UPDATE: September 23, 2014, from JC comment, additional to The_Animal’s original list:
The injustice is even worse than presented:
a) Canadian Welfare payments are considered taxable by the US in Canadian Government POV
b) Canadian Disability payments are considered taxable by the US in Canadian Government POV
c) Canadian Employment Insurance is considered taxable by US in Canadian Government POV
d) Canadian Worker’s Compensation is considered taxable by US in Canadian Government POV
e) Canadian Child Support Payments are considered taxable by US in Canadian Government POV
f) Canadian Child Tax Benefit payments are considered taxable by US in Canadian Government POVThe Canadian-US Tax Treaty is an abomination to embody the point of view of the Canadian government, that Canadian government assistance to families is taxable U.S. income. These areas above should have been explicitly exempted from U.S. tax in the tax treaty. Without the exemption, there is no clearer case of US government infringement on Canadian sovereignty.
I believe this subject is so very important. These are the families I, too, worry about the most — and, believe me, I worry about ALL *US Person* families. For these families, how will they ever have enough for the US citizenship renunciation fee, let alone the cost of compliance either to remain a US citizen abroad or to check out of the USA properly? How will many even understand all of the complexity? Who at a US Consulate OR what Canadian MP, who must take responsibility in subjecting persons to this by not standing up for these *US Person* Canadians, their rights waived by the signing of an intergovernmental agreement for FATCA with the US Treasury, will assist these low-income persons?
From The_Animal, put into this post to be further discussed in comments.
How FATCA will impact those of modest means (low income families).
Homelanders like to trumpet the fact that we have an “foreign earned income exemption” of 97,000. Unfortunately, the trump card is the “earned income” classification. Earned income means pay checks from an employer. So what does that do to most sources of income for those expats of low-income or on social assistance?
a) Welfare payments are not considered “earned income” in IRS’s POV.
b) Disability payments are not considered “earned income” in IRS’s POV
c) Employment Insurance is not considered “earned income” in IRS’s POV
d) Worker’s Compensation is not considered “earned income” in IRS’s POV
e) Child Support Payments are not considered “earned income” in IRS’s POV
f) Canada Child Tax Benefit payments are not considered “earned income” in IRS’s point of view.So all of these are taxed by the United States Internal Revenue Service in its overreaching grasp. Since most expats of modest means have a corresponding lack of education, they are furthermore hindered by not being able to understand the intricacies of the US tax system. Furthermore they do not have the monetary resources to get into compliance as their choice is between putting food on the table for their families or starving and coming into compliance.
Secondly all accounts that are not disclosed by means of an FBAR are subject to a financial penalty of $10,000 per account that is not considered wilful non-disclosure – the penalty for wilful is $100,000 or 50% of one’s account balance, whichever is greater. How is someone who makes $18,000 per annum supposed to come up with $10,000 for a non-wilful penalty let alone $100,000 (if the whim of the IRS is that the account-holder is a wilful non-disclosure)? For these families there is no financial safety net to dip into. For these people there is not a single way to come into compliance that would not wreak financial ruin on the family.
“There has to be a better way” is the constant refrain that I’ve been hearing from everyone. Unfortunately there is NO way for those of low-income to even think of coming into “compliance”.
***************
From a comment I made this morning, the portion pertaining to low income persons who have Canadian Registered Disability Savings Plans: http://isaacbrocksociety.ca/2014/06/01/its-time/comment-page-72/#comment-3097016
I want something that makes sense for my son — and all others like him. I have said all along that for me this is not about “my son” or my family. In fact, it is more about other such sons and daughters of other families who, unlike mine, do not have the “luxury” of a hard-earned and saved retirement fund to dip into to pay for US tax law and immigration / nationality lawyers and US accounting professionals. As well, if they have squeezed any funds out to save in a Canadian Registered Disability Savings Plan to provide for their family member with some kind of disability, they will have to pay US taxes on gains and matching contributions, courtesy of the Canadian taxpayer. In fact, for a person with a disability (other than a ‘mental incapacity’ for which he/she would not be able to understand the financial aspects of opening and maintaining such an account),
A RDSP can be opened without making contributions if you qualify for the government Bond. (http://rdsp.com/tutorial/)
with any gains for such a person and the government Bond itself being subject to US taxes. So, the only thing that makes sense is for the Canadian Government / Canada Revenue Agency to discriminate further for Canadians with disabilities and tell them that the RDSP is not meant for those who are *US Persons* — only for first-class Canadians who have some kind of disability.
I may be wrong, but I believe that not only would monthly provincial payments for persons with developmental (and other) disabilities, such as Assured Income for Severely Handicapped (AISH) in Alberta be taxable by the US, but also any Disability Tax Credit applied to Canadian federal and provincial taxes would taxable by the US. Any benefit allowed by Canada to make the lives of disabled persons more bearable could be affected as those things are not addressed in the US / Canada Tax Treaty and certainly are not, as The_Animal points out, “Earned Income” that would be addressed by the Foreign Earned Income Exemption (FEIE). Would perhaps even my son’s $115 honorarium in The Venturers Society (http://venturers.edublogs.org/) be US taxable? Is the only way to receive any benefits for such Canadian (or other country) persons who are also so-called *US Persons* to be by having to move to the USA, away from their family, their friends, their country of birth and growing up? What would there be for them in the US other than a US disability benefit that they can not now get in Canada without tribute to the US? Remember the information I got from the Washington, DC immigration/nationality lawyer I hired regarding a way to “free” my son of US citizenship:
DOS persons have “sympathy” for such cases. However, the developmentally disabled person will have to have FULL understanding of what he’s doing; if any question of lack of comprehension and grasping meaning and importance of ramifications, they could NOT approve such a case. From DOS point of view, US citizenship is precious and they have therefore established fundamental requirements for “compelling reason”. Even though there is the risk that a person’s financial resources could run out before his/her life was over, they will never approve a renunciation for financial / economic reasons. DOS has NEVER had such a renunciation case approved due to “compelling circumstances”. Ms. Tapanila could sue but persons he talked with at DOS are SURE no one would ever win such a case as the courts view the discretionary action that DOS has would take precedence.
I will add to this post as I have time, but that is all I have for now.
@Don
Neill has always talked about being a greencard holder resident in the U.S. who has been through the OVDP wringer over his UK accounts. I believe I even saw a really good comment from him on Forbes. I don’t know why you think he is a troll. Maybe he just has strong opinions.
@Animal
You’re right that it isn’t fair. Congress has always mainly been focusing on taxing certain types of rich people but forgetting that it is writing laws that affect everyone else as well. When CBT was reintroduced in 1913, the top 10% had all the wealthy and the income tax was targeted at the top. There wasn’t much of a welfare system in most countries, either. Nowadays, income tax effects less well off people, more people have investments and saving, and there are more government benefits providing unearned income. It’s a completely different world.
So let me be clear.
I thing CBT is wrong. I think PFIC is wrong. I think the tax treaties are rubbish. I think FATCA is terrible. I think that the compliance costs are terrible. I think the costs we have to bear to file taxes either as US persons abroad or in my case US persons in America.
I don’t have much compassion for many on welfare because I have to pay a lot in US taxes. I don’t think much of Obama care because it put up my taxes. I think I pay way too much already.
I view my OVDP penalties (substantial) to be an Obama tax. I think many people complaining about it voted for the guy. I of course was not allowed to but I am required to pay the taxes.
All I am saying is that as a practical matter I think the IRS will not go after poor people. That would bring down the whole system. Sure poor people can try and come into compliance and get creamed (like rich people do only worse).
I think the IRS will pay it safe and just go after the money. Pick on minorities like those with some money to milk it. I think I am on safe ground here because this seems to be the way the IRS plays it in the homeland.
So forget about telling me what’s fair. I probably agree with you.
Either way it’s going to be a wild ride and I can’t see how they manage to handle all the renouncers. I think they need to bring in some consultants from cults that marry thousands of people at one so they can work out how to handle the numbers.
Haha Animal…I love that shirt!!!
I have an anecdote. My best academic friend is originally from Britain but he has been at U. Toronto for 35 years now. He is the foremost plant evolutionary biologist in the world (Spencer Barrett). I was fortunate to be next door to him for 11 years before moving to Vancouver. He is also a total gossip. This stuff will get around now. His email from yesterday:
“I will meeting up with Dan Schoen in China in 3 weeks and it will be intersting to get his perspective on the stupid citizenship and tax issues that you have had to suffer. They certainly seem Stalinist to me. ”
There are comparisons of IRS and FATCA to all these repressive governments, but I think the Berlin wall is the closest comparison… what with this $3250 renunciation fee now.
$2350. To lend credence, Spencer played soccer with Elton John (of a different name) when they were teenagers.
@The-Animal @Calgary411 Excellent Post.
The injustice is even worse than presented:
a) Canadian Welfare payments are considered taxable by the US in Canadian Government POV
b) Canadian Disability payments are considered taxable by the US in Canadian Government POV
c) Canadian Employment Insurance is considered taxable by US in Canadian Government POV
d) Canadian Worker’s Compensation is considered taxable by US in Canadian Government POV
e) Canadian Child Support Payments are considered taxable by US in Canadian Government POV
f) Canadian Child Tax Benefit payments are considered taxable by US in Canadian Government POV
The Canadian-US Tax Treaty is an abomination to embody the point of view of the Canadian government, that Canadian government assistance to families is taxable U.S. income. These areas above should have been explicitly exempted from U.S. tax in the tax treaty. Without the exemption, there is no clearer case of US government infringement on Canadian sovereignty.
IMHO, The Tax Treaty should be lawsuit Mark II.
Part of the problem is that Canadian legislators have been duped by US Treasury Department doublespeak in regards to the tax treaty as ‘avoiding double taxation.’ In the above examples it does nothing of the sort.
Some say that the U.S will not go after those people receiving a-f above. The Canadian government responsibility to its citizens and residents might actually encompass making it all very clear and legal that the US has no right to tax the above. I would also like to add that the exemptions need be more far ranging such as retirement funds, pensions, mutual funds, family home, Canadian only businesses, Canadian persons with account signature authority etc.
The Tax Treaty must change.
Thank you for furthering — and will update the actual post with your additional points, JC. Well said!
@Animal. I would like to wear a shirt that simply says “Execute Harper for TREASON”
one more thing to add to the list I don’t think that the Tax Treaty covers pension splitting between couples. – pension splitting in order to reduce taxes is not allowed by the US. This is yet another financial blow to lower income seniors. I suspect that since this is not allowed in the US any one who has been doing this will be subject to penalties if there mea culpa I did not know is not accepted. Another financial blow to seniors who are allowed to pension split in Canada in order to reduce overall taxes and free up more money to live on.
-another one to add to the list is the $250,000 deduction when you sell your residence, If your significant other is in a long term care facility, for instance, for longer than 2 years the $250, 000 deduction when you sell your jointly owned house is not allowed. You must live in the residence you own for 2 out of 5 years in order to qualify for this deduction. So the Canadian spouse loses out yet since any equity the house has gathered must now be shared with the US. – again thus impoverishing them even further.
I don’t know for sure but I think that there is no Canadian capital gains when you sell your jointly owned house in Canada when your spouse has been in long term care.
And finally let us not forget the estate taxes when they die. Yet another blow to seniors.
@downtherabbithole
I believe this article would answer your question. I think this is how our accountant covered the time my mother spent in long-term care.
http://retirehappy.ca/your-principle-residence-is-tax-exempt/
NativeCanadian, I whole-heartedly agree.
Rule is $US250,000 capital gains exemption on primary residence.
Hi thanks bubblebusting.
JC read from Moody’s article what they say about when you may owe tax
“The US allows an individual to exclude up to US$250,000 from the sale or exchange of his or her principal residence from gross income.2 To qualify for the exemption, the property for which such exclusion is being claimed must have been used by the person two of the previous five years. In order to calculate the gain, a US citizen must convert the purchase and sale price into US dollars using the exchange rate in effect on the respective dates. With the rise in the value of the loonie against the US dollar, a US citizen selling his home in Canada may experience an unexpectedly large US taxable gain.
“Pension income splitting
In 2007, the Canadian Government introduced pension income splitting legislation which enables optional pension income splitting with a spouse. In some cases, this can result in significant tax savings amongst spouses.
However, pension income earned by a US citizen is attributable and taxable to the person who earned it for US purposes. Although US citizens filing a joint return may realize a similar result, splitting pension income is simply not allowed in the US. As a result, the entire amount of pension income will be recognized by the recipient with only a portion of the tax that would otherwise have been creditable to offset the US taxable income to the extent that Canadian pension splitting is utilized.”