I have received an okay to publish these notes from the Speaker of Part 2 of the meeting that was held in Toronto on June 15. I apologize that they are not in narrative form; I don’t have total memory of all that was said nor did I understand everything that was said and I fear giving the wrong impression if I were to attempt to elaborate. Hopefully, the general sense is correct. I wanted to do them as a separate post so that more might see them; it seems less people will benefit  if they were buried as comments only. Many ideas were remembered by commentors on the original post but there are some important ideas that need to come out. The Speaker did an excellent job  outlining and organizing a lot of information that many will need as they try to figure out what to do about their own situation. Also, I did not take any notes on the first session as it was my understanding that it was to be completely private and I thought it would be inappropriate for me to do so.

Notes on June 15, 2013 Meeting at Don Mills United Church

Session II: US Citizenship Abroad and Compliance Issues

• Where we have come from
• Where we are
• Where we may be going

INTRODUCTION

*The 14th Amendment forbids forcing a US citizen to forfeit their citizenship

*For those in this situation, the emotional aspect dwarfs the practical

*Speaker has been in Canada for 40 years and has studied much regarding

“What is the law of US citizenship?”

*Can foresee a day when the Department of State and the IRS operate from completely different definitions of citizenship

*As a practical exercise, can consider as many as 16 different scenarios when trying to consider a course of action

 

WHERE WE HAVE COME FROM

The acquisition of US citizenship is by birth or the naturalization process.

The US government has always used citizenship as a weapon.

In the 1960’s-1970’s, there were two expatriating acts that always resulted in aggressive stripping of USC:

• taking on a 2nd citizenship
• voting in a foreign election

1967, a seminal case of Afroyim v. Rusk the Supreme Court of the United States per Justice Black, 5-4 vote, the US government cannot strip those born or naturalized in the U.S. (14^th amendment citizenship) of their U.S. Citizenship and affirmed the Right to Expatriate; they cannot force you out of the political community

The Constitution is what protects the people from the government

an audience member asks – “What is naturalization?”

Speaker  – “The process of establishing status in a country via residency, green card to becoming a citizen.”

The big problem in our situation is the US place of birth on the Canadian passport.

If born abroad to a US citizen, do not automatically assume that you are a US citizen. Investigate this.

The most severely damaged people by all this are long-term residents of another country who are all of a sudden told, <that they are US citizens.>

Did you perform an expatriating act? According to INS 349 (a) (5) the 7 evils

INA: ACT 349 – LOSS OF NATIONALITY BY NATIVE-BORN OR NATURALIZED CITIZEN

Sec. 349. [8 U.S.C. 1481]

 

(a)    A person who is a national of the United States whether by birth or naturalization, shall lose his nationality by voluntarily performing any of the following acts with the intention of relinquishing United States nationality-

 

(1) obtaining naturalization in a foreign state upon his own application or upon an application filed by a duly authorized agent, after having attained the age of eighteen years; or

 

(2) taking an oath or making an affirmation or other formal declaration of allegiance to a foreign

state or a political subdivision thereof, after having attained the age of eighteen years; or

 

(3) entering, or serving in, the armed forces of a foreign state if

(A) such armed forces are engaged in hostilities against the United States, or

(B) such persons serve as a commissioned or non-commissioned officer; or

 

(4) (A) accepting, serving in, or performing the duties of any office, post, or employment under the government of a foreign state or a political subdivision thereof, after attaining the age of eighteen years if he has or acquires the nationality of such foreign state; or

 

(B) accepting, serving in, or performing the duties of any office, post, or employment under the government of a foreign state or a political subdivision thereof, after attaining the age of eighteen years for which office, post, or employment an oath, affirmation, or declaration of allegiance is required; or

 

(5) making a formal renunciation of nationality before a diplomatic or consular officer of the United States in a foreign state, in such form as may be prescribed by the Secretary of State; or

 

(6) making in the United States a formal written renunciation of nationality in such form as may be prescribed by, and before such officer as may be designated by, the Attorney General, whenever the United States shall be in a state of war and the Attorney General shall approve such renunciation as not contrary to the interests of national defense; or

 

(7) committing any act of treason against, or attempting by force to overthrow, or bearing arms against, the United States, violating or conspiring to violate any of the provisions of section 2383 of title 18, United States Code, or willfully performing any act in violation of section 2385 of title 18, United States Code, or violating section 2384 of said title by engaging in a conspiracy to overthrow, put down, or to destroy by force the Government of the United States, or to levy war against them, if an d when he is convicted thereof by a court martial or by a court of competent jurisdiction.

(b) Whenever the loss of United States nationality is put in issue in any action or proceeding commenced on or after the enactment of this subsection under, or by virtue of, the provisions of this or any other Act, the burden shall be upon the person or party claiming that such loss occurred, to establish such claim by a preponderance of the evidence. Any person who commits or performs, or who has committed or performed, any act of expatriation under the provisions of this or any other Act shall be presumed to have done so voluntarily, but such presumption may be rebutted upon a showing, by a preponderance of the evidence, that the act or acts committed or performed were not done voluntarily.

The court ruled that citizenship is yours to do with what you want.

If you commit an expatriating act with the intention to lose citizenship

In 1986, USC was not automatically re-bestowed; the SCOTUS just turned it back to the way it was.

People used to swear an affidavit; taking CDN citizenship without relinquishing USC. Would send a second copy to self, unopened

an audience member pointed out he had done just that.

 

LOOK AT THE LAW OVER THE YEARS

Many CDN politicians are dual

You might find something to say you are not a USC

Board Appellate Reviewed those who wanted it back

Very long history

1st step

Determine if you are a USC

Remember that trials are not searches for truth but searches for proof

Did you get a Social Security number or a US passport – not if you do not consider yourself a US Person

These are not determinative, just factors.

Petros says “The DoS accepted the argument that a son of <?> was forced to get a US passport by bad treatment of a border patrol guard and that such passport was not proof of USC

2nd step

What if you are?

Petros asks “What if you are a CDN but used a US passport? They won’t let you enter the country without one.”

This is a circumstance used against you when determining expatriating factors.

Petros says “<Become a citizen?> but not filing your taxes, because you don’t consider yourself a US is an argument.

What is important is your state of mind at the time of expatriating

Speaker does not see a passport as a determinative factor; voting is a more difficult issue

A Social Security number has nothing to do with citizenship issues

The state of mind in affidavits mentioned above, are the state of mind “frozen in time”

There is no clear proof of what the state of mind is

A clear factor – dual citizenship, swearing of oath

Richards case in the 1970’s – U.S. Citizen became a Canadian citizens and took Canadian citizenship oath which required renunciation of U.S. Citizenship – oath of citizenship changed/ prior, the CDN oath required renunciation of all other citizenships….but, it is not as simple as it sounds

Find something you did wrong against the US government – have you committed an expatriating act?

an ounce of prevention is worth a pound of cure

Re: U.S. Tax Compliance – Only U.S. Persons need to be in U.S. Tax compliance

“Reasonable cause”

Find the law and stick to your position

Taxes are a form of life-residency control

3rd step

What to do? So many situations and different factors

There are very few tax compliant USCs abroad because they either don’t know they have to file or they feel they don’t have to since they don’t owe anything

In 2011, this whole situation exploded

Speaker feels a general principle of citizenship is to obey the law however, the US government is a great teacher of the fact that laws have no moral force and that law is unequal to morality. Tax = confiscation

It’s almost impossible to be tax compliant; the law clearly has nothing to do with taxation.

In August 2011, the media began to publish information regarding OVDI- NEVER ENTER THE OVDP/OVDI

For criminals, with large amounts of untaxed dollars, the program is an unbelievable “professional courtesy” to criminals.

For criminals the ‘in-lieu-of penalty’ is awfully cheap; so much less than the income tax that they would have to pay on that money

US politicians concerned with so much crime; perhaps there is so much crime because there are so many laws.

OVDP extended because of hurricane; 9 more days of agony in deciding whether to enter or not

Respect that the Harper government has taken a position

What happens after September 9 – Capp & Drysdale, a law firm closely affiliated with Department of Treasury and others, such as Charles Rettig, start writing articles……Is Canada “OFFSHORE?”     “Where’s the water?”

Petros says “Lake Ontario”  Nobledreamer says “Lake Erie”     LOL

OVDI was designed by criminals for criminals and grew out of the debacle of UBS etc. Shulman said, “Those who came in early would pay less….” This is your last chance……”

2009 version OVDP a misunderstanding regarding FAQ 35, the bait-and-switch; “under no circumstances would anyone pay more than they would normally pay, outside the program”

Not going to consider reasonable cause

October 18 US Amb to Canada David Jacobson suggested that these problems would be resolved. In early December came Fact Statement 2011-13 There’s no safe way to file but the FS was linked from a previous page with instructions to Canadians, the UK, etc which basically implied they should go ahead and just file – “reasonable cause” was acknowledged.

The compliance lawyers did not interpret the December 2011 FS favorably. However, the Speaker does not see it that way it was more like, wink, wink – this is reasonable cause, to not know about while the lawyers said the FS means nothing (different)

Jacobson said to Barrie McKenna (G&M) that there would be a refund of penalties – This was a 2nd betrayal  because there was nothing like this in the FS

January 2012 Shulman, (Orwell is his idol), says the OVDP program is back. Later comes the ‘streamlined’ program, which is just a watered-down version of OVDI. The Fact Statement is clearer then either OVDP or Streamlined.

 

Logical options offered by UK-based- tax practitioner listed

• Do nothing

This is the preferred option for many but obviously, is becoming more dangerous with FATCA coming. No lawyer or accountant can recommend this. Furthermore, at some point something must be done.

• File some tax returns (Quiet Disclosure)

in Speaker’s opinion on QD-different than the prevailing perception

in March GAO claimed the IRS was not collecting enough penalties; not enough QD’s audited, etc.

Speaker: in context of OVDI program “people evading taxes”

• Compliance going forward
• Traditional Voluntary Disclosure the IRS always had a VD program; the OVDI is a subset of VD

after the OVDI expired in September 2011, VD was still an option

“small time” or “big time” – where lawyers would make deals so could return for non-prosecution

VD reasonable cause letter 100 or so from Fact Statement 2011-13

an audience member said in 2007  had sent letter plus 6 returns and going forward that is VD

re: VD the “Front Door” is to file with CI the “Side Door” is to file with IRS

Don’t fear the FBAR and don’t fear compliance. Rethink the financial.

RRSP and tax-deferred savings the US is attacking tax deferral plans.

Don’t enter OVDI don’t enter streamlined.

But here’s the problem. First, who you are i.e., the emotional and second, what are the objective facts? US tax issues and also, information form issues, the SOL doesn’t run until both are done; example of info form is if you are Canadian Controlled Private Corporation and have to file a f5471 the absence of a filing means not complete tax filing

What to do

1st – get an assessment of what your tax situation is

don’t send an accounting firm your name, the account numbers; not hiring them to file, just play with the numbers to get idea OR

2nd – do same with lawyer OR

3rd – use an Enrolled Agent – better than 90% of lawyers and 70% of accountants. EA’s are a class of tax professional, less expensive

6 years SOL filing, FBAR

 

DO YOU OWE TAX?

HOW MUCH?

WHAT SOURCE?

Presuming you have no other information returns to do in addition to  FBAR

Situations:

 

• Owe some tax; have filed tax returns; have filed FBAR

sold principle residence etc/incompatible tax systems
SOL on tax -run after 3 years

 

• owe tax, filed tax, not filed fbar

the rules for FBAR- if you don’t owe tax, no penalties for not filing fbar

don’t enter programs and file fbar

clean up tax liabilities before

FAQ 17 OVDP especially if interest on an undisclosed return

 

• owe tax, no tax filed, no fbar filed

better than filing tax returns with excluded income

 

• nothing owed, filed tax, filed FBAR

Think this is okay?

No, you are IN THE SYSTEM & demonstrated you are aware so you’d better keep it up

 

• nothing owed, filed taxes, not filed fbar

just get over 25 accts there is no disclosure required for more than 25 accounts $10k attached or more

The law is one thing, the regulations are something else

SPECTRE (SPecial Executive for Counter-intelligence, Terrorism, Revenge and Extortion)

Dr No – 4 pillars of control/  the 2 siamese fighting fish

The IRS has become the 4th arm of the government and terrorizes the other 3

 

• don’t owe tax, filed no returns, have filed fbars

example of this is a housewife with no income yet may have signatory control over some accounts

 

1. owe nothing, not filed taxes, not filed fbars

It is unlikely USC’s / Canada is a high-tax country;

need tax deferral to accumulate wealth  which puts them in the crosshairs of the US

no SOL on tax things omitted some kind of generated income

 

1. owe nothing, filed taxes, filed no info returns or fbar

the MOST DANGEROUS

accounts generate income and are undisclosed

an audience member says– too much of a risk to reveal pension

 

 

MUTUAL FUNDS/PFIC’s 

historical discussion first

In 1986, there were none of these problems

Reagan was interested in Tax Reform

votes were bought and sold/ special interest groups

Mutual Funds a pro-rata base; pay out every year and cannot be deferred

Out of Step – rewarding such special interest groups

1986 Tax Equity came PFIC’s = Passive Foreign Investment Corporations

The reason this was established, companies were angry that Homelanders could invest offshore and defer tax

What is a PFIC?

1. the income test
2. the asset test ½ corporation or 75% of income PFIC
3. PFICs not subject to tax but to Confiscation

Think of Mutual Funds as stock; say you have one share of stock in Telus; the dividends are paid out quarterly

Your income is taxed. Dividends in Canada are taxed subject to principles of integration and are very different than those in the US.

That income is either dividends or when sell, capital gains

Say you have a share that you buy for $100 and sell for $200; the gain is called a capital gain which you have to report and pay tax on the gain

<?share of stock – tax 100% of?>

A fundamental choice of US is to attack deferrals as the Treasury Department sees this as money of theirs being taken, so they punish

PFIC Mutual Funds prevent US homelanders offshore

keep track of their dividends

lack of consistency

If a dividend exceeds 125% average 3 preceding years – a special penalty – it is an “excess distribution”

if sold, one would think a capital gain but NO

Gain is taxed at the highest rate of tax in the Code in the year sold

depriving us of <?tax?> every year you’ve owned

Have for 20 years capital gain $100 capital gain

Attach the prescribed rate every year

THE TAX CAN EXCEED THE GAIN

 

Triggered – Is a Mutual Fund a PFIC?

Most complicated, punitive thing in the tax world

5 years ago – didn’t know that Mutual Funds would become the most cancerous tumor in your retirement fund

in 2010, an IRS lawyer memo said CDN Mutual Funds are corporations under US law and thus are PFICs

a means to your financial destruction

in reality the IRS has never finalized the PFIC regulations

but the treatment of MFs are based on an IRS 2010 memo

The PFIC regulations have not been passed – therefore there is room to argue …

Nobledreamer asks “Is this situation only in Canada? Do they have these in say, London?”

A Presumably yes, but ours are very different than UK MF’s

1. licensed lawyer – don’t designate MFs as PFICs
2. group discussion
3. advice is totally personal

Petros says/asks The IRS cannot unilaterally issue regulations. Wouldn’t that be a violation of the Treaty and of NAFTA?

The 8938 is massive, requires reporting of stocks, etc and is supposed to include PFIC – missed the boat but is on the horizon

If you know the value of your pension, you can reasonably expect to have to include it on 8938

for 8854, you have to know it

gets complicated, such as the elections on 8621, etc

One good thing about the streamlined program, 8891’s are in

There is no relationship between TAX and RENUNCIATION/RELINQUISHMENT

the 8854 is to establish whether one owes exit tax

in 2008, James Dale Davidson anticipated this in “The Sovereign Individual”

Covered or not?

3 conditions

*annual tax liability of $145k and over across the 5 years

*assets of $2mn

*failure to certify last 5 yrs of filing, including info returns

What happens if you are “covered?”

a Mark to Market regime, as if all your assets (US or not) are sold the day before your expatriation

know the Adjusted Cost Basis, Fair Market Value; the  difference is gains deemed sold or what your CGs would be

< ?an exclusion amount?> of ~$700k

$2mn is the threshold, if you  have 1.9mn, you are not covered

would think they would have set it differently

ways to get under the $2mn

*sell assets and pay the tax in Canada

*spend the money – on that around the world trip or whatever it is you’ve always wanted

*watch the exchange rates, remember all of this is in Canadian dollars

When thinking of others or these explanations, all sounds completely rational yet, when think of one’s own situation, it becomes completely irrational

Suggestion: get a renunciation buddy, discuss, bounce off, support, etc

Petros asks “If one doesn’t pay because they are CDN, can you be thrown in jail for trying to cross the border?”

and “Can they extract 45% tax on inheritance to children?”

Speaker believes that in 2-3 years, there will be a shift to residence-based taxation and no longer required to pay US taxes

Be ready

1. prepare to renounce
2. vast majority of USC’s abroad – organize your affairs so that you do not owe US tax
3. if you have MF’s with very small gains, get rid of them; the best thing in this situation – accept that you made some bad investments

ACB (adjusted cost base) of fund per unit – reinvestment / if not a lot of gains – SELL IT

<??? if gains holding period low rates due to erosion via management fees>

an audience member says RRSP form 8891 exempt by the treaty; complex area as MFs are in the RRSP’s

make a sandbag; make sure it doesn’t affect you

Finally: You must think with your pen – make sure you understand the tax implications of anything you do!