This post appeared on the RenouceUScitizenship blog.
Video: The Canadian dollar could tumble to 83 cents next year http://t.co/ynDaVNZGQs – good for #Americansabroad renouncing US citizenship
— U.S. Citizen Abroad (@USCitizenAbroad) October 6, 2014
Almost two years ago to the day, I wrote a post explaining how:
How Fluctuating FX Foreign Exchange Rates Generate Capital Gains on the Sale of Property and the Discharge of Debt.
Those wishing to understand how exchange rates affect possible U.S. capital gains liability for Americans abroad should revisit that post. The “Readers Digest” version is as follows:
1. For the purpose of U.S. taxes, all transactions are converted to U.S. dollars (using the applicable rate at the time of the transaction);
2. The result is that fluctuating exchange rates can generate “phantom” capital gains and losses, which can generate U.S. tax liability for Americans abroad.
As the Canadian dollar rises in value, fewer Canadian dollars are needed to purchase a U.S. dollar. The capital gains measured in U.S. dollars would increase.
As the Canadian dollar falls in value, more Canadian dollars are need to purchase a U.S. dollar. The capital gains measured in U.S. dollars would decrease.
The Canadian dollar has fallen by about 10% in the last two years. The above tweet references a video suggesting that, the decline of the Canadian dollar or (as a Homelander would say), the strengthening of the U.S. dollar is EXCELLENT for Americans in Canada considering renouncing U.S. citizenship.
There are at at least three reasons for this:
First: Remember the “asset test” when determining whether you are a “covered expatriate”. As you know those with asssets worth at least two million U.S. dollars are “covered expatriates” (and deserving of punishment). As the Canadian dollar falls, more Canadian dollars are required to purchase a U.S. dollar. Every 10% fall in the Canadian dollar means that one can have approximately 10% more Canadian dollar assets before one is a “covered expatriate”.
Second: If you are a “covered expatriate” you are subject to the U.S. Exit Tax. An interesting Wikipedia article that discusses past and present Exit taxes (including the Nazis but not including Soviet Exit Taxes) is here. The Exit Tax includes (but is NOT limited to) the payment of a capital gains tax on the “pretend sale” of your worldwide assets. Notice that as the Canadian dollar falls in value, the amount of the capital gain also falls.
Third: Although this is an oversimplification, “covered expatriates” are given an exemption on the first (approximate 660,000 of capital gains calculated in U.S. dollars). As the Canadian dollar falls fewer of the capital gains will be subject to the Exit Tax.
Bottom line: The decline in the value of the Canadian dollar is good for Canadian exporters. It is also good for Canadians wishing to renounce U.S. citizenship.
As Phil Hodgen once said:
“Get out while the “getting out” is semi-good.” (with additional commentary here).
To go back to the early days of this blog (almost on its 3 year anniversary):
Good stuff, but that would increase the renunciation fee by several hundred CDN dollars!
My understanding of this… because of the lower value of the looney… it also lowers the value of ones assets because assets is changed over to US dollars.. so the extra u need to pay to get rid of your citizenship… u save on your assets… am I correct in my summary?
For those of us who aren’t even close to owing anything, it actually just increases the cost of renunciation, unfortunately. However, I’m still pleased to not owe any taxes, so I’ll just consider the soonish-to-be-paid renunciation fee as the cost of freedom.
Our lives, our fortunes, and our sacred honour, right?
Cheryl, can you find a link to that — can be paid in $US or $Cdn? Thanks!
In looking at the fee structure for passports, http://toronto.usconsulate.gov/service/passports-and-citizenship.html says:
I assume it would be the same policy but I cannot find specific reference to the renunciation fee. Since their “reason” is to have the fee reflect the actual cost, I would question that they’d allow a discount in any FX of the many countries where US Consulates reside and where we can renounce.
OK, I also found this: http://toronto.usconsulate.gov/service/frequently-asked-questions.html
I’m not sure where I saw it, perhaps in the info from the consulate in Calgary. I’ll look through my stuff and let you know.
This is what the consular office in Calgary emailed to me April 2, 2014.
“On July 13, 2010 the Department of State implemented a fee of $450 for administrative processing of formal renunciation of U.S. citizenship. This fee is payable in either U.S. or Canadian dollars or by major credit card on the day of your appointment.”
They did not say it would have to be the $US equivalent in $Cdn but that may be the what they intended to say. Sorry, I don’t have anything more specific..
Proof, my renunciation fee Sept 2013. Copied from my Visa bill. It is 450 USD but you can pay in CAD. For some reason the money is sent to South Carolina where the Appalachian trail leads to South America.
SEP 09 CAN US CONS VANCOUVER CHARLESTON SC
Foreign Currency-USD 450.00 Exchange rate-1.077066
I just thought at the time that if I paid $Cdn cash they would probably take $450…likely not true on reflection but I’m not sure.
Our money’s at par at the consulate? Doubtful.
Thanks — they failed to also say that the CAD would be at the foreign exchange rate. I know that I paid CAD when I renounced — converted to the appropriate rate after the US foreign exchange.
Note: that everything we do that is US must be converted from our own country’s currency and expressed in the US currency through FX rates on the appropriate day — FBARs, 1040s, 8938’s, etc., etc.
If I looked back on my VISA statements, it would show a similar conversion.
Thank you U.S.CitizenAbroad for this explanation of phantom gains. I have never been able to understand this. On would think it so obvious that an adjustment would be made for something so incredibly “inaccurate,” if you will. Business transactions, inventory valuation and all sorts of financial deals are adjusted to reflect differences between cash/accrual basis, foreign exchange, capital gains reserves, etc. It is hard to believe any justification for this could stand even the most simplistic challenge.
There is a link from your original article to an AARO page with some very interesting observations. Firstly, the AARO proposal regarding this seems so reasonable; I am curious if anyone knows when/if this was submitted and what the status of that submission might be?
Allow Bona fide foreign residents the option to choose a foreign currency as their functional currency and calculate all capital gains/ loss transactions in that currency before converting to U.S. dollars. The current average annual exchange rate with the U.S. dollar is then used to convert any gains/ losses into dollar amounts from the foreign currency. Since the use of a functional currency is allowed for foreign subsidiaries of U.S. corporations, it is only reasonable that a similar logic be applied to U.S. citizens abroad.”
The second aspect that got me thinking was the fact that some thresholds are adjusted for inflation while others are not. In particular, the asset test for determining ‘covered’ status is fixed at $2,000,000. The video reference the expectation that the CDN dollar is expected to continue falling, one estimate was as low as $0.83 by the end of 2015. Today:
October 2014 $2,000,000 USD = $2,231,571 CDN (0.89xxxx)
December 2015 $2,000,000 USD = $2,340,000 CDN (0.83xxxx)
Comparing the CDN amounts, there is a gap of $108,429 CDN. Of course the amount is worth less in 14 months but if that amount was even worth only ½ the face value ($54,215), when added to the $680k exclusion, there is a $734,215 window. (I just looked at the constraints of how the exclusion is applied so again, realize this is likely way too simple a suggestion). I am wondering if planning for that in advance, one might be able to offset phantom gains. Or maximize gifting at a such a time. Or perhaps, compare whether one might be able to “afford” taking the hit in the next year and renounce versus remaining compliant for the next 20 years? Reading on in the AARO article, the description of how unfair the US tax law treats foreign earned pensions and the much-discussed retirement tax-deferral accounts, I honestly cannot imagine how anyone could possible ‘be ahead” by keeping US citizenship.
Not only does America expect everybody on the planet to live by the US dollar, but it does not take into account the differences in standards of living and prices in different countries. To put it simply: 1000$ will not mean the same thing in London or Paris than it does in Arkansas.
The exemption for income earned abroad is also in US dollars, 90-something thousand U.S. dollars means more CAD.
Consular fees are a sticking point in some countries. If they have currency exchange controls, the locals are not allowed to have U.S. dollars, so they have to be allowed to pay in local currency at the official rate of exchange. Then I _THINK_ the central bank has to exchange the local currency for U.S. dollars at the official rate of exchange, which actually puts the brakes on some of the absurd official rates for worthless local currency. The central bank would have to pay all the consular fees in U.S. dollars or set a reasonable official rate.
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