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
P.S.
When we moved to Canada, we filed US tax returns for 2 years, then stopped for 18 years. Towards the end of those 18 years, I became increasingly nervous about the fact that my wife was not filing with the IRS, specially with the introduction of FATCA. Finally a few years ago she filed a whole bunch of late tax returns (with a nice letter of apology to the IRS). She also filed a few years worth of FBAR. We took the “quiet disclosure approach”. There was no taxes due thanks to Form 2555. And for the last 4 years she has been filing on time. One thing I hate about the IRS is the no-response attitude. You file your tax returns and you never know if they have received it, if they have approved it, if they are happy with it. The CRA is much nicer. They send you a Notice that says something like “Thank you! We have received your tax return. All is well. By the way, your RRSP contribution room for this year is this much”.
@FormerPatriot
Congratulations that your wife and son are renouncing. I also renounced in 2014. I can give some information for your questions #2&3.
“2. What will happen to her SS benefits? US tax withholding at 15% according to the Canada-USA tax treaty? 3. What will happen when she inherits from her mother who lives in the USA? Can assets such as stocks be transferred from the estate of the deceased in the USA to my wife’s brokerage account here in Canada or should these assets first be sold within the estate and her inheritance be only cash?”
I’m receiving social security benefits. There is no US withholding but they are taxed in Canada. I believe this is stated in the treaty. There is an adjustment (reduction) from the US side on social security if one is also receiving CPP.
As far as inheritance from your wife’s mother, that is more complicated. I’m researching this myself with an inheritance coming eventually from my mother residing in US. Here’s an article from a tax consultants website on US versus Canadian Estate taxes:
https://serbinski.com/taxation-in-usa/estate-taxes
Also if one receives a distribution from an inheritance as capital rather than income, it is not subject to tax in Canada or US. But any income would have to be reported on tax return in Canada. I intend to have any US stock sold and then invest the capital here in Canada. Any capital gains (or loss) on stocks sold from decedents estate are only from date of death until date the stocks are sold in US. This is then paid by the estate prior to distribution to heirs.
It is quite complicated and I’d suggest you do some of your own research. Good luck.
Thank you PatCanadian! I have indeed been doing lots of research and lots of reading. Regarding my question #3, you say that you ” intend to have any US stock sold and then invest the capital here in Canada. Any capital gains (or loss) on stocks sold from decedents estate are only from date of death until date the stocks are sold in US. This is then paid by the estate prior to distribution to heirs”. That is what we would like to do. My understanding is that (a) when the person (my mother in law) dies, the base value of the stocks she owns are reset to the day of death; (b) the stocks can be sold while still in the estate of the deceased, with little capital gain (or loss) since the time from death to selling will be short; (c) my wife’s portion of her inheritance (she has siblings) can then be distributed to my wife in cash; (d) once my wife receives the money, she can do whatever she wants with it; she would probably invest it in some ETFs such as XBB, XIC, XUU and XEF in a non-registered brokerage account and (of course) she would report gains (or losses) on her Canadian tax returns. Does that make sense? I am assuming that she will renounce BEFORE her mother passes away. In the unlikely event that her mother passes away before she (my wife) renounces, that (a), (b), (c) and (d) remain unchanged except that for point (d) my wife also has to file a 1040 and declare all her investment income. Does that all make sense?
Thank you Formerpatriot for inspiring me to review this situation. I’m glad someone else is researching this as well. Please keep in mind my information is only from certain websites as well as some free advice passed on to me from from a prospective financial adviser’s cross border accountant. I can’t afford to hire a cross border accountant with their high fees. A,b,c,and d do make sense to me but my perspective is limited. I’m still learning about this. For the sake of simplicity, let’s hope your wife renounces before she receives her inheritance.
Another piece of information I’ve received refers to inheritance from trusts. I had to resign as trustee because of my Canadian citizenship and renunciation of US citizenship. This would have turned my mother’s trust into a foreign trust with very harsh US tax consequences. This advice did come from a US attorney.
“You file your tax returns and you never know if they have received it”
Each year, wait a few months after sending the tax return and then send two Forms 4506-T. One Form 4506-T should ask for a transcript of the return. One should ask for a transcript of withholding reported on Forms 1099, 1042-S, etc.
If I had known about Form 4506-T when I didn’t know I needed it, maybe IRS data entry clerk Monica Hernandez would have been arrested years earlier and maybe I could have avoided many years of problems.
PatCanadian, you wrote “I had to resign as trustee because of my Canadian citizenship and renunciation of US citizenship. This would have turned my mother’s trust into a foreign trust with very harsh US tax consequences. This advice did come from a US attorney”. Am I to understand that you have one or more siblings who are US citizen and who remain trustees whereas you are now simply a beneficiary?
@Formerpatriot
Trusteeship was transferred to a US attorney. Although I think that trusteeship could go to a sibling who is a US citizen only.
Norman Diamond, thank you for your comment. I think there is another approach. I just went to http://www.irs.gov. The website has been revamped since last time I was there. You can now create an online account. I have not done it but I presume that it would show, among other things, whether a taxpayer’s 1040 has been received and processed.
Get Transcript – notoriously insecure.
Rettig’s going to fix it:
https://fcw.com/articles/2018/07/24/irs-infosec-gao.aspx?m=1
Right…
Formerpatriot and PatCanadian – I’m also looking into the question of how my US retirement savings will be taxed given that I renounced in 2016.
Of course, I’m looking at it from the perspective of an Australian rather than a Canadian, and the results are highly dependent on the individual treaty.
Article 18(1) of the Australian treaty exempts from US tax “pensions” paid to a NRA residing in Australia (this provision is subject to the saving clause, so US citizens cannot use it). Is the payout from a 401(k)/403(b) or IRA a “pension”? Apparently it is, under some circumstances. Reading through the IRS technical explanation (which should be similar for any country with a similar clause in their tax treaty), it appears that the US will treat retirement account payouts as a pension when they are paid to someone of retirement age (65+) who is actually retired. It doesn’t appear that it matters whether the payout is a lump sum or a series of staged withdrawals. Of course, as an Australian tax resident, Australia has the right to tax this income when I receive it. My understanding is that Australia will tax only the appreciation and not the original contributions (this means I have some work to do figuring out the original contributions to these accounts which were set up in the 80s and 90s).
As for Social Security – the result is highly dependent on what country you’re living in. Unfortunately Australia has a treaty that says that social security is taxed by the source country rather than the resident country – so the US will withhold 25.5% in US tax from my SS benefits, but they will not be subject to further taxation in Australia.
“Get Transcript – notoriously insecure.”
That’s an understatement.
https://qz.com/628761/the-irs-is-using-a-system-that-was-hacked-to-protect-victims-of-a-hack-and-it-was-just-hacked/
To Karen: From what I have been reading, it appears that the situation in Canada is quite different from the situation in Australia. Here’s what I found out. Please, anyone reading this, correct me if I’m wrong.
US Social Security benefits:
1. As a resident of Canada (whether a US Citizen or a US Green Card holder or a US Non Resident Alien), US Social Security benefits will not be taxed by the USA. There will be no tax withheld. The benefit will have to be reported on the beneficiary’s Canadian tax return. Only 85% of the benefit will be considered taxable income. This is according to the Canada-USA income tax convention.
2. For social security benefits, either Canadian or US, there is a “totalization agreement” to help people who would otherwise be penalized for having spent some years working in the USA and some years working in Canada. My personal situation is an example where the totalization agreement comes into play. I have worked only 7 years in the USA and I have accumulated only 28 credits toward Social Security. Thus I do not have the 40 credits that are normally required in order to receive benefits. With the totalization agreement, I am eligible to receive US Social Security benefits even though I have only 28 credits.
401(k) plans:
3. As a non resident alien living in Canada, I have to file a W-8BEN with the company managing the 401(k) and my 401(k) payments will then be subject to a flat 15% tax withholding by the IRS. Without the treaty, it would have been 30% instead of 15%. I will then be allowed to claim a tax credit when I file my Canadian income tax return.
IRS filing obligations:
4. As a Non Resident Alien (of the USA) living in Canada, I will not be required to file a tax return with the IRS if I have no US source of income other than US Social Security benefits and 401(k) payments.
One scary thought: If my wife renounces her US citizenship, is she still covered by the Canada-USA tax treaty? She is a Canadian citizen, born in the USA, but living and working in Canada for the last 25 years.
“One scary thought: If my wife renounces her US citizenship, is she still covered by the Canada-USA tax treaty? She is a Canadian citizen, born in the USA, but living and working in Canada for the last 25 years.”
It’s the other way round.
USCs normally cannot claim treaty benefits; non-USCs normally can.
There’s a few treaty benefits that even USCs are allowed to claim; see the saving clause and (usually) the following paragraph in the tax treaty.
To plaxy: Thank you for your reply. I was mislead by the following passage on page 118 of Brian Wruk’s book “The American in Canada”. In a section on the consequences of renouncing US citizenship, he says the following:
“Another “gotcha” is that you are required to irrevocably waive any right to claim any withholding reduction under another country’s income tax treaty with the US related to eligible deferred compensation items that include 401(k), profit sharing plans and phantom stock arrangements”.
After rereading that section of the book, I realize that the author may have been talking about covered expatriates only. That would make sense. Luckily, my wife is too poor to be a covered expatriate! 🙂
P.S.
As of 10:00 AM on July 25th, 2018, my 29 year old son is no longer a US citizen! All went well at the US Consulate where he took his oath of renunciation.
Congratulations to your son! 🙂
Formerpatriot and Karen:
Payment and taxation of social security benefits outside the United States are affected depending on what country one is residing in. There are even some countries to which the US will not send payments. Please see the following:
https://www.ssa.gov/pubs/EN-05-10137.pdf
One is covered by the tax treaty if they renounce. But if they don’t renounce before receiving an inheritance they can possibly become a covered expatriate.
PatCanadian:
My wife just sent an email (with all the required documents) requesting an appointment at the Quebec City consulate for renunciation.
In the case of my son…
– He sent his request on April 18.
– He received an email on June 21 informing him that his appointment was scheduled for July 25.
– Yesterday (July 25), he went to the consulate and he renounced his US citizenship.
– From April 18 to July 25. That’s exactly 14 weeks.
– Now he waits for his COLN.
He told me that it took one hour at the Consulate. He told me that they never asked him why he was renouncing. He told me that they were not very efficient.
Formerpatriot…Congratulations to your son and best wishes to your wife. Renounce and rejoice seems to be the way forward. I was initially shocked when faced with renunciation but now I’m at peace with it.
“Now he waits for his COLN.”
Almost but not quite. Certificate of Loss of Nationality is usually abbreviated CLN. Thank you for putting us on the right track, but we’re only halfway there. Let’s fix it.
Now he waits for his COLON to move.
Okay, okay, I stand corrected!
Now he waits for his CLN!
I am excited, I am happy, I am relieved.
One more US tax return for my son and that’s it!
One more US tax return for my wife and that’s it!
No more threats of 10,000$ penalties from the IRS.
No more 1040, no more 2555, no more 8938, no more FBAR.
Reminds me of ditty we sang at the end of school
No more school, no more books, no more teacher’s dirty looks..
@PatCanadian wrote:
I am a New York attorney.
Not so much “harsh US tax consequences”: the tax should be the same whether on Form 1041 or Form 3520-A, dependent upon the beneficiary(ies). In NYS a problem is that one cannot resign without consent of the Surrogate’s Court (so that means either hiring an attorney or working out the court procedure yourself). And if you are a co-trustee (or not), addressing the issue of controlling court (in an estate almost certainly that of the decedent’s domicile) and person(s).
In either case the benefits should be taxable to, or at the rate of, the beneficiary(ies). But there’s a trap for the unwary: California and England, to mention two jurisdictions I know about, tax trusts (also) based on the residence of a trustee (in the case of England, a non-professional trustee).
The challenge arises when there is no trusted family member ready, able and willing to replace you and/or the Will doesn’t make provision. Given the chance, a probate judge may appoint a crony. Do a Web search on ‘mollie orshansky washingtonpost’. Orshansky invented the Poverty Index but more importantly when she was hospitalised in D.C. a Superior Court judge tried to divert her assets, including her New York trust, to the control of a crony. Her family abducted her from hospital and took her to (her own) New York apartment that she’d bought next to theirs for retirement. It then became a spitting match between the N.Y. and the D.C. court. With the press publicity, the N.Y. relatives won, and so of course did Mollie.
So: in your case resignation may have been to the trust’s benefit. Or not: it depends whether the professional trustee’s fees (which is apparently what you had to incur) are greater than those for filing 3520-A. My practice is to file both 1041 and 3520-A (it’s basically the same information in different format), with form K-1. And that is because IRS in Ogden, UT which handles foreign trusts and those with Western and Southern addresses, tends to threaten people willy-nilly with $10,000 (or 35 %, whichever is higher) penalties.
Reference: Foreign Trust Reporting and Compliance https://bit.ly/2AfQIeH
@alice wrote
In the UK you can have PFIC investments within a SIPP (or for that matter a Junior SIPP for a minor. (Tax Treaty art. 18) And with luck, if you have or can contrive to have $5,500 of U.S. taxable wage or self-employment income (even if not taxed because under the personal deduction) a Roth IRA which will never be taxed either by the US or the UK.
You can have an ISA but only if you hold cash or stocks and shares of non-U.S. non-Canadian firms and not PFICs. Some FFIs will not take your account if you are a U.S. Person but Hargreaves Lansdown and some others will. A Child ISA (other than cash) is practicable only if the child is not a U.S. Person. Of course ISAs are subject to U.S. income tax. And if you contemplate renunciation at a future date accumulating assets poses the risk of making you a covered expat some day. But if you have no U.S. heirs that’s a moot point, and U.K. Inheritance Tax (actually an estate tax) on estates over £325,000 (somewhat more when there is a main residence involved) is 40%, creditable against the tax on covered expats’ estates.
andy05 says, “I am a New York attorney.” And why is a New York attorney spending their time posting on Isaac Brock?
“With the press publicity, the N.Y. relatives won, and so of course did Mollie.”
No they didn’t. They just lost less than a corrupt judge wanted them to lose.
Just like people who can’t afford a lawyer, but who have the silly idea of reading instructions to find out how to get their tax refund after their withholding was embezzled. In the rare case where a judge might let the person get the refund that is owing to them (I haven’t met one yet), the person still needed heart surgery because of injuries caused by the stress, and the person still spent more than a year’s salary in legal expenses. The only way to win is to volunteer to lose the stolen withholding, which means less of a loss, but hardly a win.
Some people think they have a better chance in court than in lobbying legislators. In Canada, maybe, let’s hope, though the only reason for hope is the expert lawyer on our side. In the US, there’s no chance.