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.
It is only Nov. 4th here, when I post it is Nov 5th.
Foo we will have to look for action that potus can not veto
This would include defunding FATCA implementation or defunding FATCA on expats
We need to demand Senate hearings if the igas violate the advice and consent of the senate
We will not see repeal of cbt because that can be vetoed
Oh we should also look for pressure on the treasury secretary to index the that amount and to exempt countries with aml
People keep consoling and soothing themselves with this false sense of safety. That might be the number one reason there is so little push against FATCA. Its this complacency that they fall into. Maybe a disbelief that anything could be so sinister and latently ruinous? I`d like to know exactly how that man reacted to discovering what the sale of his home will mean in the future.
Let’s hope that the Republican victories will ultimately lead to reform and repeal of CBT or at least FATCA removed from Us persons living abroad!
Monalisa I know many demean abroad and none voted yesterday
We all need to keep pressing Congress to redo fatca if there is silence it will get worse
True, @George, though too late for me 😉
The problem I see is that I suspect that the IRS, at least initially, will just focus on a few egregious cases of whales living abroad; this will give a further false sense of complacency to ordinary Expats. The issue I could see is that eventually, the IRS could start making random examples of minnow expats.
In the near term, I still believe the more immediate threat is the banks and predatory compliance condors.
@george:
Just slip it inside something innocuous-sounding, like the Pets for American Warriors (PAWs) Act. Free puppies and kittens for veterans! Who could possibly veto that??
If they’re serious, that is what they’ll do.
Great post. The state tax for life analogy to CBT & FATCA has the best chance of communicating with homelanders. It is easily imagined and identified with. We should offer it at every opportunity.
My email to Solomon Yue – Republicans Abroad…..
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Dear Solomon
As Fox as of a few minutes ago is predicting the Republicans will
control the Senate and keep control of the House, US expats hope and
pray that this Republican controlled Congress will take positive steps
to stop any further enforcement of FATCA via defunding, and to take
steps for the US to move to Residence Based Taxation (RBT) consistent
with the rest of the developed world.
Millions of US expats living overseas are informal ambassadors of the US
but have now turned against the US government due to Obama and his
Administration’s absurd Jihad against US citizens living abroad.
There are millions of US expats that are putting their hope for the
future in the hands of the Republicans now to do the right thing and
eliminate FATC and RBT.
Will the lawsuit be pursued by Mr. Bopp? It would seem that there is
better path now through Congress.
Thank you for everything you are doing – it is SO SO important to those
of us living overseas, just trying to live a normal life as do our
neighbors from every other country in the world.
Steve
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Great comments from all of you here!
Bubblebustin & FromTheWilderness: I particularly enjoyed your Rosa Parks analogies. Right on!
Foo: “Just slip it inside something innocuous-sounding” … Absolutely! Since nobody apparently knows about CBT or FATCA the US government could repeal the whole ugly mess and not a single average voter would be any the wise. No heads would roll.
Part II will be up later today. I have definitely decided on a Four Part post. Thanks for all your kind words! I would be honoured to have the article picked up by some media outlet. I won’t be able to send it to anyone myself but I’d be very happy if someone else wanted to do it. I’m posting it here for the use of everyone.
@MuzzledNoMore
This is a really terrific article! It deserves widespread distribution.
I suggest that the administrators of IBS consider the idea of compiling an eBook to showcase articles like this, and to chronicle the emerging consciousness and awaking to action. It could also include the excellent articles by the late beloved journalist and activist “Arrow”, “Blaze’s” amazing testimony to the Finance Committee, “Petros” sounding the alarm early, “Calgary411’s” moving saga of son’s inability to shed unwanted US citizenship, and the comprehensive Briefs and Presentations of John Richardson, Stephen Kish, Allison Christians and others.
The story of the ADCS is worthy of a chapter, as is the chronicle of renunciation experiences from around the world.
Funds from the eBook sale (and it could be sold on-line for a few dollars) could support the IBS site and possibly contribute to the ADCS as well.
Maybe approach a school of journalism or library arts to get a few students to take on the editing and organizing as a project? Or a Canadian publisher?
@MuzzledNoMore – thank you, thank you, thank you for this most clear and readable article for newbies (including home-landers). I very much look forward to your further posts.
@ Wondering – what a fabulous idea about having an E-book about FATCA and the US-Expat experience! Surely there must be some journalism or history profs (US expats or not) out there who might want to assist in making this happen – – it’s an amazing unfolding story.
Hopefully now that there is a Republican Congress there will be swift movement to eliminate FATCA and, hopefully, CBT.
kermitzi,
You’re way out there in the west, three time zones away from the IsaacBrockSociety.ca blog.
@Secessionist,
Everyone’s a critic. But this is the first time anyone has dissed specific genders here at Brock – good job stirring the pot.
I agree that Canada is not nearly as peace-keeping a country as Canadians (both sexes) seem to think, and we have a lot to be ashamed of. People tend to delude themselves that they are the ‘good ones’ and have blinders on when it comes to the not so good things that they or the society they live in has played a roll in. Is that perhaps why homeland Americans, and fellow Canadians as a rule just do not see or care about the immorality of CBT?
People are ALL the same in a lot of ways, just our perspectives are different, because we naturally care more about what affects us personally. We want to believe, and often often delude ourselves, that we are the just ones – I think this is one of the points you are trying to get across here.
Regardless, please lets stick to the issue at hand. Every immorality has its fighters. CBT/FATCA is the beast that WE here at Brock, ADCS, and friends happen to be fighting regardless of our gender, and regardless whether or not we are aware of, or care about, other injustices that we may even have played a role in. Hopefully the abuse we are facing will help open our eyes a little to the abuses of others.
I put Seccessionist’s comment in pending while we discuss what to do.
@Petros,
I think you should leave his comment up.
It is in discussion. We suspect it is by someone who has already been put in moderation. In any case, his insulting comment is so void of any beneficial content and so completely useless is to not merit the storage space we have to use to store it.
@Petros
I disagree what Secessionist said, but think it is probably better to keep it up. Brockers don’t seem to ruffle easily. People have bigger things to think about.
I was just about to point out that the whole wealthy Civil War tax dodgers living the good life in Paris thing seems to be a myth (if anyone has proof otherwise, I would love to see the evidence, since I found nothing). All the historians I have read say that the wealthy bought their way out of the Civil War draft..
@Foo, MuzzledNoMore
I agree that homelanders would scarcely notice if the US was to suddenly switch to residency based taxation, after all weren’t we all also under the assumption that the US conducted itself like the rest of the world in this area? We certainly would not have found ourselves in this mess had we known, and the US government seems quite willing to forgive us for not knowing by promoting it’s Streamlined Amnesty Program with zero penalties for being clueless.
The problem seems to be when homelanders misunderstand the difference between CBT and RBT and make the wrong assumption that we don’t want to pay our “fair share”, with no clear idea of what “fair” really is when it comes to its non-residents. Most seem quite willing to allow us the FEIE and tax credits to reduce CBT’s harm, and may be even be quite supportive of reducing our reporting burdens to the point where we may as well have RBT, but vehemently oppose exempting us as citizens from the tax system altogether. That’s why I often preface my comments with “as an American citizen living abroad, I expect to be a part of the US tax system, only one based on residency”. After all, Canadian expats are subjected to the Canadian tax system, albeit one based on residency which subjects it’s citizens to a departure tax.
The saying “a little knowledge is a dangerous thing” applies to homelanders when it comes to something as complex as the taxation of Americans abroad, so it’s probably better for our cause that they don’t have prior knowledge of any switch to RBT!
Reckon I’m one of the Brockers that does ruffle easily. Seccessionist’s post almost made my head explode. I think we have enough on our plate dealing with one atrocity let alone grappling with another issue altogether. That post was bordering on trying to divide and conquer. The Kat’s response was pitch perfect.
The point is that Seccessionist been told to be nice when he was another alias. So now he has come back as with another moniker and makes rude comments? Zero tolerance for that.
Foo et al. Don’t hold your breath. A change in the control of the Senate isn’t going to change a thing. As Milton Friedman said there are simply too many vested interests keeping it as complex as possible. Every politician can peddle his influence to some special interest or other. The lawyers and accountants and H&R block are making out like bandits. As someone said Sauve qui peut.
@ Steve
Good e-mail but I hope you won’t send it until you correct this … “eliminate FATC and RBT”. Although I’m sure Mr. Yue will know what you mean.
@MuzzledNoMore
thank you so much for your elegant and cogent post . if Homelanders can’t understand after this…. well ….nuff said !