 through 2013. Tax will be assessed at the highest possible tax rate for each year and compounded interest will apply on the taxes due. Various tax elections can possibly be made to avoid this harsh treatment. Making an election, however, is not always a simple matter since certain requirements must be satisfied. Many times, the requirements cannot be met and the taxpayer is left in the lurch.
What does this mean practically?
It means that you may have to renounce your U.S. citizenship in order to save your financial future. This is why the issue of being a “covered expat” is becoming more and more important. If you are NOT a covered expat, you will get your “Get of Jail Free Card” for free. You are NOT subject to the mark to mark exit tax rules. If you are a “covered expat” there will be a deemed sale of your mutual funds (and all the horror that this sale implies). You cannot afford to be U.S. citizen when you sell your investments.
U.S. citizens abroad who:
1. are tax compliant
2. have investments they do not want confiscated by the U.S. government
3. have a net worth of less than two million
4. are not paying more than about 150,000 per year in taxes should:
Renounce your U.S. citizenship now!
It’s necessary to preserve your financial future. If you continue your habit of “tax compliance” (playing by the rules) and you reach the two million mark which is inevitable, you will be locked in a fiscal prison the rest of your life!
Caveat: Those who were born dual citizens and meet other requirements may “Get out of jail free” in any event.
Epilogue – Added one day later …
An interesting discussion which touched on the issue of non-U.S. mutual funds has been taking place at the Isaac Brock Society. See this thread.
Note this comment in particular. Note specifically the words I have bolded. Do NOT see these investments until you are no longer a U.S. person!
@Neill
Ignore this if you plan to reside in the US permanently. Also, I have no idea whether this option would still be available to you if you have already filed returns using the MTM method for PFICs.
Have you examined reporting your PFICs under the excess distribution method? Under this method, you pay tax only on the dividends distributed by the underlying PFICs. Most of the dividends will be treated as ordinary dividends in the year the dividend was received. Dividend distributions in excess of 125% of the three year average are deemed excess distributions and the excess portion as apportioned over the holding period and taxed at the highest marginal rate in the period plus interest. However, it avoids having to pay “capital gains” tax on a MTM basis which is where you can get whacked by dollar depreciation or underlying fund appreciation or both. If the underlying funds you held paid a fairly stable rate of dividends from year to year then most of the dividends will be treated as ordinary dividends.
Additionally, I’ve had two different sets of tax preparers tell me that only dividends from Income class shares need to be reported as dividends since Accumulation class shares don’t distribute dividends.
If you bought and held your PFICs, if you have PFICs that are Accumulation class shares, and if you don’t plan to permanently reside in the US, and if it is possible to amend the returns submitted, it may be worth investigating. This method, however, produces absolutely brutal consequences if you sell the holding while you are US tax resident.
(In context the words “while you are a US tax resident” actually mean “while you are a US person”.)
And more bad news (just got this off the AARO FB page)
http://www.international-adviser.com/news/tax—regulation/us-institutions-to-expats-take-your-retirement
Some US brokerage firms want Americans abroad OUT. That means IRA’s and 401(k)s. I know a woman here who was gold by Fidelity in the US that she can no longer do anything with her US investment account except SELL. Since many of these types of accounts have penalties for cashing out early (not to mention selling at a loss) all this means we can’t win. Can’t invest locally because the banks won’t have us – can’t invest in the US because they don’t want us either (unless we have millions and make it worth their time).
Conclusion: Can’t be US citizen abroad and save for retirement. Pretty powerful motivator for renouncing US citizenship.
All these articles I’ve read always mention “U.S. citizens abroad” and seem to completely leave out that we have families abroad too! Any solutions they mention leave out that vital information. They are looking at this as if it is only U.S. citizens abroad who are affected. That is simply not the case and no solution that leaves out foreign family will be workable for a lot of people. It’s the number one reason people seem to be renouncing. We have family abroad and U.S. citizenship no longer is workable at all for our family. It’s just so myopic and narrow the way they are approaching this issue. No, you can’t be a U.S. citizen abroad and save for retirement and this impacts more than just those who are “U.S. citizens”
@atticus in Canada, That’s a damn good point. I know that my husband and I are looking at all the ways to protect him and HIS ability to save. This is the point I and others are trying to drive home to the EU folks. It’s not just US citizens, ladies and gentlemen, it’s our spouses and partners too! Thanks again for pointing it out.
Before you renounce your US citizenship you should know that there is a proposal that anyone that renouncing citizenship will never be allowed in the US again. There has been a law on the books for sometime called the Reed Amendment that says the same thing, but it is optional and has never been enforced. The US government is looking at making the enforcement mandatory.
@Dale
I was wondering if you could explain in a practical sense how it is possible for tax compliant U.S. citizens to keep their citizenship. What exactly are they supposed to do? U.S. citizens abroad who are in compliance with U.S. laws are disabled from having any normal productive life.
The alternative is to not be in compliance with U.S. laws.
So, which way are they supposed to live?
Dale Walters. You exaggerate. The proposal is to bar covered expatriates from returning. Very few of us will be covered expatriates. Only the wealthy will be. The proposal won’t pass.
@Dale Walters, Just my .02 here but my impression is that this kind of thing still bothers people but consider this: I do not want to return to live in the US. So I’ve been thinking hard about why I should care if I can’t go back. I am concerned about my parents but realistically I have siblings who could do it. I like the family farm but I like the country house in Brittany too. As for the rest of my family, they all live close enough to Canada that we could move our family reunions to Vancouver, B.C. where my aunt has already been living for over 25 years. And there are all kinds of other places that I’d like to see in the world like Thailand, Brazil, Australia and so on.
In the end, other than the emotional shock of being exiled, the Reed/Schumer amendment just isn’t going to make that much difference to me as I consider my options. Something to think about? Yes. A renunciation deal killer? No.
That’s where I’m at as of 18:31 Paris time.
Dale Walters, apologies if you are well known to IBS commenters, but I always like to know up-front whether a commenter charges for “private client services.”
“Dale Waters is partner and CEO of Keats Connelly, the largest North American cross-border wealth management firm. He holds a BS in Accounting, is a Certified Public Accountant, Personal Financial Specialist, CERTIFIED FINANCIAL PLANNER™ Professional (US and Canada), and a NAPFA Registered Financial Advisor. He was named Top US Financial Advisor by Mutual Funds Magazine in 2001 and 2002.”
A previous posting from @Calgary 411:
calgary411 says
June 20, 2013 at 4:49 pm
… and doing business in the city in which I live: http://www.keatsconnelly.com/2012/05/keatsconnelly-expands-into-canada-announces-firms-first-office-in-calgary-opening-for-summer-2012/ Reading his comment creeps me out.
http://isaacbrocksociety.ca/2013/06/03/canadian-snowbirds-could-face-us-tax-servitude/
Victoria writes:
What the fine lady said. If the price of getting out of the dysfunctional relationship that the US has with its citizens abroad is to never step foot in the US again, well I can live with that. As long as I can fly over the US, I’m good to go.
Naturally, everyone has their own unique situation, and I would have a hard time arguing that, say, a 25 year old dual Canada-US citizen should not care about being banned from the US. But I’m not 25 by more than a few years, so ….
To All
and
@Duke of Devon
I came across this in my readings…
Here is the reference in FAM
UNCLASSIFIED (U)
U.S. Department of State Foreign Affairs Manual Volume 7
Consular Affairs
7 FAM 1210 Page 13 of 13
UNCLASSIFIED (U)
7 FAM 1216 VISA REQUIREMENTS FOR FORMER U.S. CITIZENS AND VISA EXCLUDABILITY
(CT:CON-262; 08-06-2008)
a. Visa requirements for former U.S. citizens: An expatriate is subject to all of the
requirements for entry to the United States that apply to other aliens, including visa requirements, and to all of the grounds of visa denial and inadmissibility for aliens.
b. Visa excludability for persons found by the Attorney General to have renounced U.S. citizenship for the purposes of avoiding taxation: The Illegal Immigration Reform and Immigrant Responsibility Act of 1996 (IIRAIRA) (Public Law 104-208) added 212(a)(10)(E) to the Immigration and Nationality Act (8 U.S.C. 1182 (a)(10)(E)). INA 212(a)(10)(E) made inadmissible “any alien who is a former citizen of the United States who officially renounces United States citizenship and who is determined by the Attorney General to have renounced United States citizenship for the purpose of avoiding taxation.” This amendment applies only to individuals who renounced U.S. citizenship on or after the effective date of the Act, September 30, 1996. (See 9 FAM 40.105 N1 Applicability of INA 212(a)(10)(E).) The Attorney General’s authority transferred to the Secretary of Homeland Security under the Homeland Security Act of 2002. The Department of Homeland Security has not published implementing regulations on INA 212(a)(10)(E) (8 U.S.C. 1182), so no procedures implementing this law are currently in effect.
@Dale, what you are missing here is the those amendments barring former citizens are for “covered expats” Most of us are not rich yet we are being so negatively affected by FATCA,FBAR fines that we cannot function in normal daily life. We have foreign family who object to having all their information turned over to a country they are not a citizen of. These renouncing folks are people who would not have been forced to such a decision before all of this mess kicked up. It’s protect your foreign spouse and family or renounce and there’s no in between. It’s the fault of the congress, IRS and those who wouldn’t listen to the tax payer advocate Nina Olsen, to ACA, to us that this is happening. If the U.S. wants to back innocent expats who are mostly low and middle income into a corner and then pass laws barring us for doing what they forced us to do then so be it. We have very little choices here.
I have family there who I go to visit but, realistically I am never moving back there myself. I haven’t lived there for 35 years. The U.S. needs to let us go peacefully and let us re enter as citizens of our various countries providing we are law abiding the same as any other citizens of those countries. Otherwise, they start to look worst than King George indeed. You know we still have families down there. The U.S. wants to start barring people like us? I think some of our family might start kicking up a fuss and maybe the truth will come out about how punishing and immoral this whole thing really is!
It’s not obvious that renunciation of citizenship will cure failure to report in the past, or forgive unpaid tax. (“a ‘disposition’ of PFIC shares can occur by redeeming them, selling them, gifting them away, or even by giving up one’s US resident status or citizenship”)
The increasingly complex, expensive and draconian US tax law as applied to “accidental” US Persons might be considered by some a “good thing”. The more draconian – disproportionate – tax laws and penalties become, the more costly it is for ordinary families living abroad to report and pay tax on concessionary funds (such as for minors and disabled dependents, and retirement and tax-sparing funds not envisaged in the relevant bilateral tax treaty) the more impossible of enforcement and outrageous in principle such unilateral and exorbitant laws are seen to be.
And the less likely it is that the country of residence of a noncompliant person deemed to be a US person will assist the USG in collecting tax, prosecuting an individual and pursuing others on the basis of “transferee liability”.
Canadians who faced double taxation of their inheritance in that decade after Canada moved to capital gains taxation of estates based on deemed sale at death vs US imposition of estate duty (there is now a credit of one against the other under a tax Protocol) will understand that individuals are cannon fodder for Governments, who when they negotiate tax treaties are mainly concerned with the interests of multinational firms as represented by lobbyists. It is no wonder that of the 6 million Americans said to be resident abroad (the State Department knows of only half of those), an increasing number, unable to pay for tax advice or preparation, for renunciation of citizenship or the incremental US tax itself, are simply remaining underground. A series of GAO reports has looked at this and found no solution. And, by and large, legislators and bureaucrats (including diplomats) don’t care.
For the time being, the Lord Mansfield Dictum protects. But the hostility towards tax evasion abroad translates into hostility to expatriates generally. That is not a good sign.
@ Dale Walters
Kindly take your booga-booga and be gone. I am a Canadian, married to an American, living in Canada. My husband will be throwing off his American millstone and burning that passport ASAP. We would NEVER want to live in the USA, even if Canada freezes over in a sudden onset Ice Age. Why would we want to go to a country hellbent on destroying the personal freedoms and privacy of its own citizens? I have not visited the USA in over 15 years (at first for reasons other than FATCA and now for those same reasons plus FATCA). I will never cross the border. My husband has one more trip to make to complete the disbursement of his mother’s estate and then he will never cross the border again either. I do understand however, that for people who have family obligations in the USA access is essential but I do not think for one minute that despite the ugly mean spiritedness of some US congress critters renunciants will ever be banned entry. That would expose too much of the U.S. of Arrogance’s growing pile of dirty laundry. (I didn’t start out being quite this snippy about the USA but now the FATCA devil makes me do it.)
Re: 7 FAM 1216 VISA REQUIREMENTS FOR FORMER U.S. CITIZENS AND VISA EXCLUDABILITY
The reason why no Regulations have been published and no former US citizen has been denied a visa or entry is out of the belief by many jurists (including the Office of the Legal Adviser, I have been told) that the provision is unconstitutional.
The degree to which noncitizens (including former citizens) not located on US land have any constitutional rights is arguable however. Think: Sosa v. Alvarez-Machain http://en.wikipedia.org/wiki/Sosa_v._Alvarez-Machain
@all
Dale Walters hasn’t yet had the realization that we’ve had: that US citizenship is a liability for nearly all US citizens who live abroad. He’s attempting to scare us with tactics that have long since been known to us, and is clearly not on the same page as us. He should go to the Facebook group “Americans in Canada” and try and flog what he’s selling over there.
Yes, they might just want to rethink those threats of not allowing us back in. After all many of us have family living there. Some of us even have family who might be somewhat powerful politically. I’ve already begun to leverage everyone I know who I am friend or relative to. For instance my step mother was voted three times the most powerful woman in her state, she’s livid already over this. I could give other examples but, no need. There are literally millions of expats with families ties back there and people who care what is happening to us already. So keep threatening, and maybe even go ahead and do it. Let’s see what kind of storm that creates back home when one million Canadian/American expats are affected by being “barred” to say nothing of the millions more of us around the world, Dale. It sure will be great for cross border business when we’re “barred” too.
Maybe, people such as Dale are more concerned with us staying U.S. “persons for tax purposes” because “Hire” was meant to drum up business for tax professionals. If we renounce well then after a big boom, a bust forevermore. Hence all the threats, fear mongering and such. I’m over it and there’s no one to blame in this except a horribly unworkable and stupid law called “FATCA”
@AtticusinCanada,
Mr. Walters and his employee J. Bradford Flecke (well known to IBS; see http://isaacbrocksociety.ca/2013/06/03/canadian-snowbirds-could-face-us-tax-servitude/) just have a business to run and could use our help.
Dale A. Walters, the continuous punitive threats and $$ penalties are what disgust us, along with FATCA, which is a gun to the head of all ‘foreign financial institutions,’ a threat to our chosen countries privacy laws and their sovereignty and sucks dollars out of our countries’ economies. Your US is the first-class bully of the world. The only reason many of us who have chosen other countries to live our lives in, raise our families in, would think of again crossing the border is to be at a family member’s sick or death bed. That the US would deny us that is beyond reprehensible. We are not tax evaders; we are not traitors; we left a country as we thought it was a sacred right of the country that bills itself the most democratic in the world. We, instead, see the US is building another Berlin around itself to keep those born there from leaving and forcing others to return to the homeland or face financial ruin. It entraps into US citizenship some born abroad to US parent(s) who may have never stepped foot into your country or even speak your language. Some can go through the process of renunciation; some, the developmentally disabled, the mentally incapacitated are not allowed to renounce nor can their Parent, Guardian or Trustee on their behalf, even with a court order.
I left this comment for one of your colleagues who tried to sell your wares to those of us at Isaac Brock, Bradford Flecke, after I got this opinion from someone whose opinion I value, unlike yours. Although I don’t presume to speak for others, I could almost say that NONE of us is interested.
bubblebustin –
If you’re into fantasies of legal sabotage, try this one on. Prepended disclaimer: this is a fantasy, not a recommendation, and takes place in another dimension. This situation manifests on the planet Gor. Exiles abound from the abusive state Jejunity, which seeks to tax ordinary residents outside its own borders. Unlike any other state on Gor. Those residents, by virtue of their persecution, develop telepathic interconnection. One of them, Z, emits this thought: once a week, quietly and simply issue a formal paper to the wretched authority to disclose that your personal avatar of the week, name disclosed in previous night’s dream (yes, there is night on Gor), has zero income, but wishes to come into compliance. All of this is true, but useless. Jejunity experiences a mounting flood of paper which it must examine and process. Unable to keep up, it cannot recycle the paper. Gor consequently runs out of fiber to make paper. Etc.
@Victoria wrote: “And more bad news (just got this off the AARO FB page)
http://www.international-adviser.com/news/tax—regulation/us-institutions-to-expats-take-your-retirement ”
It is going to be hard (but not impossible) for anyone without a US address and credit history to open, and perhaps maintain, a brokerage account with an American firm. But the Know Your Customer rules (what the linked article discusses) are hardly insurmountable. If you can justify the expense, earthclassmail.com provides a mail service whereby letters are scanned and downloadable from their Web site and checks can be deposited to your account (or you can just eDeposit the scan). Whether you have, and can maintain, a credit history depends on your family, property and financial connections in the USA.
I spent about 15 minutes searching the Web for consumer complaints of involuntary closings of 401(k) and IRA accounts and couldn’t find any. I haven’t researched the law but I wonder if it is even possible for a firm to close such an account unilaterally and impose penalties and taxes on the account holder. The articles quote on this is too vague to be meaningful: “American Citizens Abroad, a Geneva-based advocacy organisation, said it could not independently verify reports that expats had been asked to close or move retirement accounts, but said it could confirm hearing from some “who have been rejected for accounts or had limitations put on accounts held by Fidelity, Scottrade, Sharebuilder, ETrade and TD Ameritrade”.
A search for shows nothing on the ACA Web site on the subject. It seems to me wildly improbable that if expats were facing a serious issue it wouldn’t show up. And if it were an issue, Treasury officials who negotiate tax treaties and, in recent years, have modified the (art. 19, usually) pension provisions (including RRSPs) to provide mutual recognition of tax-sparing pensions, would have an interest in dealing with it.
As would multinational corporations, for whom, after all, tax treaties are written: dating from years ago when defined benefit pensions were “integrated” with Social Security, it became their (and Treasury’s) aim to implement SS totalization agreements and include provisions on pensions in tax treaties.
Fresh in the Indian press:
@5thSwiss, some individuals at IBS have reported problems. See the comments here:
http://isaacbrocksociety.ca/2012/07/22/fidelity-investments-refuses-to-service-to-u-s-persons-abroad/
@Dale A. Walters, the Reed Amendment is awesome because it would help me to save thousands of tourist dollars that I wouldn’t have to spend in the US. Thus, I’m praying every day that the US will banish all Americans abroad, including those who escaped America’s treasured national origin discrimination.
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