The following post appeared on the RenounceUSCitizenship blog. It discusses an issue which, if true, makes it impossible for Canadian citizens resident in Canada, who are also U.S. citizens to retain U.S. citizenship.
I intend to do a good bit of research on this topic (and I urge those of you with a background in this area) to provide comments. It is clear that U.S. citizenship-based taxation is a form of evil, the Exit Tax and FATCA are on a par with the most vile in history.
Furthermore, it is clear that the U.S. is using the taxation of “Americans abroad” to attack the “tax base” of other countries.
The claim/assumption that the U.S. has the “sovereign right” to tax its citizens in any way that it chooses is the same as the claim that the neighbor next door has the right to rape your wife. Of course that may be exactly what those Harper backbenchers actually believe.
Analysis suggests that Cdn retirement accounts of those Cdn #Americansabroad always subject to double taxation http://t.co/pkv1P95Zs2
— U.S. Citizen Abroad (@USCitizenAbroad) July 6, 2014
The above tweet references a comment to the Allison Christians revelation that the U.S. Treasury has no authority to enter into IGAs. Although I have not had time to research this specific issue, the questions it raises are so important that discussion must begin now. I have reproduced the comment in its entirety. See also the comments responding to this comment. If this is true, the effect is that: The retirement plans of Canadian citizens who are considered to be U.S. taxpayers will be subject to taxation in both Canada and the U.S. – pure double taxation. In other words, you work you whole life for retirement only to see the plan subject to double taxation. Assuming the truth of this (and I intend to do further extensive investigation) it is absolutely essential that you renounce U.S. citizenship at the earliest possible moment. It is my sincere hope that this commenter is incorrect. But, I will find out. I hope you are sitting down before you read this.
JC says July 5, 2014 at 10:41 pm @Bubblebustin; @Just Me; @Polly; @Moaner –
The Canadian IGA makes FATCA Canadian law ; The Canada-U.S. Tax Treaty makes US CBT permissible under Canadian law.
While there is momentum to upend the Canadian IGA, upending the Canadian IGA should be the focus. However, revision of the Canada-U.S. Tax Treaty needs focus as well.
Example, as the Canadian-U.S. Tax Treaty does not exempt from U.S. taxation Canadian retirement accounts, the U.S. laws in regards to these accounts extend over Canadian territory as if Canada were a sovereign part of the United States. Canadian retirement accounts – incentivised by the Canadian government to help Canadians save for their retirement – get their benefit neutralised and penalised when treated by the IRS as “unqualified pension plans” as if Canadians have a choice of putting money in these “unqualified pension plans” and plans deemed qualified under U.S. Law ( 401K savings and IRA and Keogh may only be accessible by U.S. residents).
Generally, the best tax breaks of either country get cancelled out by the other, under the tax treaty. The Canada-U.S. Tax Treaty needs revision to include specific mention for Canadian tax residents: exemption from US taxation of Canadian retirement accounts, Canadian family home, proceeds of Canadian life insurance, Canadian mutual funds, and include a very significant exemption threshold from taxation – a blanket exemption – for other Canadian income and assets.
Exemption may also be made against FIBAR and nonfiling penalties for Canadian tax residents.
The existing Canadian-US Tax treaty has many holes in it. One example is the new ObamaCare tax which gets put on top of all other taxes paid (and your gain in your pension account over the year gets included on top of your income to reach the threshold for this tax). This Obamacare tax law was written in a way to be exempt from any tax treaty credits!
The retirement account taxation is another example. If your income is over $105,000 you are considered a “high earner” and get taxed on the change in account value each year which gets put on top of your other income to determine a U.S. marginal tax rate that the U.S. wants to tax it at every year. If you are below US$105,000 income the U.S. wants to tax these accounts at the marginal rate when the money is taken out- similar to U.S. 401K and IRA. (Who knows what happens if you are a “high earner” one year but not the next or next many years). Here is the rub: the Canadian-US Tax Treaty does not have provision for credit against Canadian tax for any U.S. tax paid on Canadian retirement accounts – as the U.S. tax is not considered on “foreign” income.
Nor is there any credit against U.S. tax with any Canadian tax paid on Canadian retirement accounts. Plus Canadian law does not have special provision for withdrawals from retirement accounts to pay for the U.S. tax liability.
The way the tax treaty works is that each tax is considered its own silo.
For instance, with earned income the extra Canadian tax paid on income compared to the U.S. tax (as the Canadian income tax rates are higher than in the U.S.) may not be used as a credit against other taxes the U.S. has but Canada does not – such as U.S. tax on Canadian pension accounts, family home, and death tax.
In my opinion, the Canadian-U.S. Tax Treaty represents the Canadian government giving up some of its sovereignty to the U.S. government in regards to Canadians who happen to be U.S. citizens. It does not have to be this way. Canada should stand up to the U.S. in regards to its right as a sovereign country for self determination of its own people free from interference by another sovereign country.
Anne: thank you for the response. So basically long-story short, there are very few filers from non-resident crowd. And I haven’t heard anything about anyone being prosecuted for not filing or FBARing. FATCA might become the game changer though. Speaking of U.S. indicia and FATCA, should I consider myself lucky that I was born to my parents while on a military mission abroad?
@USCitizenAbroad – re: your detail about taxation.
Left out: U.S. death tax of 40%. So perhaps better to face the capital gains then the potential to leave your nonUS spouse the prospect of the 40% estate tax above estate value of $US650,000 (about), unless put in a QDOT trust with a U.S. bank. The estate tax is on value with disregard to debt – so potential for forcing the sale of the family home to pay the tax. And according to the estate rules if the house is 50/50 owned the spouse has to prove that they contributed to the other 50% else it may be considered all owned by the deceased U.S. citizen.
What is a GIC?
Speaking of GIC, there has got to be somewhere here a plan for tax avoidance which is legal, where tax evasion is not. So with a nonUS spouse, the idea is no joint accounts, only separate accounts – this also splits the compliance reporting. Perhaps park most of the wealth with the spouse. A house may only be purchased in the name of the spouse. While the martial deduction may not apply, there is an allowable $125,000 amount that may be transferred each year plus $14K as a gift.
I think one of the issues here is that, up until now, US persons resident in countries like Australia and New Zealand etc., have had no idea of the potential US tax that could be imposed on their retirement funds (e.g. Kiwisaver in the example of New Zealand). Most persons have not been filing US tax returns or FBARs and even if they have they probably have not been treating their retirement accounts as PFICs.
Now that people are starting to find out about FATCA, either from media, or from their banks, many will at some point attempt to come into compliance and these retirement fund issues, capital gains, and all the other nasties will come as a huge shock. In New Zealand, any USP who is self employed will face full US self-employment taxes on their income in addition to what they pay locally.
This is why these governments are clueless when they trot out the phrase “FATCA does not impose any new taxes” as some form of justification for the whole charade. They heap the responsibility back onto the individual who should apparently have known of this potential theft of their savings all along.
At some future point they will finally realise the extent to which their tax base is threatened by these taxes (and potentially the FBAR penalties). Unfortunately, I think we are still a long way from that point.
@osgood In Australia there are several government websites that use the word “prevent” double taxation in regards to tax treaties and tax treaty with the U.S. This is false as there is potentially significant double taxation over the lifetime of the USPand is part of the problem: see no problem, is no problem. I tried to bring this point of information to them.
While there is all this U.S. double taxation, if the USP is the key breadwinner, then the situation is definitely not fair on the family of the USP who the resident government should look after and shield from double taxation.
@osgood
“In New Zealand, any USP who is self employed will face full US self-employment taxes on their income in addition to what they pay locally.”
And if they’re not paying into the New Zealand equivalent of Social Security, they’ll be forced to pay into US. S.S. and Medicare as well – with quarterly advance payments on their self-employment income required.
@JC, if you are ‘treaty shopping’ for ideas to improve the US tax treatment of Australian or NZ pensions, I would suggest also looking at the US/UK tax treaty. It may be as good as things get in this area.
@JC
I read somewhere that bankrupt governments first target the pension funds as a way to solve their problems. They force pension funds to buy government treasury bonds. When they later declare the government treasury bonds to be worthless, its too late. So it is not a wonder that pension funds should be a target, methinks. Its one of the first places they go hunting.
@JC
Thanks for your comments and for the original comment that is the subject of this post.
@Osgood
Thank you for your most interesting comment.
I have always believed that one reason that NZ and Canada signed the IGAs was that their governments did NOT understand what the rules of CBT were and how those rules applied.
The effects of FATCA
FATCA will both:
A. Enforce CBT; and
B. Necessarily force those affected and their advisers to learn the rules, sickness and pure evilness of CBT.
The OMG2 Moment
We are used to referring to “OMG” as the moment that people learn they may be taxable U.S. property. But, their will be an “OMG2” moment. This will be the moment where they learn how disabled they are by being “U.S. persons” and gradually learn the effect that this will have on their lives. Life will NEVER be the same for people once they learn of this.
As I put in my previous comment, U.S. citizenship will make it much harder to succeed in life, in financial planning and in retirement planning. Furthermore, with the coming of FATCA, even the “accusation” of being a U.S. citizen will create problems.
Reprisals will be coming
As the reality of this dawns on people, governments and policy makers, there will be reprisals against U.S. citizens abroad. My example of possible amendments to the Income Tax Act to deny U.S. citizens “the benefits of home ownership”, is one of many that are likely to come.
The meaning of citizenship
In a broader context, I predict that many governments will not allow U.S. citizens to immigrate. U.S. citizenship-based taxation will also play a role in bringing the concept of “dual citizenship” to an end. In a more academic and philosophical context, CBT will force a “rethinking” of what a “citizen” really is – i.e. what are the various relationships that a person can have with a government. I believe that there is a continum which starts with “slavery” and ends with some kind of meaningful engagement (on the part of the citizen) and respect (on the part of the government) that we will call “citizenship”.
It’s clear that “what” the U.S. proudly calls “citizens” (and I include those in the Homeland) probably are NOT “citizens” in any meaningful sense. It’s obvious that “U.S. Citizens Abroad” are clearly NOT treated as “citizens”. Are U.S. citizens abroad slaves? Are they subjects? Can any group that is treated with such deliberate abuse, contempt, disrespect, cruelty and viciousness ever be considered to be “citizens”? (See the thought provoking comment from the National Post article below.)
Americans abroad are forced to renounce and The “Exit Tax” will be seen as an investment
It takes a considerable degree of knowledge and awareness to understand all this. Once CBT is understood, U.S. citizens abroad must, in order to protect and free themselves, renounce U.S. citizenship. As James Dale Davidson implied in “The Sovereign Individual”, payment of the “Exit Tax” will likely be seen as simply an investment in one’s future.
On the question of being forced to renounce citizenship see this blog posting:
Perhaps, as has been suggested at MapleSandbox and the Isaac Brock Society – Americans abroad will declare independence from the Homeland.
Finally (and I keep coming back to this point) – A lack of awareness is still the norm:
Most people don’t know about this or have made the decision to simply not comply.
The problem is that Americans abroad who want to be in compliance with U.S. laws find that they simply can’t. In some cases they can’t get accurate information on what the rules are. Even if the rules are understood, one must consider how those U.S. rules interact with the tax rules of other nations. (This point is clear from this thread where we learn that the post was based on a comment from an Australia resident. Notice that the effect of U.S. tax rules on Canadians may be different from the effect of U.S. tax rules on Australians. (This implies there is now a need for a new and different kind of – country based – financial planner.) In other cases they can get accurate information and they realize (as this thread demonstrates) that they can’t afford the financial risk that U.S. citizenship implies.
The truth is that the vast majority of U.S. citizens abroad have been caught completely unaware. They have scrimped and saved for retirement and now have to choose between:
A. Coming into compliance which means “past, present and future” which will destroy them; or
B. Simply staying under radar.
I also have the impression that people are beginning to see that a life of U.S. life compliance abroad is simply not possible.
It’s important that those of us who are aware of this, be patient and generous in educating those who are not.
In closing, on the question of the meaning of U.S. citizenship, consider the following comment that appeared to the recent National Post article:
http://business.financialpost.com/2014/07/04/u-s-tax-crackdown-driving-more-expats-living-in-canada-to-renounce-citizenship/#comment-1469489956
I highly recommend all the comments to this article. They provide interesting clues to current attitudes and levels of understanding.
http://business.financialpost.com/2014/07/04/u-s-tax-crackdown-driving-more-expats-living-in-canada-to-renounce-citizenship/
@Watcher, with respect to “Dual Tax Treaties” I doubt I am not the only one but you can read through one of them and the conclusion you get is that all you need to do is pay and file taxes in the country you are living in.
That was also the response that I received when I went into a regional office of the national tax collection office and asked “what do I need to do having returned home?”
We need to start a “second class Canadian” handbook for all the New Canadians we have just created. We need to invite the media and have our own “second class Canadian” ceremony complete with a new flag and handbook with all the information the Second class Canadian needs to live in second class Canada…..
The problem with double taxing of passive income is like FATCA the rules can change on the whims of the USG.
We blog about FATCA 2014, but what will FATCA 2018 be like? Or FATCA 2020?
The USG will attempt to tighten the screws on the following definitions:
FFI
FATCA Data Set (data from Reportable Account or FDS)
US Indicia
Reportable Account
OR FFUR for short (the 4 Levers of FATCA).
You broaden the scope of each of these and those are the levers of FATCA.
For example the FATCA Data Set, at present they want the opening balance, closing balance for each year. How about if the USG demands all transactional data? So they would have even more information. Where, when, and how you spend your life and your money, do any of us want the USG to have this type of information about us?
Or for example change the definition of US Indicia, you visit a US website to buy something and bingo you’re now under suspicion of being a US Account because you made a US Connection.
The consequences are enormous for everyone.
@USCitizensAbroad – If governments abroad start denying US Persons tax breaks which the USG doesn’t recognise all US Embassies better start employing an army of extra people for renunciations and lots of angry ex-pats.
Here’s a good article from this morning’s NY Times. We are now starting to see why the Banamex customers were cut off unsuspectingly in Mexico.
Also, is this the beginning of the Capital Controls we’ve seen posted in other articles?
http://dealbook.nytimes.com/2014/07/06/immigrants-from-latin-america-and-africa-squeezed-as-banks-curtail-international-money-transfers/?_php=true&_type=blogs&emc=edit_th_20140707&nl=todaysheadlines&nlid=59346573&_r=0
You simply can’t be self-employed or own a business in your country of residence as a USC. I simply quit working at all once I figured that out and became a SAHM. Put aside my plans of starting a business.
Which helps nobody. Not me. Not the US and certainly not Canada.
Fuck it though. I will start again when I am no longer burdened with the nonsense of conflicting rules.
FATCA imposes newly realized taxes due to the negligence of governments in not having had them previously dealt with in our tax treaties with the US.
A few comments (although I think we are spinning a little off topic):
1. Death tax, estate tax etc – all interesting but of limited practical concern at least for a dual citizen (and very possibly a long-term resident) without US beneficiaries or property. If USC “X” dies outside of the US tomorrow with NO property located inside the US and a non-USC executor, the claims of the IRS will be almost entirely theoretical (if indeed the IRS ever acquires enough knowledge to make a claim). Most countries would not admit the IRS claims to probate or give them any right to any share of distributions unless they would also have collected the tax from the deceased while alive (and they wouldn’t). IRS can demand abroad, but it cannot collect without a tax treaty giving it help. I don’t know of any that do in the case of duals. Practically speaking, their claims are largely irrelevant unless there are US beneficiaries against whom it might exert pressure or US property that it can put a lien on. So, yes, all kinds of theoretical claims that can paint a black picture, but in reality, non-residents are a pretty tough nut for them to crack absent US property. In Canada, for example, an executor can be personally liable to the CRA for distributing an estate without ensuring CRA claims are settled. No such liability can be assessed by the IRS in Canada against a Canadian executor. Obviously, different story if there is US property as the IRS won’t let it go until THEY are satisfied. FATCA does open the door to the IRS having somewhat more information than it might have had in the past in some cases. However, absent points of pressure inside the US, it doesn’t arm the IRS very much more than before.
2. All the myriad of “tax breaks” the US allows its citizens are NOT allowed USC living outside the US in calculating their tax where they live. That doesn’t mean you can’t use the tax breaks if you are a USC filing in the US. I don’t know much about US returns never having seen one, but the theory of the tax treaty is that the US has agreed to let you take credits for Canadian tax paid (incompletely and imperfectly as we all know). Other than that, the two returns are in a silo. Canada only gives you credit for US taxes paid on US source income.
3 @Madonnamia: if your US citizenship issues arise from birth outside the US to US parents, then there is little practical reason to believe FATCA will ever be an issue for you. Your “US indicia” will not be of a sort that any bank will ever notice or report unless you yourself identify yourself as a US citizen. Remember however that all of the tax systems are founded on self-assessment first. IF you are actually a US citizen, then the US has bunches of laws that it purports to apply to you (file a tax return, FBAR reports, etc). Most people on this site have been pretty careful to relinquish or renounce in order to stop the clock running on those obligations, fair or unfair. If a bank asks them tomorrow “are you a US citizen”, they can honestly say “no”. I guess what I’m saying is “just because they can’t see you doesn’t mean that you are not there”. You must make your own decision as to to how you deal with past obligations that are as unfair, unjust (and largely unenforceable) as these. I am not, however, going to suggest that you lie in any statements you provide to banks or government. As I’ve said before, if you are still a USC and plan on keeping it that way, you have a problem that is not going to get easier to solve by hiding from it forever. Inform yourself (lots of resources here) and start the difficult process of making decisions. Personally, I don’t think it is possible to lead a halfway “normal” life outside the US and maintain it. However, there are quite a few here who ARE long-term compliant (and as mad about double-taxation and FATCA as any). So I guess it can be done if you are prepared to deal with the very considerable sacrifices entailed. Nevertheless, I firmly believe that if have been “in the dark” for thirty or forty years and acquired any success or assets along the way, the cost of retaining that US link and “entering the system” is likely to be a greater percent of your net worth (as in all or substantially all) and sanity than almost anyone I have ever met is prepared to pay. I don’t think it possible. Choices such as these, though, are personal.
@Yogagirl: You are not incorrect. Self-employed or in partnership (with non-USC) = recipe for tax disaster if you are a USC. I doubt most accountants in Canada could figure it out. You must go on welfare or renounce and start all over. Sad but true.
@USCitizenAbroad
Fascinating post highlighting the future difficulties and affects of trying to maintain US citizenship while living outside the US.
@Anne Frank
Thank you for answering my question about non-US executors of the estates of US persons.
Our tax treaties really only serve a red herrings, lol!
There is a philosophical question related to this discussion. To what extent should we listen to a stupid law? We all have been taught that we need to listen to a law, nobody doubts about it.
What if the law tells you that you need need to jump from a window in the 1st floor? Would you do it? Sure, after all it is not that hight, right? It wouldn’t hurt too much.
Then, what if the same law changes that everybody needs to jump from a window in the 10th floor? Would you do it now?
I don’t know about you people, but I can see the same problem with all the tax and filing requirements …
And … I don’t want to be a USC anymore. But at the same time, I will pay no stupid fee just to be able to renounce!! Thats ridiculous! I have money but I don’t have the money for that.
The fee of $500 to renounce (not including the time and trip to the embassy) is maybe just a pocket money in the eyes of the USG. But for me, it is a month salary baby. I am not going to listen to such abuse.
@Madonnamia
You must be new at this? We have all been tearing our hair out over the things we have had to do. I renounced. Had to- or I would not have been able to have a bank account where I live. Thats just the way things are now. A nightmare- to be sure.
@Polly:
Yes, I am sort of new to this, but at the same time I have had some time to think about it. I am USC born abroad. I am just going to fly under the radar, I am going to use my foreign IDs only and I will simply stop calling myself American. Simple as that.
@Madonnamia
Good luck!
@MadonnaMia
To use your analogy, the US not only says we should jump out a window, but if we don’t, we will be thrown out on to a spike!
The ONLY thing citizenship based taxation has had going for it is the fact that relatively no one knew about it.