Renunciation and Relinquishment of United States Citizenship: Discussion thread (Ask your questions) Part Two
Ask your questions about Renunciation and Relinquishment of United States Citizenship and Certificates of Loss of Nationality.
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NB: This discussion is a continuation of an older discussion that became too large for our software to handle well. See Renunciation and Relinquishment of United States Citizenship: Discussion thread (Ask your questions) Part One
Welcome, Hardtobelieve.
Good handle. Of course, doing nothing is always an option — but as usual, it REALLY depends!
If you haven’t read already another thread and its comments that links to US tax lawyer, Phil Hodgen, recent advice — http://isaacbrocksociety.ca/2015/03/10/the-real-risk/. Also be sure to read the comments there for others’ opinions!
And, welcome to Isaac Brock Society!
@ Hardtobelieve –
First off, welcome to IBS. What you are facing is a very difficult set of circumstances and decisions, so it is good you are doing a lot of reading.
Since you obtained Cdn citizenship in 2002 but then got a new US passport in 2008, the US is going to see you as a US Person despite your 2nd citizenship (sorry for the painful truth). In other words, no chance of relinquishment. The fact that you have not filed tax forms in all this time definitely expands the difficulties you face (again, sorry for another painful truth).
Yes, you are able to take the renunciation route; however, that process DOES ABSOLUTELY require that you swear to have filed 5 years of tax forms and paid any necessary taxes. So, this giant step must be done before you make any appointment with the consulate/embassy.
Being a “covered expatriate” (definitely not ideal) depends on your total wealth on the day prior to your day of renunciation (totality of stocks, bonds, house, jewelry, cars and/or boats, cash, other valuable collections, etc – – I’m not sure about business assets, but if you are a sole-propriotor then this definitely should be checked out). The painful pill is that, yes, if you feel unprepared to spend the time and stress to fill out all these tax and reporting forms for yourself (and, unfortunately, they can be complicated with high penalties for making errors), then you must “spend the vast sums of money to file back returns and then renounce”. Depending on that level of wealth the day prior to your renunciation, you may or may not be a “covered expatriate”; but doing your calculation-homework, you may find ways of reducing your own personal “bottom line” (e.g. you can gift to your non-US spouse up to $145,000 (US) each year; also, you can legally (for now) dip into your personal US Lifetime Gift and Estate Tax Exclusion (currently $5,430,000) and further transfer some of your funds out of your hands that way prior to renunciation.
From my point of view, doing nothing is NOT an option as you and your spouse will always be looking over your shoulder and fearing being found. I think I heard that the new forms for getting a renewed US passport has a line on it requiring you to declare that you are up to date on your tax filing. And every time you go in to see your aging parent and cross the border, you will risk being pulled over and long interrogated about why you (with a US birthplace) are travelling on a non-US passport; indeed, they may even turn you back/refuse you!
So, strongly consider going forth and doing your horrible homework and taking the ugly steps required to clear up this awful mess that so many of us have faced. Best of luck and keep in touch as you move along and have new questions or comments. That’s what we are here for!!! 🙂 🙂 🙂
Thanks everyone for your kind and informative replies. My heart is aching over this situation, being forced to renounce my US citizenship! I will continue to read and learn what I can here.
Concerning my assets my biggest concern would be how the IRS will view them. Combined with my wife our income, house (capital gains), RRSP’s, Pensions, savings, etc are relatively significant. But if only using half of those values I think I may be ok. Certainly on my own I think I am below the income figures they present. I will have to look into this more and also the gifting. Anyone know if they view us together or separately? For example if I only have to claim half of the capital gain on our house then I could be ok there as well.
@LM, sorry, but the tax side DOES NOT have to be done before making any embassy/consulate appointment. Yes, given his circumstances, he needs to investigate/research what he needs to do on the tax side first so he has a clear idea of how he’s going to proceed, but he certainly doesn’t have to file back taxes before making a renunciation appointment. In fact, given the timeline at Toronto at the moment (end of Jan 2015 is when next appointment is available), it may be best to get an appointment first and then start on the tax filing while he’s waiting to renounce.
http://globalnews.ca/news/1519628/want-to-shed-u-s-citizenship-get-in-line/
@Hardtobelieve, you can do this in 3 ways. Get all the back filing done first and then make an appointment; make an appointment, renounce, and then start on the filing (you have until June of the year following your renunciation to file the 8854 form) or do them simultaneously given the long waiting time to get an appointment in Toronto.
@hard to believe
Medea is correct,you can file 5 yes of tax returns and 6 yes of Fbars AFTER you renounce. There are no questions about your tax filing on your renunciation forms or at the embassy.You will also have to file 8854 to avoid becoming a covered expatriate. You will have to confirm that you did not know of your
tax filing obligations to enter the streamline program. You can choose to only file 3 yrs if you wish to stay a US citizen and become a ‘lifer’.
Re:
You don’t swear to this at the consulate. It is not necessary to be tax compliant at the time of renunciation. The renunciation goes through regardless of whether one is or not.
To avoid “covered expatriate” status, one certifies that one has complied with the five previous years of tax obligations on the 8854 (exit tax form), which is due June 15th of the year following the renunciation.
That gives one (depending on the time of year you renounce) 5-1/2 months to 17-1/2 months to file the back taxes.
Nevertheless, once you renounce, the clock starts ticking on that, so I do think it’s important to be sure you can get caught up on back filing by June 15th of the following year. And for that matter, it’s important one has an idea of what the tax implications of renunciation would be in their situation before deciding to do it.
Another aspect is that, depending where one lives, it can take a long time to get a renunciation appointment (Toronto was 8 months last I heard). So, you can book your appointment and be working on your tax forms in the interim.
A person has until June 15th of the year following renunciation to wrap things up with IRS (form 8854, 1040s etc for the five years preceding renunciation and the partial year of renunciation). FWIW, if they never do this, their CLN remains valid and they remain a non-US-citizen. Anyway, to avoid covered expatriate status with a 2015 renunciation, one has til June 15th, 2016, to complete filings with IRS.
A person’s citizenship (or lack of it) is not dependent on their tax status. The consulate doesn’t want to see tax forms. Not their department. Dept of States’s only involvement/connection with tax is the following:
(1) At the consulate the person signs DS-4081, Statement of Understanding of Consequences; one of the 12 items on it is Item 10, that renouncing “… may not exempt me from US tax income taxation [etc] …”
(2) Dept of State is to provide IRS with a copy of each CLN they issue as per DoS Interagency Coordination and Reporting Requirements, 7 FAM 1243(a).
(3) The questionnaire, DS-4079, at q. 13 (e) asks “Do you file US income or other tax returns?” [DS-4079 is used to determine if a relinquishment actually occurred when the person claims it did. DoS does not require the 4079 for renunciation, but allows consulates to use it for renunciation files as well, if they wish. So, some consulates use the 4079 for renunciations and some don’t.] The tax question on the DS-4079 is there as an indicator of your ties and connections to the US, which is important if you’re claiming to have relinquished some time ago. But it has no relevance either way to a renunciation.
Oops, didn’t realise how old that Global Mail article was. Sorry. Still, iirc Toronto is still pretty backed up for appointments to renounce.
@hardto beleive
you can divide your assets between you and your wife . if the house is in both your names it can be divided , or you can actually transfer it to her name if that works. Bank accounts etc can also be transfered but remember your net wealth will be calculate on the day before you renounce. Gifts can also be made. Phil Hodgen gives good advice on his blog .
@hardto beleive
Make sure you understand that the 8854 “income” thresholds are not _income_ numbers, but “tax paid” numbers.
Hardtobelieve,
Given that your spouse is non-US, part of your homework in terms of assets may be establishing (and drawing up a chart so you can keep all these details in mind, especially if there is any transferring of assets along the way) how much is yours and how much is not. You are the citizen who is renouncing; it’s only your assets (and your annual income over the last few years) that they want to know about (in detail, I’m sorry to say)
Can you document what you have paid for, what percentage of a property or stock portfolio came from you (and what from your spouse)? The effort to get these things nailed down in your mind may be quite important in organizing your life if you plan to renounce. Documenting income or future pension (or personal TFSA and RRSP) may be easy, but can you show what proportion of the purchase of your home or car or a vacation property or a joint investment account came from your side of the ledger?
Otherwise (and don’t quote me on this, I am not an accountant) everything may have to be totaled and then halved. But if you CAN demonstrate that certain items came from your assets and others not, it possibly could be an advantage. Or perhaps not….. But it’s best to look at all options if it might save you from the dreaded forever “COVERED” status when listing YOUR assets.
BTW, in terms of your house, it is not the capital gain they will be looking at but the CURRENT VALUE (that is, your proportion of this current value).
@ Medea Fleecestealer,
You are right (and I was not) about when the filing needs to be done. Whether the appointment is made now and filing done before or after the renunciation “ceremony”, given his situation as a self-employed person (with, I’m sure, lots of day to day work in his career) I still suggest that he start moving on getting a handle about all the filing and calculations and best approach to his assets as soon as possible. Even if he does his own filing, given his asset status and no filing for a long time, having a meeting or two with an expert in cross-border and renunciation issues is something I would certainly advise – – just to make sure he is fully up to date on all the rules (which, of course, could change at any moment Grrrrrrrrrrrrrrrrrr).
If he worries about the possibility of becoming a “Covered” expat, he doesn’t want to miss out on any allowed opportunities or to step into anything extra complicated. Even not realizing the pitfalls of holding Canadian mutual funds is something that many don’t realize.
Anyway, mea culpa and thanks for correcting my error.
@Hardtobelieve
Welcome, Hardtobelieve. You’ve already received a ton of advice and hopefully I won’t repeat anything said.
There is a 3rd option that may or may not appeal to you (though I’m not sure how being self employed complicates it). Rather than spend vast sums of money to pay someone to do your returns, do them yourself. Take the naive approach to filing the returns, which greatly simplifies things, and let the IRS come back and tell you what (if anything) you did wrong. One thing you probably would want to get as accurate as possible are the FBAR filings. The IRS is so under-funded, and likely so used to seeing returns from Canada owing $0 or next to nothing, that you would have to somehow paint a large target on yourself to be of interest. Having said all that, only you can evaluate how comfortable you would be with this approach, and the greater your income and assets, the less attractive this may be.
If you decide to renounce before filing, be very aware of the $2 million USD net worth threshold. Unless you don’t care about being a covered expat, you want to be sure your net worth is below $2 million on the day (day before?) you renounce. If you get this wrong you can’t fix it. As others have mentioned, unless you’re ridiculously wealthy (and in that case, what the heck are you doing here?) you can gift away your assets to your wife at zero cost (other than perhaps some paperwork). I believe the maximum you can gift tax free is $5.43 million in 2015 (actually it can be somewhat more than that, but close enough for our purposes for now).
The position you’ve found yourself in sucks, but at least you’ve found IBS. You won’t find a more welcoming place.
The best advice so far is to not rush into anything.
We have barely begun to scratch the surface of what you can do.
Has anything changed recently that makes you want to ‘do something’?
If not, you could continue as you have for the last 25 years or so. Presumably, you have financial accounts where you are not identified as a US person. You could keep it that way. It is interesting that you renewed your passport and yet have not heard from the IRS. State is supposed to inform Treasury when someone renews.
You could renounce and then decide to do nothing further. Nobody seems to know exactly what would happen. In theory you would be a covered expat but since you have no children and no desire to move south, what are they going to do ?
You could renounce and file 5 years. The estimated accounting fees are $10,000 plus. Self employment complicates the issue especially if you are incorporated. Nobody knows for sure how TFSAs should be treated. PFICs are another issue. and on and on and on….It might be worthwhile spending the fees to find out if you would owe taxes and or penalties. (basically ,there are no penalties if no tax was owed.)
One Brocker (BC doc) tried to relinquish. She was refused so she resolved to say ,if asked , that she was Canadian and was born in Montreal.
You could renounce, file and consider the $2million threshold for the exit tax. There are ways to deal with that as well.
So many options, so little information! sigh! Good luck. You are among friends.
@tdott and Hardtobelieve,
Yes, one must be “very aware of the $2 million USD net worth threshold” but, also, one must be absolutely certain of one’s calculations and inclusion of ALL assets. With a self-employment situation, Hardtobelieve will need to be absolutely certain about what needs to be included (e.g. from his business holdings). And then there is the random issue of US$ – Cdn$ exchange fluctuations; best to make sure one’s assets are WELL below the 2 million level before renunciation day so one has a cushion in case the exchange rate changes suddenly in the wrong direction. And the important “tally-up” date is the day BEFORE renunciation; as you said, Tdott, if you get it wrong, you can’t fix it afterwards..
As for gifting, one is allowed to gift to a non-US spouse $145,000/year with no consequeces from the US IRS. With that in mind, Hardtobelieve may want to hold off on renouncing until early 2016, which would allow TWO annual opportunities to divest his stash of $145,000 to his wife with no complications. Annual gifting to any person is also allowed (now $14,000/year) tho Hardtobelieve said there were no children..
Using the Lifetime Gift Tax Exemption is worth considering if needed; however, be very careful as there is special filing required one is cutting into that lifetime exemption – – you have to document these gifts and may need to get a proper “deed of gift” signed at a lawyer’s office to demonstrate that these monies or assets are, indeed, being given freely and fully and without any lien or requirement to return these gifts ever . It must be documented carefully to the IRS on a form; as I recall, the form was not that complicated but one must remember to do this documentation in a timely manner.
All this takes time and thought; while one can do it on ones own, it is (especially if one has a very comfortable level of assets and, perhaps, a diverse portfolio) very helpful to have a guide along the way. While one may want to do all the filing and forms, one also could hire an accountant specializing in this field, to help walk a person through the process, reminding him/her of what needs to be done and when so that nothing gets lost along the way. Such people do exist, but you have do have to seek them out and ask. As Hardtobelieve surely knows, time is money and stress will be reflected in one’s energy to do one’s profession/business. All this has to be taken into account.
@Hardtobelieve
You first have to determine your net worth and if it is above the 2,000000 mark then consider gifting or transferring to your wife some of those assets. The calculation of your ‘unrealised gains’ only comes into play if you are over the 2,000000 mark. You will then be considered covered and will have to pay 15%
tax on any gain above 649,000 or thereabouts. Some covered expats may owe no exit tax IF their gain is below this amount
It is important that you have all your finances in the order that you wish to present on your 8854 on the day before you renounce , although the 8854 does not need to be filed until June 15 the yr after you renounce.
@LM, I quite agree. Given that Hardtobelieve’s financial situation is likely to be complicated I think he does need to concentrate on understanding what he needs to do there first. But once he’s done that and knows how he wants to proceed then he can ask for an appointment at Toronto. While he waits to go to the embassy he can get the actual tax paperwork underway.
Hardtobelieve –
You’ve been hit with a tsunami of “advice” and have lots to sort out. Here’s one bit of counsel that never seems to get the due respect.
Do not mess up on sequencing and tax filing deadlines.
Renounce fast and then maybe repent at leisure as a covered expatriate. Or nail down every last tax detail, have the previous tax filings submitted, and have the final paperwork strategy and timing absolutely clear. Including possible rapid exchange rate shifts. Only then pull the expatriation trigger. Not before.
Every time I see the loosey-goosey “Oh, you can do this in parallel, renunciation takes so long,” I cringe. You can proceed in parallel, but only on the understanding that you duck out on the renunciation if you hit stumbling blocks with the tax situation or haven’t gotten as clear and far along with that mess as you should have.
This is your biggest juggle. Do not drop the ball.
Do not try to sort out the tax stuff AFTER renouncing. There will be a clock ticking away to the unforgiving zero hour.
Like all the other valuable “advice” you have already received, this is free and worth every penny.
@ usxcanada RE your advice to Hardtobelieve – –
AMEN and AMEN and AMEN!!!!!
Hardtobelieve is a mid-career self-employed fellow with no kids and a good set of assets. He needs to get all his paperwork fully organized and know exactly what he is doing before he gets over to the Consulate/Embassy so he doesn’t run into the problem of the potential “time-bomb/crush” of renouncing and THEN looking after the paperwork”. The latter could push him into a corner of umpteen unforseen situations like work-crunch-pressures, unexpected potential health issues, or sudden demands by his aging mother – – all of which can easily (but with deadly consequences) steal away that post-renunciation time .
@LM
usxcanada makes some very good points. What if you reach a stumbling block, inhibiting your ability to certify compliance? Compliancy isn’t solely filing taxes. Compliancy is the lack of objection from the IRS that your filings are in order, and considering how many pitfalls there are for non-resident filers there could be many. Another something that hasn’t really been addressed is which taxpayer rights you retain or lose once you renounce US citizenship.
Of course, one can always choose to agree with those who will tell you that the IRS lacks the resources to ever pursue you – that is until there’s evidence to the contrary.
I was very surprised to receive my CLN in the mail today!!! I had a relinquishing appointment in Vancouver in mid-December 2014 which went well, although at that time they couldn’t complete my application because I had brought my laminated Citizenship card issued in 2002 and not the ceremonial paper document. They allowed me to mail in the ceremonial document when I returned to Ontario in mid-January. So that is just about 2 months to get the CLN which seems very fast. Have they gotten so many requests that they are speeding up the process? Included with the CLN was form 8854 which doesn’t apply to me since my expatriation on the CLN is dated before June 4, 2004. Are they just automatically including form 8854 with every CLN they issue?
@ Somerfugl
Congratulations! I’d say that was bad form including 8854. It’s not something the Calgary consulate is doing (unless that has changed since 2014). If they want to be truly “helpful” they could speed up the wait times for appointments. At least your CLN arrived in a relatively timely fashion but there sure isn’t much consistency between consulates. Anyway, the main thing is you have the CLN so celebrate!
@Somerfugl
Congratulations! It must feel great!
Thanks, EmBee! I agree the wait times are ridiculous and there doesn,t seem to be a good reason to make people wait so long. I was lucky I happened to be traveling to Vancouver for Christmas and was able to get an appointment. I don’t know what the wait times are in Vancouver now. Interesting that calgary hasn’t been including form 8854. Maybe Vancouver bureaucrats can’t be bothered looking at the CLN dates and toss 8854 into every envelope with a CLN.
I’ve been waiting over 11 months! Grrr…
Congrats Somerfugl – another one safely crossed to the other side.
@WhatAmI, after about 3-4 months, I inquired by email to the consulate about progress on my CLN, and got the answer that they didn’t know how much longer it would be. Strangely, shortly after telling me it could be months away, and asserting ignorance, then they called to say the CLN was being mailed out. It may be worth inquiring.