NB: STAY TUNED – a 7-part video on the Transition Tax, with
John Richardson & Karen Alpert are available here .
NB: For anyone with time to spare/the interest/needing specifics to make the point regarding the “intention” of the law, here are some of the relevant House/Senate hearings and/or documents:
Oct 3, 2017 Full Committee Hearing -Senate Finance
Nov 6 – 9, 2017 H W & M Markup
Nov 13, 2017 Open Executive Session to Consider an Original Bill Entitled the Tax Cuts and Jobs Act Sessions also continued Nov 14, 15, 16 with videos at the page)
Supporting Document Markup – Senate Finance Committee
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Another day, another set of articles and comments where the #TransitionTax & #GILTI are being stuffed down the throats of expatriates who have their own small corporations. The proliferation of articles on this issue, all proclaiming the U.S. can now inflict a deeper cut into the retirement savings of non-residents, is infuriating. The first two articles at least expressed the idea that these provisions do not might affect non-resident U.S. taxpayers.
Max Reed , posted on November 3, 2017:
As part of this transition, the new rules impose a one-time 12% tax on income that was deferred in a foreign corporation. Although perhaps unintentional, since US citizens will not benefit from a territorial model, the new rules impose a 12% tax on any cash that has been deferred since 1986.
Kevyn Nightengale, posted on November 10, 2017 (I have not included the updated comments because this is what we saw at that time):
This provision was not designed to catch individuals (I think), and certainly not Americans abroad – they are collateral damage. it’s incredibly unfair.
When I saw the House version, I expected that individuals would be exempted after a sober second (or third) thought. Or at least individuals living abroad would be exempted. But seeing a parallel provision in the Senate version makes me expect the worst.
Seems fairly obvious that the biggest clue that the #TransitionTax IS NOT meant to apply to small CFC’s is that they are not “transitioned” from a worldwide system to a territorial one. This is so basic it is hard to believe nobody just calls these people out on this. How many tax professionals watched all of the House/Senate hearings? Many of us did, all hoping to hear that the move to territorial would include individuals; or at least some mention of us. There simply was nothing to suggest that this tax applied to anyone except large multi-national corporations.This provides the context in which the law was conceived. It should be considered just as thoroughly as the plain reading that professionals claim catches expats in the net. Just exactly who is really making the law here?
Now, on to the two prominent articles of the week. The Financial Post has U.S. tax reform to bring double taxation to some Canadians by Julius Melnitzer. Mr. Melnitzer is well-known for making huge distortions of reality. Canadians are familiar with the fact that he perpetuated “the biggest personal loan fraud in Canadian banking history.”
The biggest personal loan fraud in Canadian banking history was the work of a wealthy, respectable London, Ontario lawyer, Julius Melnitzer. When he left the board of Vanguard Trust, a small firm with which his law firm had been dealing, he just happened to take a copy of the corporate seal that Vanguard had used, among other purposes, to attest to the validity of certain forms which it issued in lieu of custom-designed share certificates. Melnitzer’s first trick was to create fake shares by simply typing in the share amounts and stamping the certificates with the company seal. He created five certificates representing a total of almost 900,000 shares. Then he used these “shares” as collateral for personal lines of credit. He also forged financial statements of a company that his father had founded, in which Melnitzer owned 20% of the shares, along with a pledge from the company that it would guarantee Melnitzer’s debts. Using the Vanguard shares and the phoney loan guarantees Melnitzer received a total of $5.6 million in lines of credit from five major Canadian banks. The scam went on for years. Each time a bank would start to press him for repayment, he would threaten to take his business elsewhere. He would also request a letter of recommendation from one bank, then use it to obtain funds from its competitors. A few years later, the banks pressed him to either pay up or come up with better collateral. Emboldened by the fact that no one had questioned the veracity of the forged documents, he decided to do the second.
Melnitzer went to a small local printing company that his law firm had done business with for years. He told them he was representing a client charged with using forged stock certificates to get loans at banks. He wanted to prove in court that printing technology had improved so much, even a small shop like theirs could do a credible job. When the company agreed, he ordered single shares of five blue-chip companies in the name of his daughter to avoid suspicion. He then altered them to put in his own name and bumped up the amounts until they had a face value of about $30 million. Not only did the great majority of the financial institutions he dealt with accept these in the place of the initial collateral, but some even significantly increased his line of credit. Alas, when an officer at National became suspicious about how Melnitzer’s personal wealth had risen so quickly, the officer asked bank experts to inspect the stock certificates. Melnitzer was arrested three days later.
Julius Melnitzer, a London, Ont., lawyer, was brilliant in the courtroom and had a stable of powerful clients, including some of the province’s biggest landlords. Thanks to a tip from an observant middle manager at a bank, the police discovered Melnitzer had printed up more than $100 million worth of stock certificates bearing blue-chip names like Exxon Corp. and used them to secure around $67 million in loans from several banks. He also bilked several friends out of more than $14 million by getting them to invest in a bogus property deal in Singapore. In 1992, Melnitzer pleaded guilty to 43 counts of fraud. He was sentenced to nine years in jail but was out on day parole after a couple of years and full parole in 1995. Melnitzer is now a well-known and respected Canadian legal affairs writer.
For Mr. Melnitzer’s point of view see here.
So why am I making such a big deal out of Mr. Melnitzer’s background? Irony. Hypocrisy. Disgraceful. Despicable. Along with government and the tax compliance community, the media is guilty of presenting only one side of the picture, consistently. We are labelled as “tax cheats” “scofflaws” and so on for not filing pieces of paper we knew nothing about. This man, who cheated banks out of $67 million, his friends out of $14 million, is promoting a questionable point of view that seriously affects the lives of millions of expats. Sorry, I cannot consider him a “well-known and respected Canadian legal affairs writer.”
The article quotes Roy Berg on the Transition Tax issues and Paul Seraganian on estate tax issues. An example of the Transition Tax issue:
A doctor who is a dual citizen practising in Canada,
with $2M of accumulated earnings in a private Canadian corporation,
would have a one-time U.S. tax liability of $300,000 this year
Roy Berg, director, U.S. tax law, Moodys Gartner
“A one-time tax liability of $300,000.” Incredible. Just a “fact.” Doesn’t matter at all how immoral this tax is in the first place. Doesn’t matter that this likely represents the doctor’s retirement savings. He/she likely worked very hard to earn that.This is a real-life person, not a hugely wealthy individual such as a corporate CEO who makes far more than $2 million a year in bonuses alone. It’s not small potatoes to confiscate that from a non-resident “U.S.” person. A Canadian citizen and resident. It is unbelievable that anyone, in any country would simply accept that U.S law applies outside it’s borders. It seems to me that “tax professionals” need to think carefully about what they are doing, who they are hurting and their role in what is truly an amoral regime at best and an immoral regime at worst. And people affected by this should think long and hard about parting with such amounts. I sincerely hope renunciations will be off the charts next year. One can at least be certain that “unofficial” renunciations, people “just walking with their feet” (as in non-compliance) will continue. There is a limit to the value of anything and U.S. citizenship is quickly becoming something non-residents simply cannot afford to keep.
An excellent comment by Karen Alpert on this article:
It is patently clear that Congress was not thinking about the impact of tax reform on non-resident US citizens. None of the discussion in the lead-up to tax reform, or in the committee hearings, indicated that Congress intended to punish the citizens and residents of other countries who happen to be claimed by the US as citizens. Nothing written by the IRS so far has indicated that they believe this applies to non-resident individuals – every example in the IRS notices has specifically looked at corporate shareholders. The only indication that this might apply to non-resident individual shareholders is from the tax compliance industry that stands to earn a large amount of fees on attempts to comply with this extra-territorial over-reach by the US.
If applied to non-resident individuals, the “transition” tax would be a pre-emptive grab at the tax base of Canada and every other country where US emigrants and Accidental Americans are living. The “deferred foreign income” that would be confiscated is money that was never subject to US tax, and is only claimed by the US because of a fictional “deemed repatriation”. Think about what that really means – the US is pretending that US emigrants are “repatriating” funds back to a country where they don’t live, and that they may no longer really identify with. The only good that could possibly come from this is the long overdue realisation that US taxation of the citizens and residents of other countries is contrary to the national interests of those countries and contrary to normal international practice.
The comments section is still open; Brock SWAT please go over and make your views known.
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The other major article this week is at the Financial Times.
You can see the article on the
citizenshiptaxation facebook group
Financial Times
Americans abroad hit by Trump’s new repatriation tax rules
by Andrew Edgecliffe-Johnson in New York – FEBRUARY 4, 2018
John Richardson comments:
(A previous comment of John’s is here . )
@Mitchell @WBY @Brian Lillis @Monte
@Mitchell gives us an excellent description of the reality of this situation.
We are dealing with a situation where the “tax compliance community” says: “Resistance is futile” and the reality is “compliance is impossible”.
What will be people do? Those who have long term relationships with “tax compliance people” are probably in the worst situation. They will be under enormous pressure to transfer their pensions (in reality this is how these corps are often used) to the IRS. These people will be confused, frightened and “easy prey”for the amoral individuals who populate the industry. I saw one explanation of the “transition tax” from a highly regarded tax firm that noted that they must search their client base for “victims”.
Notably, this is also taking place against a backdrop where VERY FEW “tax professionals” even understand how this (so called) tax works and how to work with it (or against it).
It is laughable that the only way any individual could even know that this exists is because of the combined efforts of the media and the “tax compliance industry” (frankly the last group of people I would trust).
I would also like to stress that members of the tax compliance community do NOT know more about this than the individuals impacted. Sure, they may be able to calculate the tax better (assuming that it applies to Americans abroad at all.) But their insight into this is limited by the thought (if you want to call it a thought):
The law is the law – the intent of the law was irrelevant – the unintended consequences are irrelevant.
The unfortunate truth is this:
People are going to have to choose between following the advice from their tax professional that “the law is the law” and retaining their life savings.
It will be interesting to see what happens.
All the while the USA insists that US persons will remain liable to the US tax code regardless of their country of residence, no US person will ever be safe from financial ruin at the stroke of a pen in the USA.
This law today, what next?
Carefully plan now all you like, financial ruin is always one small US tax law away.
And we need to get this message out loud and clear….
Complying with the US tax code is frequently OPTIONAL!
@Mike as I have stated several times in threads before it is no one but compliance condor industry that is the tax attorneys, CPAs etc who are making these laws and they also have structures to sell as a loophole to those who have deeper pockets. As explained to me by a tax attorney friend who told me to renounce and get away before they make more laws to make it impossible for you. I did not listen to him and regretted later on. He was absolutely correct as he knew his condor comrades would make life more difficult for an average person to even exist outside US and comply with all their forms and the taxes as we see now. You can scream and yell but unfortunately there is no solution except to renounce and rejoice. The sooner the better your life would be as a person. I am in that process too now.
@Patricia Moon
Thanks for a great article highlighting the interaction between the media and the tax compliance industry.
I just wanted to emphasize that the people who are “potentially” impacted by this are largely people who just happened to have been born in the United States (or possibly born to U.S. citizens in Canada). This means that this group would NOT be people with a strong connection to the United States who simply moved to Canada.
Lately there has been an attempt define the problem of “citizenship-based taxation” (possibly suggesting more of a connection to the USA) as being a problem of “non-resident taxation” (more accurately reflecting the attempt by the USA to impose taxation on the residents of other countries).
The media and the “Call Of The Condor” mostly describe all of this as the taxation of Americans in Canada.
A more accurate description would be that the “transition tax” is:
The attempt to confiscate the retirement assets of the “tax residents” of other countries.
@Harrison
The phrase “Renounce and Rejoice” was one of the original and founding principles of the Isaac Brock Society. When you use this statement reflecting this important principle, please:
“Renounce and Rejoice”
@USCitizenAbroad. I understand it truly that it was the founding principle ‘Renounce and rejoice’ of this blog and appreciate Patricia blog for starting this blog every time. I was told also to renounce and get out in 2009. Wish I had listened to my attorney friend’s advice and got out of this years ago. A costly and huge mistake to keep it.
“The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.”
Hopefully there are a lot more people hissing about this than we see on social media.
My accountant’s “small” accounting firm counts about 50 clients affected by this. One is a doctor who stopped sleeping after hearing about it. I have the advantage, I suppose, of having been through the OVDI/Streamlined process and am in no hurry to get fleeced again. #NotPayingThis.
I wish someone would comment on the Financial Post article that Melnitzer’s true expertise lies in how to commit a massive bank swindle and he really should not be worrying people into the talons of the compliance condors (like Booty Garner) who are only too willing to tally up, for a huge fee, a person’s tab for the transition tax while pretending to denounce its inception. I’d like to see #NotPayingThis go viral. The camel went down to its knees when the TT straw was added.
To its knees and under the tent, EmBee.
I’m having some browser issues with the FP commenting. Someone needs to post the usual boilerplate about how this is only a problem if you’re filing US tax returns, but only a very small subset of US persons abroad (who have complex cross-border business and/or personal ties) should even consider compliance. For the rest of us, you can’t be stuck with this tax if you aren’t in the system, and this is another reason to stay the hell out of the system.
Quite apart from the fact that this is a case of the compliance-industrial complex making the law.
There’s a Moody’s seminar here where I live on the weekend, but unfortunately I’m going to be off enjoying winter sports and cannot attend. I would really enjoy standing up and ask some hard questions about the risks of non-compliance. Oh well, missed opportunity. But I’m sure they’ll be back again soon!
Renounce and Rejoice or Stay Out of the System. Whichever works for your particular circumstances and your risk tolerance level.
With the Transition Tax the plot thickens. Things are headed downhill south of the border.
My friend is so very lucky. She saw the writing on the wall in 2011. Sleepless nights followed along with appointments with lawyers and accountants. They could barely discern what was happening. Thought about OVDI and decided no, not about to give away half of her retirement.
Dissolved her company, transferred some investments and assets and waited 5 long years
Did a quiet disclosure of 4 yrs with nothing but zeroes and 1 current year of the same.
Renounced last year and filed 8854 recently. A lucky escape that took a lot of work, a lot of planning and quite a few sleepless nights.
I don’t mean to sound smug, and it may all come back to bite me in the ass one day (possibly posthumously), but when I had my moment in 2011 my first reaction was “this is bullshit, they’ll never find me” and decided to stay off the radar. (Thought about renunciation back when it was still cheap at $450 but didn’t realize how easy it was without the tax filing, plus had a kid heading for university age eventually who could redeploy a US passport if she so chose.)
I think I’m very lucky, because I decided to do nothing (except making it my hobby to evangelize non-compliance) and so far that’s proven to be the smart choice.
It doesn’t matter a lot what congress does. The deep state will rewrite the regulations to fit whatever model they want unlesst the IRS is totally disbanded and some other system of taxation is adopted they will do whatever they want and say that is the intent of the law. We are in the middle of losing our friends in congress and Polosi and Schumer cares not what the deep state does to us or you. We had a revolution last Nov and the deep state is trying to negate it with a counter revolution. Pray it holds and we have friends in gov’t to help keep the swamp drained.
Wilton! How we’ve missed you.
Viva la contra-revolucion!
You can’t be serious!? They are actually saying that the territorial system for corporations with the transsition tax applies to individuals!? That’s just nuts.
And this is from the guy who has learned and try to share that the law means only what those who one deals with (bankers, employers, etc) believe it means.
…”U.S. shareholders owning at least 10% of a foreign subsidiary may end up paying a one-time “expatriation tax” on profits earned abroad that have not been taxed previously.”…
…”We await more guidance from the Internal Revenue Service.”
Biggest takeaway: “may” and “await more guidance”.
https://www.taxconnections.com/taxblog/the-tcja-changes-for-american-expats-or-not/
Move all your assets to cryptocurrencies, and then do nothing. They can’t control this.
@Abey you do realise that even cryptos have tracking mechanism plus they are falling and loosing values tremendously. There would be central banks that would line up to regulate it sooner as they had risen to very high values last year and inflation would set in all over the world as central banks and govts are scared as they are banning it outright all forms of crypto.
@Harrison
Mosy cryptos can be tracked indeed, but they can’t be *confiscated*. Also, if you worry about tracking, some cryptos provide full privacy (such as Monero).
Re. losing value, that’s not really true; virtually all of them have 10x at least in the past year.
Banks can’t regulate crypto, and governments have no way of stopping them either. BitTorrent exists not because the goverment wants it, but because it can’t stop it. Same goes for Bitcoin, Ethereum, Monero, and all other cryptos.
They’ll try to get their cut for sure, but that’s as far as they’ll get.
i am caught up in the “new transition tax.” I finally renounced my US citizenship last year. I am a canadian citizen with a canadian company holding retained earnings (my retirement earnings). After many years, i am finally not a covered expat. My “previous” accountant refused to do my 1040, 1040NR & 8854 without doing (& reporting) a net calculation tax on the transition tax supposedly owed by me. After much research, i MIGHT have found a US accountant to do my 1040 and company forms. However, I might have to do my 1040NR and 8854 forms myself. With only 3 days in December to report on the 1040NR form, does anyone know if the 1040NR form should be “blank” or filled in exactly like the 1040 form? thank you for any advice as i have been on this site since 2012 and could not have gotten this far without your help.
@lioness Tell the accountant you don’t agree with Transition Tax as the issue has not been settled for small companies abroad (also I thought there was some 7 year period to pay?). Say else you will take your business elsewhere. If the accountant does not agree you may find another or can you do it yourself? The alternative sounds like giving your pension to the IRS.
@lioness
Tell your accountant two things:
1. You renounced before the tax bill so the “transition tax” cannot apply.
2. Go jump in a lake.
@Abey. I don’t want to argue on crypto with you as this is not the forum for it. They might have increased 10x last year and increased 100000x during the previous years but now they are going down as central banks are going after it and banks are not taking them as payments and exchange houses are getting hacked. While Monero is a good idea, I would rather sell everything and keep it as cash on you or move half in crypto and cash so at least you have something in case something happens to your nest egg. Cash on you is not reportable asset so you are safe there. Looks like lot of Canadian small business would be up for sale this year.
@Nononymous. Bad advice the accountants will not jump in the lake they will simply report you to the service as being tax obstructionist. Remember always IRS enforces these laws by the help of accountants and tax attorneys. They are the service’s eyes and ears. Of course the organization could not have enforced all these codes, made them laws without the help of these condors. They have to sign a sworn statement that they will upheld laws and report any wrong doings as I am beginning to get the whole picture now after reading the posts.
1st advice is good.
Lioness. I think I recognise your story. As far as I know, the transition tax only starts in 2018 and wouldn’t apply to you.
It seems you renounced at the end of 2017. If so, the 1040 is not sent in as a tax return. It is sent in as a statement. You write “dual status statement” at the top.
The number from line 38 (adjusted gross income) is transferred to line 36 and 37 of form 1040NR. You write “dual,status return” at the top of the 1040NR
My understanding is that you can only use one personal exemption of 4050 rather than a standard deduction of 6300. Don’t know why. The instructions for 1040 NR are 77 pages!
8854 is complex. All you can do is your best. Then there are fbars.
The good news is that, if there is no tax owing, they won’t bother you.
My friend just went through this process. She was lucky- she renounced at the beginning of 2017, had no income to report so opted not to file 1040 or 1040NR
good luck.
Lioness if you haven’t seen this, it’s where you start. NB the confusing terms resident means citizen even tho you live in Canada. Non resident means non citizen
https://www.irs.gov/individuals/international-taxpayers/taxation-of-dual-status-aliens