I am a US-born Canadian citizen who is personally impacted by the Foreign Account Tax Compliance Act (FATCA), a US law that was passed in 2010. The Canadian perspective will dominate this article but the reader should be aware that FATCA affects the entire world. The full brunt of this ill-considered addition to the US tax code falls heavily upon people who live outside the United States. For this reason I ask the reader to take a few moments to stand in the shoes of a person who is associated with the United States, in my case through citizenship conferred by birth, and whose life has taken her to live elsewhere.
Canada, like the United States, is a land of immigrants. From diverse backgrounds we have come together here in North America and made our lives, having contributed to and benefited from our wonderful countries in a myriad of ways.
Like Americans, many Canadians have maintained family ties with the lands of their heritage and many have made visits to their ancestral homelands. We have probably never questioned our right to return providing we did not immigrate from countries with despotic or totalitarian governments. Within our countries we take for granted our right and ability to move freely from one state or province to another.
Now, imagine for a moment that you were born in Pennsylvania and moved as a young child to Illinois. You grew up in Illinois, prospered there, raised a family and retired there. Then one day over the dregs of your morning coffee your eye is riveted on a small headline in the back pages of the newspaper that says “Native Pennsylvanians in Illinois Beware of Little-Known Tax Law”. To your horror you read that everyone born in Pennsylvania, even if they haven’t lived there for decades must file Pennsylvania tax returns and “out-of-state bank account reports” annually for life. The penalties for not doing so are draconian and could include jail time unless you enter a special “amnesty program” which would reduce the “failure-to-file” penalties from 50% to 27.5% of your assets and allow you to skip your stay as a “guest” of the state.
It sounds like a bad plot for a novel yet today this ridiculous domestic scenario is actually playing out on the international stage for people who are unfortunate enough to hail from one particular nation. Sadly, that nation is the United States of America.
The following will help to explain what is happening and why the issue so desperately needs the serious attention of everyone.
Citizenship-Based Taxation (CBT)
To understand the origins of our current situation we need to explore the concept of “citizenship-based taxation” (CBT). CBT has been on the US law books since the Civil War initially to punish wealthy Americans who ran away to Europe in the 1860s to avoid military service. It was enshrined as law within the US tax code in 1913 and upheld by the US Supreme Court in a landmark decision of 1924 which has never been over-turned. US tax law states that all persons deemed to be American citizens shall forever be liable for income taxation by the United States wherever their money is made and wherever they live. CBT, which has (until recently) been largely un-enforced, was either completely unknown or misunderstood by many emigrants (and their advisors) to say nothing of their children who have been utterly blind-sided.
According to the 14th Amendment of the United States Constitution anyone born in the United States is a de facto US citizen regardless of whatever other citizenship they may hold in the course of their lifetime. Therefore, with the existence of CBT anyone with a United States birth certificate is forever taxable by the US even if they have never lived there as an adult or earned any money there. The only recourse is to officially renounce or relinquish that citizenship at a US consulate or embassy. Although renunciation is a right guaranteed in US law the process is impossibly expensive for many and could even result in financial ruin. Of the world’s 193 nations only two practice CBT, the African dictatorship of Eritrea and the United States of America. Eritrea has been condemned for the practice by both the United Nations and the Supreme Court of Canada.
Although it began with the intent of collecting revenue from people who left their country in order to avoid their military responsibilities at a time of the nation’s gravest need, CBT as practiced today is inherently unreasonable and entirely unjustifiable. Its continuing presence in the tax code shows that the United States has adopted the policy that anyone who leaves the United States must be doing so for some nefarious purpose. (In reality, US citizens leave the country for a variety of very ordinary reasons. My father, for example, was offered a job in Canada that was so perfectly suited to his skills and temperament that he took a cut in pay so he could take it.) CBT’s punitive provisions require that people who receive no services from the United States and no payments from the US government, who have no property, investments or any other monetary relationship to that country, and who cost it not a dime, must file tax returns that are so complex and full of so many potentialities for making penalty-generating mistakes that there can be no thought of saving money on accounting fees by doing them oneself. “Cross-border” tax accountants are notoriously expensive and ordinary people making ordinary money are simply out of their league.
It must be remembered that CBT is levied in addition to the tax that the individual pays to the country she is actually living in and from which she receives her services. While it is true that a certain amount of “foreign earned income” is exempt from US tax, other forms of “foreign” income such as investments are actually taxed by both countries. In other cases, the US imposes tax on income that is entirely tax exempt in the country of residence as a result of that exemption. For example, CBT demands that a Canadian of US origin declare and pay tax on a long list of registered accounts set up by the Canadian government as tax-deferred or tax-exempt savings vehicles for special purposes. One of these is the Registered Disability Savings Plan (RDSP). The contribution to this type of plan made by the individual is matched up to three times by the Canadian government. By taxing these accounts the United States receives revenue from the entire pool of Canadian taxpayers most of whom have no connection to the United States. In addition, Canadians of U.S. origin risk paying capital gains tax to the IRS on the sale of a principal residence which is fully tax-free in Canada.
It is beyond the scope of this article to provide a comprehensive listing of all the requirements that “overseas” Americans (who get nothing for their money) must meet on their tax forms because of CBT. It must suffice to say that they are far greater than the requirements for Americans living in the US who actually receive the services for which they pay.
However, I must not fail to mention the Foreign Bank Account Report (FBAR). Instituted in the early 1970s but unknown to most “overseas” Americans until very recently, this is easily the most offensive filing required of us. On the FBAR one must list all one’s “foreign” financial assets to which one is signatory if the aggregate is above $10,000. This includes accounts held jointly with non-Americans and accounts for organizations of which one might be a signing officer. Included in the reporting requirements are account numbers and bank addresses. This exposes the accounts to an array of vulnerabilities never imagined before the age of computers. A Canadian of US birth has all her money, often jointly with a Canadian spouse, in a Canadian bank down the street from where she lives. This account is not offshore. The bank is local to her and she and her husband must have this account in order to survive in their own country. What I earn may be the government’s business but what I have is my business and my business alone.
Wonderful example even a Homelander might be able to grasp.
In all the conversations out there …..no one comments on the most obscene examples of FBAR , FATCA and CBT etc
What about the children of one US citizen who were born in Canada and carry Canadian passports? They have NEVER lived in the US, worked there nor owned property there. They have no affiliation with nor affection towards the US.
They are deemed to be US persons …….for tax purposes ONLY!
They are now faced with the task of applying for a US passport ( and proving the parent is a “qualified “US parent) , becoming tax compliant, getting a SSN ….simply so they can renounce OR face outrageous filing costs and harrassment the rest of their lives.!!!
Is this totally unfair and unreasonable……I certainly think so!!
Well said, MuzzledNoMore. One homelander actually told me that paying US tax reserves a space for me in the US while I’m gone. I guess Canada and the rest of the world gives theirs away. Flabbergasting, the mindset.
Reading the last paragraph about FBAR, would I have to declare a research grant of which I have signing authority over? These grants are well above the $10K threshold, and are awarded by grant councils such as the Natural Sciences and Engineering Council (NSERC) of Canada. (This a moot question for me btw as I have the golden ticket).
Great article MuzzledNoMore. CBT has become a way for the US to attempt to collect funds to pay off its great national debt. FATCA combined with CBT is a huge human rights violation for us ordinary people (Canadian citizens living and paying taxes in Canada). The United States has lost its moral compass.
@Muzzled
Is there any way this could be submitted to the US media? It seems most miss the simplicity of the absurdity even at this late date. Just yesterday we were still being deemed greedy tax cheats! We need so much more press, so much more enlightenment/educating. It seems Keith Redmond has the ear of CNBC. Keith’s last article gave the details, yours gives it a human voice and describes its outmoded history.
What do you think? At this point we just have to keep throwing everything at the wall hoping something finally sticks.
@Muzzlenomore
Very nice piece.
@Nick Green
Yes, and the mathematics of it have rather mind-boggling implications. If you take one person who lived in the U.S. until they were 19, add one foreign spouse, and a couple of kids, and la voila: three Americans right there, only one of whom has ever lived in the U.S. I think this is why the U.S.-born population figures for foreign countries are generally only a fraction of the total number of U.S. citizens the State Department claimed were living there. Many “Americans” abroad aren’t so much un-American as non-American.
@Bubblebustin
The rationale for CBT has changed over the years as the policy has drifted ever further away from its original targets.
Hi all,
This is my very first post after becoming a Brock “author” and I am much indebted to Petros for spending two hours on the phone with me earlier today getting me up to speed on blogging technology. Thank you, Petros!
This is Part I of a three (or four) part series which is a reworking of an article designed for my Canadian friends. The rewrite was inspired by Petros’ recent inquiry about articles specifically meant for a “homeland” American audience. Look for the next installment tomorrow.
As an american living in France since 1973, born in Davenport IOWA in 1965, I feel betrayed deceived, angry, dissapointed, ashamed of being an american citizen. I’m running for French nationality. Thank you so much dad for bringing me to this wonderful country. By by US of A, you have become my worst enemy. A NAZI dictatorship that free men have fought before.
FATCA has America doomed to fail.
Don’t be afraid fellow citizens, we all have guns to act and defend ourselves if that is what it will take, then ok; we’ll do it. So, just like the americans fought the Japonese and the German dictatorship, we shall now fight our own. So be it. I’m ready to die for freedom and justice.
@Charl
That’s a great suggestion. Keith wrote to Allen Wastler of CNBC in response to an article by Mr Wastler wrote that many of us took exception to. Keith wrote:
“Please see below the response I received from Alan Wastler. If anyone is interested in writing a commentary as he suggested, that would be great. Personally, I think he should do a follow-up to his commentary citing all of the Americans overseas’ comments/responses he received. His e-mail address is: Allen.Wastler@nbcuni.com and he copied his “commentary editor” is: Cindy.Perman@nbcuni.com .
Dear Mr. Redmond,
Thanks for the note. We’re always interested in hearing and giving voice to different points of view. So I invite you to submit a commentary piece defending the practice of renouncing citizenship.
I warn you. If your piece just concentrates on attacking my shortcomings (which are admittedly many) it won’t get published. But if it is a sober, straight forward piece arguing your point, it will. I’m copying in our commentary editor who will be the reviewer. We usually like around 500-700 words.
I looked at your Facebook page. You have a very robust community. I appreciate your calling attention to my article, although my title is “managing editor”. Putting my phone number there was a little over the top, but hey, it’s part of the job.
Thanks again,
Allen Wastler”
Thank god the republicans have won today. They want to repeal FATC with an amendment and now they have the power to do so. Let’s hope it will come through.
@ MuzzledNoMore
Well done — a clear, well-written primer for the CBT/FATCA/FBAR duh what’s dat crowd.
@ Bubblebustin
When I asked an IRS customer service person why does my husband have to file 1040s every year when he never owes anything, her reply was “So we know where he is.” I told her I was sure he’d be happy to send them a change of address if he should ever change his address. Didn’t go over well.
Thanks, MuzzledNoMore. I see you were a quick learner today. Congratulations on your first post — the content looks and reads great! I and many others will look forward to your future work.
@ Bubblebustin
The word count on Muzzled’s piece is 1378 … but half now, half later? Just sayin’. 🙂 I’d love to see this part and the parts to come published at CNBC and elsewhere too.
I have come to realize that no matter how much you talk to many home lander journalists about these problems we have a fundamental disagreement. They will defend CBT and so will many Americans. Every single defender I have seen has not had their family subjected to it though so there is that. With such a fundamental moral disagreement and with their suggestion that if one does not like being discriminated against one should just “renounce” I guess that’s what some people would have said to Rosa Parks when she didn’t like riding at the back of the bus.
Muzzled thanks for the article, it’s nice to see you making such submissions here.
@MuzzledNoMore Great initiative becoming an author of IBS and your 3 part series.
I am trying to develop this angle: that FATCA,CBT, FBAR is clearly antifamily and is unacceptably intrusive into a family’s ability to build financial security through savings, retirement accounts, financial planning, home equity etc. The US laws are most unacceptably intrusive in regards to non US citizen family members of “accidental American” breadwinners. In Canada and other countries, children/spouses have right to family wealth under the laws of the host country, but it is the US through taxation, and excessive compliance changing normal life and financial planning choices who is illegally interfering into family finances. IMHO, nonUS citizen family members (as well as US citizens living overseas) have right to compensation claim against the US government for impacts of FATCA, FBAR, and CBT.
The country I believe this lawsuit most likely to originate from is Canada owing to the large actual number and percentage of the population who are nonUS family members of US persons.
@AtticusinCanada:
Like:
“just “renounce” I guess that’s what some people would have said to Rosa Parks when she didn’t like riding at the back of the bus.”
Rosa Parks would have been told she was an ungrateful, lazy good for nothing for wanting to take the bus at all, and should try walking if she doesn’t like her seat. The fact that she’s allowed to ride the bus at all is a gift, as there are plenty of people who are dying to have her seat. Get off the bus, Rosa if you don’t like the way it is and forget about getting back on if you change your mind.
Moreover, Rosa Parks should have to pay an “exit fee” in order to get off the bus.
@Nick Green
How is the IRS ever going to figure out who was born to US persons in Canada (or anywhere else)? Those kids have passports with Canadian birthplaces on them!! The US has NO right to impose unwanted citizenship on people NOT BORN THERE! I don’t care what their stupid law says.
RESIST the BULLIES! Don’t capitulate to these demands if you weren’t born in the US!
@MuzzledNoMore, that’s a good, clear article that you have written, and I look forward to the remaining parts. I do hope you can get it published in some prominent publication in the U.S. When I have mentioned this subject to family and acquaintances in the U.S., the response has been mostly bafflement and/or silence. They just can’t understand how their government could treat people outside the country this way, or else they don’t know what they personally can do about it. They won’t even write letters to their congresspeople about it. Maybe they think that, if they do so, the IRS will audit them. Whatever the reason, they refuse to accept it as their problem. Only more clear publicity like your article can start to change that.
Thank you for your submission. We’ll notify you at ke***@ubc.ca when your comment has been approved.
Kermit
Vancouver, Canada Pending Approval
I am speaking for Americans who live abroad. I and any many others have been Democrats for all of our lives. Only the Republicans have taken this issue and suggested repeal — it was hidden in measure to create jobs, and hopefully the Republican Congress will remove FATCA. It is about accusing Americans who live abroad of being tax cheats.
PS submitted to NYT. Will probably ignore it. I tried to make it simple but Americans will not understand.
WoW! It is on the NYT site and already two comments.
Kermit
Vancouver, Canada 49 minutes ago
I am speaking for Americans who live abroad. I and any many others have been Democrats for all of our lives. Only the Republicans have taken this issue and suggested repeal — it was hidden in measure to create jobs, and hopefully the Republican Congress will remove FATCA. It is about accusing Americans who live abroad of being tax cheats.
So the Republicans have full control of Congress.
How soon can we expect to see some concrete action on repealing Citizenship Based Taxation?