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.
@George, I have pointed out the comment to Richardson but he is traveling and said he will get back to me.
What can Maple Sandbox confirm?
The problem is that the rules are constantly changing. THATS the problem along with nobody to trust.
And the example given of Jake just illustrates what an abomination this all is.
I believe Maple Sandbox asked the lawyer Richardson about extradition for failing to file US taxes.
Fatca info may be used if USA may want to extradite someone for other crimes. If the person has money it may encourage them to go after them. If the person committed fraud and he has money chase after him. Of course the person would have to have US indices in his account.
@ GeorgeIII
If those US indices are as hidden in the accounts as the FATCA is in the Omnibus then almost everyone should be safe. 🙂
I am not qualified to give an expert opinion on whether someone would be extradited over a tax issue.
I personally don’t believe it would happen, but a neighbour told me of a friend who has been a Canadian citizen since 1977 who paid ten of thousands of dollars to thw IRS when Canadian media was singing from the OVDI hymn book in 2011. She did this because she was convinced from media reports she would be deported and spend years in prison if she didn’t. Her Canadian accountant did nothing to reassure her. Not once did he mention to her that CRA will not collect for IRS.
‘An interlocutory order was requested and this was refused by R.E. Holland J. on August 10, 1988. Mr. Justice Holland gave brief reasons summarized in the sentence, “Canadian Courts will not directly or indirectly enforce the revenue laws of another country: United States of America v. Harden (1963), 41 D.L.R. (2d) 721 . . .”.
http://uniset.ca/other/cs6/68OR2d379.html
Extraditing people to USA for failing to file a simple USA tax form sound contradictory to court ruling.
Blaze I think someone asked Richardson at a meeting this question?
Blaze I believe I talked to you about this question in February at Maple Sandbox. If you have a log of all my post then we can confirm.
We are also talking about Canadian citizens,
@GeorgeIII This was all I could find about extradition at Sandbox. I may have posted more about it in another thread, but I wasn’t able to locate it.
http://maplesandbox.ca/2014/new-information-sessions/#comments
I don’t have anything in my notes of the actual meeting with John about extradition. I think I may have asked him the question informally and I think the answer was No. I must admit I don’t recall his answer for sure.
I’m sorry I can’t be more specific than that, but I’m feeling quite overwhelmed with numerous FATCA issues and projects.
Perhaps Deckard will see this discussion and share what was discussed at the Montreal info session: http://isaacbrocksociety.ca/2014/03/18/levin-and-mccain-ask-for-extradition-of-swiss-bankers-have-they-read-the-swiss-federal-constitution/comment-page-1/#comment-1248322
Blaze if could have been Joe Avary the question was asked but the Revenue Rule quoted above about Canadian court not enforcing USA tax ruling is pretty definite.
George: I have not raised the issue of extradition with Joe Arvay. My communications with him have been about FATCA, Canadian laws and he Charter.
Blaze found it. It is in reverse chronological order answer 1st. I do not want people to be doing the wrong things out of fear.
CRA Now Works For IRS
http://maplesandbox.ca/2014/cra-now-works-for-irs/comment-page-1/#comments
“Blaze on February 11, 2014 at 1:25 pm said:
@George: I asked about extradition on Saturday. It’s not going to happen for failure to file with IRS.
Reply ↓
George III on February 11, 2014 at 1:20 pm said:
Blaze a question or confirmation for lawyer
The revenue Rule says Canadian Courts will not collect for a foriegn power, Can you confirm with lawyer if that also means they will not extradite Canadian for failing to file non resident US taxes?
Can you ask them if a Canadian has ever been extradite to USA for not filling USA taxes?
http://uniset.ca/other/cs6/68OR2d379.html
harrden
http://scc-csc.lexum.com/scc-csc/scc-csc/en/item/7322/index.do
I have been telling people can throw out nasty letter from IRS if they stay in Canada
“A foreign State cannot escape the application of the rule that in no circumstances will the courts directly or indirectly enforce the revenue laws of another country, which is one of public policy, by taking a judgment in its own courts and bringing suit here on that judgment. The claim asserted remains a claim for taxes. It has not, in our courts, merged in the judgment; enforcement of the judgment would be enforcement of the tax claim.”
Thanks
Reply ↓
George III on February 11, 2014 at 1:13 pm said:
The revenue Rule says Canadian Courts will not collect for a foriegn power, Can you confirm with lawyer if that also means they will not extradite Canadian for failing to file non resident US taxes?
Can you ask them if a Canadian has ever been extradite to USA for not filling USA taxes?
http://uniset.ca/other/cs6/68OR2d379.html
Thanks”
RE the discussion about the extradition treaty amendment (and please, everyone note, I am NOT a lawyer and this is NOT legal advice, however from a logical viewpoint…)
The amendment quoted by Shovel clearly states that you can be extradited “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.” (This is a cut and paste from the treaty amendment which can be found on the Government of Canada website here http://www.treaty-accord.gc.ca/text-texte.aspx?id=101349)
As far as I know, failure or refusal to file a tax return TO THE IRS or any other information return to them such as an FBAR or a Form 8858 is NOT an offense punishable BY THE LAWS OF CANADA at all, never mind for a prison or detention term of one year or more. By the laws of the US, yes; but not by the laws of “both contracting parties.” Failure to file a Canadian tax return to CRA may be a punishable offense in Canada and might land you in the slammer for a year or more, but not failure to file a US return to IRS AFAIK.
I was also told verbally by a tax and immigration lawyer when I first starting research this mess two years ago, that you can’t be extradited from Canada for failing to file US tax returns, but that is hearsay and maybe my memory is faulty (though I’m not about to lose any sleep over this issue tonight).
HOWEVER I would caution everyone that you can, in fact, be extradited between Canada and the US for filing a false tax return (or for swearing or “uttering” any other kind of false document). I know personally of someone who was extradited from the US to Canada about 20 years ago for filing fraudulent tax documents to CRA and then fleeing to the US when he learned CRA was after him. It took them a few years, but he was a whale (not a minnow) they wanted to make an example of, so they went after him big-time, and he was extradited, tried and sentenced to several years as a guest of Her Majesty in one of HM’s Canadian prisons for tax fraud and uttering false documents. So if you do file a piece of paper to the IRS, don’t lie or distort anything on it. Better not to file at all, then to file something that can be shown in court to be untrue.
Again, not legal advice, just my recollection of various things I’ve picked up over the years, and I’m not a lawyer. If you are going to lose sleep over this, spend a few hundred bucks for a one-hour consultation with a good lawyer in Canada if it will help ease your mind.
@Schubert1975 – that language essentially mimics the Extradition Act (Canada) which governs. Canadians are not required to file tax returns or report on their bank accounts to a foreign government and failure to do so is not an offence here. Little risk of IRS going that far – remember, they never tried to draft duals either. Just made them register. Not a headache Washington needs.
Schubert they enforce Canadian tax laws in USA. but not the reverse. Still it is better not to file a false IRS return.
Expatriation: The American’s Tax Experience in Canada
Kevyn Nightingale and David Turchen*
“It is possible, though cumbersome and unusual, for the CRA to pursue collection efforts through the US criminal courts. It appears that US criminal statutes can apply to evasion of Canadian tax.219 On the other hand, while such a conviction may bring unpleasant sanctions in the United States (fines and prison time), it does not result in collection of tax by the IRS and remittance to Canada.
The reverse is not true. Under Canadian common law (and in most common-law jurisdictions), Canada will not act to collect a foreign nation’s tax:”
http://www.mnp.ca/en/media-centre/library/2014/1/23/expatriation-the-americans-tax-experience-in-canada
I also talked to other lawyers who pretty much said you Canadian are safe from US tax laws in Canada.
Some of this paranoid talk will lead to bad decision
Well it would be kind of hard and moreover COSTLY to extradite 1-4 million people from Canada to USA.
Economically speaking- there might not be any profit in it for America if they have to go through all sorts of legal means to demand extradition. Not to speak of lack of jails. But they could pick and chose those who are worth the effort financially.
@Polly, that is of course not the way the IRS and the US government acts. Rather than try to destroy everyone’s life at the same time, they make notable examples of people to cause the rest to live in dread and fall into compliance.
So what we have to do, before fearing extradition, is wait until the US tries to extradite one of us for tax crimes. Then we build a legal fund to defend that person.
So as it stands, I don’t think any of us have to worry one bit about extradition. You cannot base today’s actions on changes that might take place tomorrow. You are only responsible for making decisions that best suit the information that we have at present.
Polly said:
“The problem is that the rules are constantly changing. THATS the problem along with nobody to trust.”
This is one of the key reasons I decided to renounce, although I chose to phrase it differently.
“I refuse to live my life subject to the whims of a foreign government”
@Just a Canadian, ““I refuse to live my life subject to the whims of a foreign government”
Music to my ears, that could be the motto of IBS.
@George III
Interesting what you say about US maybe enforcing Canadian tax laws, or at least extradition, and not the reverse. I can’t confirm or deny; the example with which I’m familiar is the only one I know of, and it was extradition from US to Canada and it was on the issue of fraud and false documents, not failure to file. Also, to the best of my recollection, the extradition process dragged on for several years. The individual wasn’t actually extradited until about five years (as I recall) after he fled. He did fight it tooth and claw, and I imagine the legal expenses both for him and for CRA were significant. The amounts involved were in the tens of millions of dollars in terms both of claims and tax benefits fraudulently obtained, so likely not in the same ballpark as anyone who visits this website (anyone in that financial circle doesn’t need us, they have pricey accountants and lawyers to advise them and can afford to pay for that). Which just reinforces the point that extradition isn’t something any government undertakes lightly or on a wide scale, and the “examples” they pick aren’t likely to resemble most people visiting this website.
@Just a Canadian
Well said. I renounced too.
I found this and dont know where to put it.- also will leave it up to more intelligent minds to make a statement on what this could mean. Is it a trend?
http://www.businessweek.com/articles/2014-04-02/how-alaska-and-wyoming-make-people-from-elsewhere-pay-their-taxes?campaign_id=yahoo
@Petros, you can add a paragraph like the following to make this post 1 July 2014. The Jake story could be sent to your politicians.
“As a small businessman in his local community, Jake is supported by by the Relationship Manager at his local branch of TD who oversees all Jakes and the accounts for the business. Aware that Jake was born in the USA because of previous documents in his file, the Relationship Manager notified the internal TD FATCA Compliance Officer that Jake has an unambiguous place of birth in the USA. TD FATCA Compliance Officer promptly coded Jakes accounts for CRA reporting.
In July 2016, Jake was surprised after his day at work when he had received a letter marked “Official Business” with a return address of Internal Revenue Service, Philadelphia, PA.
The letter included a tax assessment in which the US had estimated Jakes 2014 income as being equal to the gross deposits made into his business account and that he had thirty days to make payment or appeal.”