Here is a scenario, not unrealistic, which should explain to reigning Canadian government how they have failed in their duty to stand on guard for Canada by betraying Canadian citizens to the IRS.
Jake is a businessman in Canada who employs 50 people at his workshop in the Toronto area. He is nearing retirement age. He has made a decent living but has put so much of his company’s profits back into his business that he has basically lived a frugal, middle class lifestyle. He paid for his kids’ educations, but they went to Canadian universities not elite US Ivy League schools. His wife died a couple years ago, and he inherited her half of the house and her RRSP. Consider the following:
- Toronto Home: $1.3 million, unrealized capital gains of 1.1 million.
- Business: $3 million, retained earnings of 2.5 million
- RRSP: $1.5 million
- Unregistered stock portfolio: $1 million; unrealized capital gains of $750,000
Jake, however, was born in the United States to American parents. His parents brought him home to Canada three years later and he’s been living here ever since. At age 8, his parents and he became naturalized Canadians. He has no Social Security number and has never paid taxes in the United States. He has heard of FATCA and is thinking of renouncing US citizenship, even though he’s never acted on his citizenship–it has only been a novelty to him which he thought was kind of neat. He must renounce but he’s never done anything that the State Department would recognize as a relinquishing act.
Scenario One
What would the exit tax be in his case? His net worth is 6.8 million and his unrealized capital gains is as follows:
- RRSP 1.5 million
- House: 1.1 million
- Business: 2.5 million
- Investment Portfolio: 0.75 million
- Total: 5.85 million
Now after $600,000 exit tax exemption, Jake would owe taxes on $5.2 million. At 30% tax rate, the IRS assesses Jake $1.56 million in exit taxes. But where is he going to get this money?
Jake sells his investment portfolio and kicks in a 15% Canadian tax rate on his investment portfolio’s capital gains. He now has $887,500 and still lacks $672,500. So he begins to deregister his RRSP, on which he will pay the top tax rate in Ontario of 42.16%. He withdraws $1.163 million from his RRSP and pays $490,000 in Canadian taxes. By destroying his RRSP and his personal savings, Jake can now be free of United States tyranny. Now Jake’s personal savings are gone, except about $300K in an RRSP. However, his business has a couple bad years and he loses money and has to close down his shop. Fortunately, from the Canadian perspective, he had no more retained earnings in his business–the bad years took care of that. But he has virtually no savings and he has had to lay off 50 Canadians from their jobs. If he had been able to keep his stock portfolio, he would have been able to save his business until the economy improved and none of his employees would have suffered unemployment. By the way, he also lost the house because he took a HELOC on his house to keep his business running for a few more months. He managed to clear $300,000 on the sale of his house and so he has $300K in a savings account and 300K in his RRSP.
This scenario is oversimplified. It doesn’t even take into account the bills from cross border accountants and lawyers, nor PFIC penalties or any taxes owed to the US on his five years of filing to be able to certify tax compliance on his Form 8854. In addition, it is nearly impossible to know how his business corporate tax would affect his personal taxes in the US.
Scenario Two
Jake is an avid reader of the Isaac Brock Society. He decides that he will donate $200,000 to C3F Charter Challenge. He decides that he is Canadian only and that his birth in the United States does not define who he is. The CRA eventually sends his stock portfolio account information to the United States, and the IRS assesses him $500,000 FBAR penalty every year, but he refuses to pay it. At first Jake just throws their letters in the garbage, but later he begins to write on them, “Addressee deceased, return to sender”. When the bad years happen to his business, he liquidates the remaining part of his stock portfolio and uses a HELOC to weather the storm. In the end he retires at 75, sells his business which now employs 75 people, and he clears after taxes about 50% of the sale of $5 million. He lives happily ever after, except that he never travels to the United States but takes his vacations elsewhere. In the meantime, his $200,000 along with the donations of several other Canadians results in a victory, and the Canadian government can no longer discriminate against so-called US citizens in Canada.
Conclusion
Now, dear readers, what do you think Jake should do? What is fair?
My wife’s family owns a business. Our personal savings have gone on the line over the last year in order to improve the working conditions of the business. Had things gone badly, we could have lost our house and/or a substantial part of our life savings. My wife didn’t need me to screw things up by being an American. I am glad that I relinquished in 2011. I am a free man.
Brilliant!
If Jake was born to Canadian parents then he was a US/Canada at birth. He lives in Canada and is taxed in Canada. He fits in the “Certain dual citizens” category and is exempt from the exit tax.
http://www.advisor.ca/news/industry-news/cut-u-s-tax-ties-68108
Just Canadian, thanks. I will change it slightly.
Ok, I’ve changed it. He is now an accidental American rather than a border baby.
You bring up a good point: but some of the effects are the same, because while Jake would not have to pay exit taxes, he would still have to certify 5 years tax compliance in order to renounce his US citizenship. This means he’s still in quite a pickle that could easily cost him far more than his $200K donation to the C3F campaign.
Excellent example and yes, you are correct, it is oversimplified. The real situation for exit may be much worse. Jake would need to be in compliance for the past 5 tax years in order to renounce. Here’s the problem; Jake’s company employs 50 people, which means it is certainly a corporation. If he owns a majority share and he is a US person, then by definition that corporation is what’s called a Controlled Foreign Corporation, or CFC. Just the reporting on that company will drain at least $100k in legal and accounting fees. He will need to re-state the financial statements according to US GAAP and translate them into USD for each of the past 5 years (better to do 6 years because that is the statute of limitations). There are a host of penalties payable to the IRS for failure of a US person to report his investment into a CFC – so plan on asking for waivers of penalty and have a good lawyer to argue your case in the event it is challenged. Some of those penalties are as high as $100k per incidence. My guess is that Jake could exit and live to tell the story. If he is patient and gets a good lawyer/accountant to plan his exit over a period of years, the cost would be high but survivable. That he is faced with such a Faustian decision to make is not right, but I think your example is a realistic one. I speak from sad and expensive experience.
I hope a real Jake will step up with $200,0000 for C3f or whatever the next stage will be! Are there any real Jakes out there ready and willing to help? If so, let me know at maplesandbox at yahoo dot ca.
In the meantime, this Jake is in quite the quandry–much like unlike that of New Brunswick Premier David Alward. We never heard what happened to him after he became compliant in 2011. Why is he so quiet about FATCA?!? He’s a Conservative. Has he spoken to Flaherty or Joe Oliver?
Unfortunately, there’s a price to be paid in either scenario. How many years do you think it will take for American citizens outside the US to become extinct?
@Just a Canadian: Sad4America is correct. Jake will be subject to the exit tax even if he is a dual citizen at birth, living in Canada and taxed as a resident of Canada, if he is not in compliance with his US tax obligations for the 5 years preceding the year of expatriation…..
Does Jake Need to Re-Consider the Possibility of Extradition?
Searches reveal that the only Brock postings that specifically address extradition from Canada to the US have been made by Petros.
Petros says
January 18, 2012 at 8:03 am
This story is as Tim says, truly horrifying, and it is a reminder for everyone to consult a lawyer before defying the IRS openly in this manner. I am one of the few here using my real name. I asked my lawyer, and he says that the Canada US extradition treaty does not include tax evasion (or FBAR for that matter), on the list of offenses.
Petros says
January 18, 2012 at 2:24 pm
… My lawyer told me that this [extradition] does not apply to Canada/United States extradition treaty. The list of offenses for which one may be extradited does not include FBAR or tax evasion.
Petros says
August 7, 2013 at 10:57 am
There is no possibility of extradition for unpaid taxes. Rest easy. This is one of my first questions for my lawyer and he said that the Canada United States Extradition Treaty, which lists specific crimes for which one may be extradited, does not include tax crimes.
The links Petros provides to the Canada-US extradition treaty no longer work. But I found something else:
Canada International Extradition Treaty with the United States
March 22, 1976, Date-In-Force; As amended, Jan. 11, 1988
“ARTICLE 2
“(1) Extradition shall be granted for conduct which constitutes an offense punishable by the laws of both Contracting Parties by imprisonment or other form of detention for a term exceeding one year or any greater punishment.
“(2) An offense is extraditable notwithstanding
“(ii) that it relates to taxation or revenue or is one of a purely fiscal character.”
Source: http://internationalextraditionblog.com/2011/04/12/canada-extradition-treaty-with-the-united-states/
It appears Petros’ lawyer looked into only the un-amended 1976 version of the treaty, which in fact did have a specific list that excluded tax crimes. But it seems that has changed.
This Extradition Treaty excerpt seems further relevant because the CRA reassures that under the Tax Treaty there is specific US tax dirty work it won’t do, and the comment reappears frequently on the Brock site to the effect that “because of the Tax Treaty the US/IRS can’t do anything but send threatening letters.”
Allison Christians and Arthur Cockfield in their Mar. 10, 2014, submission on the IGA and Implementation Act (p. 21) warn that, “[The problem with relying on protections of the Tax Treaty is that, by signing the IGA,] Canada appears to be putting itself in an inconsistent position because it would be furnishing tax information to the United States that could support criminal charges in the U.S. against Canadian citizens, protections against which are not covered under the [Tax] treaty.”
David Alward and all of these US born, current and former politicians. Where are their voices?
Mike Sullivan (b 1952) York South Weston NDP
Ted Hsu (b. 1964) , Kingston and the Islands, Liberal MO
Bruce Hyer (b. 1946) MP Green Party Thunder Bay Superior North
Larry Spencer (b. 1941) former Alliance MP for Regina
Diane Ablonczy (b.1949) Conservative MP Calgary
Phil Edmonston (b. 1944) Former NDP MP writes Lemon aid car
Rex Crawford ( b. 1932) Liberal MP to 1997
Svend Robinson (b. 1952) former BC NDP MP
Cindy Lou Ady, PC MPP until 2012 Alberta
Randall C Garrison, NDP MP B.C.
Viola Leger, Senator,
Ted Morton, former PC MP Alberta
Holly Nelson, former head of Manitoba Green Party
Larry Spencer, former Alliance MP Sask.
Myron Thompson, former Reform MP Alberta
We have heard from Hsu. Bruce Hyer I assume is following Elizabeth May’s lead. I don’t know about the others.
Petros,
I won’t give you a straight answer to your crystal clear question.
But I will suggest that Jake who, from your description, is unquestionably a Canadian, should act in the best interests of Jake, his family, his Canadian business and employees who depend on Jake, and Canada.
I think Jake should donate to phase 2 of the Charter Challenge.
@ bubblebustin -“how many years for American citizens outside America to become Extinct?”
this rang the 9 trillion names of God for me. my thoughts.
1. Quite a long time if by “extinct” you mean legally.. there will be such a groundswell of renunciations that waiting times will stretch to years and people will not be able to get their CLN golden tickets
2. if you mean by “extinct” as “publically extinct”. I predict by end of 2016 as FATCA is effective from 1st July 2015 . any sane USP that has emigrated, that can do so [another passport] and didnt have to visit USA again would quietly “drop off the radar” to avoid Jake’s Faustian situation.
3. if you mean by “extinct” as in “goodwill extinction” I think we are already there…….
All I know is that I would have been lost without the IBS website. you-all saved my life-literally and figuratively. keep it up, I am budgeting already for the next stage of the C3F!!!
If that’s only Jake there must be many other Canadians that can use their money to challenge the government.
I calculate that about 90% of Jake’s RRSP is subject to 30% taxation under US law, as well as full taxation under Canadian law. The only way to avoid this is for Jake to deregister his RRSP first. Then, it would be fully taxed under Canadian law, but it only what is left after CDN taxes would be subject to the exit tax. The same logic could be applied to his stock portfolio, but not to his home since that is only taxed under US law.
I choose option #2, Jake donates $200K to the Charter Challenge!
@grouchyandmad
As for MP’s who were born in the US… if they wished to relinquish US citizenship I believe they would have a strong claim, having sworn an oath of Canadian citizenship and also their oath of office, and also accepting a high policy-level position with a foreign state.
These are likely the actions Ms May refers to when she states she has “relinquished” her US citizenship.
Re: Diane Ablonczy: http://isaacbrocksociety.ca/2012/01/22/partisan-politics-in-canada/comment-page-1/#comment-5480
As it turns out, that’s shown to be true — now that Mr. Ladybug’s 1980 letter has come to light:
“Diane Ablonczy (maiden name Broadway) was born in 1949 in Peoria, Illinois, United States, as the oldest of six children. A year later the family moved to Three Hills, Alberta, and Ablonczy grew up in a variety of places in rural Alberta. In 1967 she graduated from High School in Lac La Biche. In 1973 she received her Education degree from the University of Calgary and subsequently taught English, creative writing and other subjects.”
http://isaacbrocksociety.ca/2012/05/03/one-more-free/comment-page-1/#comment-16584
and
http://isaacbrocksociety.ca/2012/05/03/one-more-free/comment-page-1/#comment-16580
Tim, comments:
Submitted on 2012/09/15 at 9:50 am
*I know Diane Ablonczy isn’t compliant and is not going to become compliant because she doesn’t believe she is a US citizen and doesn’t have a US Passport however, she doesn’t have a CLN either from what I understand.
Re: Mike Sullivan: http://isaacbrocksociety.ca/2012/01/22/partisan-politics-in-canada/comment-page-1/#comment-5477
and
http://isaacbrocksociety.ca/2012/01/31/appreciated-conversation-with-honourable-mike-sullivan-ndp-fellow-us-person-in-canada-reasonable-cause-certificates-of-loss-of-nationality-etc/
He also had Murray Rankin contact me by phone (after my CBC interview). Re Joe Arvay, the constitutional lawyer, hired to give opinion on legal Canadian Charter Challenge:
I sent an email to Ted Morton — no reply back from Ted Morton.
I recently sent hard copy correspondence to Myron Thompson, a couple months after a phone conversation with him. I haven’t heard anything back from him. During our phone conversation, he said that he told Finance Minister Flaherty that when he lived in the US, he followed US law and since he’s lived in Canada, he’s followed Canadian law.
Scenario Three: Jake dies suddenly of a heart attack which the worries about his US status and about FATCA induced. The Canadian government taxes on his estate and the retained earnings on the company means that his children can no longer keep the business operating and 50 Canadians are out of a job.
Scenario One looks really messy and terribly costly for poor Jake so I vote for Scenario Two. I like the donation to C3f part.
@ calgary411
I wonder if US tainted Canadian MPs (past and present) have obtained CLNs or intend to get CLNs in the future. Maybe they just need to flash MP membership cards (current or expired) at the banks in lieu of CLNs. If that is the case then they may not worry too much about all the ordinary US tainted Canadians struggling to obtain CLNs in order to prevent banks from breaching their privacy rights. Some probably have some empathy (like Elizabeth May) but how much will that really help us in the end?
I am the American in the family. It would have been much worse if my wife the business owner was the American.
Has anyone got a confirmation or a refutation of Shovel’s statements on extradition? Could the refutation be that legal residents not paying taxes to the other country is not a crme in either country?
I mean, it is not a crime in the US for Canadian residents there not to file or pay taxes to Canada, and not a crime in Canada for American residents here not to pay taxes to the US.
Ask the question of extradition to the lawyer Richardson. I believe Maple Sandbox can confirm that.
@J Timorov, I am working on Shovel’s excellent comment–and I will probably post on this or have someone do a post.
My first reaction is this: (1) If the CRA will not collect tax for the IRS on a Canadian citizen, why would Canada extradite a Canadian citizen to US for the IRS? That seems far-fetched. I would not bet the farm on the idea that the Canadian government will extradite me. (2) FBAR fines are still not in the treaty and the Canadian government will not collect them, and that means they would not extradite someone who according to the IRS owes FBAR fines. These two points are a fortiori arguments, which make sense in a legally sane world.
Finally, the extradition process is time consuming and expensive. Does the IRS have the will and the means to throw money at this when in most cases they will collect very little? I mean consider that extradition includes only the person him or herself, not their assets. So if the person still refuses to pay even after they have faced judgment in the US the only thing the IRS can do is have them thrown in prison which will cost taxpayers hundreds of thousands. It is a no win situation for the IRS. The only things they can do with the recalcitrant expat costs them money and there is little cost-benefit to them.
To this point, I’ve no of no one who has ever been extradited for tax from Canada to the United States. Please give me examples of this and I will start being afraid.
@J Timorov, I think your explanation is correct, but I’m not a lawyer.