As John Richardson calls it, the US’ confiscatory tax on a covered expatriate’s pension in their home country is indeed “a particularly difficult and unfair aspect of renouncing US citizenship.”  This policy is very egregious as it concerns tax on income that hasn’t even been received yet by the person and which has no connection to the US in the first place.  It’s a serious potential problem to beware of in planning your renouncing/relinquishing. (Posted with permission.)

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Prologue

To see examples of the deemed income inclusions and the U.S. tax owing click on the links to Appendices, B, C and D below.

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Outline And Structure

This post is for the purpose of alerting Americans abroad and their advisors to a particularly difficult and unjust aspect of renouncing U.S. citizenship. The punitive treatment of the non-U.S. pension is a reason for many Americans abroad to consider renunciation earlier (when they are not “covered expatriates”) rather than later (when they may be subject to the confiscatory rules applied to “covered expatriates”).

Part I – Introduction – The General Message
Part II: Relinquishment and the confiscatory case of the “ineligible” (non-U.S.) pension … A Deeper Dive
Part III: Relinquishment and the retention of the “eligible” (U.S.) pension … A Deeper Dive
Part IV – Conclusion
Appendix A – How Internal Revenue Code Sections 877A and 877 Lead To The Confiscation Of The Non-U.S. Pension
Appendix B – Dual Status tax return with a 1 million USD income inclusion on the day before expatriation
Appendix C – Dual Status tax return with a 1 million USD income inclusion on the day before expatriation with a $100,000 tax credit carry forward
Appendix D – Dual Status tax return with (1) a full actual distribution of the pension in Canada on the day before expatriation (generating a foreign tax credit in the current year)

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Part I – Introduction – The General Message

The warning! Some Americans abroad who renounce U.S. citizenship can expect to have punitive taxation imposed on the value of their non-US pensions. This is a tax imposed by a “deemed distribution” (not actual) of the the pension. Because there was no “actual distribution” those affected will need to find another source of funds to pay the tax. Significantly, the tax does NOT apply to U.S. pensions. Those renouncing who have U.S. based pensions may NEVER be taxed on the value of those pensions.

Once an individual’s net worth reaches 2 million USD, that individual is generally subject to this tax. This means that renunciation may become very costly. Americans abroad with non-US pensions and their advisors should be aware of (and plan around) this problem.

In this post I am joined by CPA Olivier Wagner who has generously provided excerpts from mock U.S. tax returns which demonstrate how confiscatory the U.S. Exit Tax rules are when applied to non-U.S. pensions (and therefore to Americans abroad). You will find his returns in Appendixes B, C and D at the end of this post.

The mock tax returns show that a U.S. citizen living outside the United States who:

– is a “covered expatriate”

– has a non-U.S. pension with a present value that includes a taxable amount of $1,000,000 USD

will be subject to an immediate tax of $344,963 triggered by renunciation of U.S. citizenship.

Because this tax is NOT imposed on those with U.S. based pensions, this tax applies disproportionately to Americans abroad, who earned their pensions while living outside the United Sates.

While US lawmakers decry recent Canadian legislation (Underused Housing Tax) as being unfair to US citizens, John Richardson considers how the US’ own Citizenship Based Taxation causes USCs bigger problems. (Posted with permission.)

Introduction

Canada’s Underused Property Tax came into force effective January 1, 2022. The return for the 2022 year is due on April 30, 2023. Generally, a tax of 1% of the value of the property will be imposed on the owners of property that are not occupied in an acceptable manner (principal residence or rented out) for at least six months of the year. The rules are drafted in a way that would appear to exclude short term rentals (think AirBNB) from meeting the test for “occupancy”. In addition, individuals who are are neither Canadian Citizens nor Permanent Resident are (1) required to file a return and (2) may (depending on whether the property meets the test for occupancy) be subject to the 1% tax. To put it simply: U.S. Citizens and Residents May Be Subject to “Canada’s Underused Property Tax”. New York Congressman Brian Higgins is been very active in drawing attention to the unfairness of “Canada’s Underused Property Tax” being applied to U.S. citizens. He has launched a public and visible campaign to pressure the Government of Canada to offer an exemption to U.S. citizens.

The basic structure of Canada’s “Underused Housing Tax”

In contrast to the Municipal (Toronto, Ottawa and Vancouver) “Vacant Home Taxes“, Canada’s Underused Property Tax is complicated. It is likely that those required to file the return will need assistance.

I am confident that people will be “trapped” and unfairly penalized by Canada’s Underused Housing law. On its face, the law does not apply to property owned by Canadian citizens and permanent residents of Canada. The law creates various categories of owners ranging from those who are “excluded” from reporting, to those are required to report but are “exempt” from the tax and to those who are required to report and are subject to the tax. (It appears that those owning properties through Canadian Controlled Private Corporations will be required to report!) This law is far more complex than its city counterparts. The best (and evolving) information sources about Canada’s tax may be found at:

Canadian Government Summary Of Canada’s Underused Housing Tax Law:
https://www.canada.ca/en/services/taxes/excise-taxes-duties-and-levies/underused-housing-tax.html

The Text Of Canada’s Underused Housing Tax Law:
https://laws-lois.justice.gc.ca/eng/acts/U-0.5/FullText.html

The Actual Tax Return – Form UHT-2900 – Due April 30
uht-2900-22e

Many U.S. Residents May Not Be Aware Of A Potential “Reporting” Penalty Coming From The U.S. Government

Although not discussed, it is likely that many U.S. residents who own residential property in Canada have Canadian bank accounts located near their properties. They even be U.S. dollar bank accounts. Although these accounts are “local” to the property owned in Canada they are “foreign” to the United States. This raises the question of whether the existence and account balances are required to be reported to the IRS. The answer is maybe. The United States has VERY extensive (continued, see lower left)

L’Association des Américains accidentels is currently fundraising to finance public relations and lobbying actions in the United States to support their planned lawsuit against Citizenship Based Taxation.

You can lend your support at GoFundMe.

The Association, founded in 2017 and led by Fabien Lehagre and a five member board, has been very active and their work to date has resulted in:

• Convincing the European Union to address the issue of accidental Americans with the United States
• Adoption of a resolution in the European Parliament
• Obtaining acceptance from the State Department to reduce the amount of fees to renounce American nationality : from $2350 to $450
• Obtaining the support of the French Parliament: parliamentary report, amendment, adopted resolution.
• Assisting lawyer Stuart Horwich in obtaining recognition from the IRS that CSG/CRDS are considered as French taxes and therefore deductible from American taxes

and they have initiated lawsuits on several fronts:

• Against the State Department to denounce the unconstitutionality 1/ of the fees charged during the renunciation procedure 2/ of the closures of American embassies and the waiting lists to renounce U.S. citizenship;
• Against French online banks that discriminate against U.S. Persons
• To denounce the illegality of FATCA under the General Data Protection Regulation (EU GDPR) in the following countries: France, Belgium, the Netherlands, and Luxembourg;

Read more about l’Association des Americains accidentels on their website (pages on the site are in English as well as French (scroll down for the English); and at Forbes Magazine Time Magazine Links to More Media Articles on this page.

US income tax applies to persons due to their having citizenship (or permanent resident status).  Canadian foreign ownership property taxes are the reverse, being applied to non-citizens (and non-permanent residents).  These Canadian taxes are currently arousing ire with some in the US, as reported in this article by John Richardson. (Posted with permission.)

Introduction

You can see the complete twitter thread here.

A recent post describes how various Canadian Underused and Vacant property taxes might apply to unsuspecting U.S. residents (Toronto, Vancouver and Ottawa) and U.S. citizens (Canada’s Underused Property Tax).

Taxes that apply to ALL owners of property

The Toronto, Vancouver and Ottawa taxes apply to ALL owners (regardless of citizenship or residence) of residential property. Although these taxes apply to all owners, some U.S. citizen/residents have argued that they are disguised taxes on being American. The broad scope of these taxes makes them difficult to challenge. (continued, see lower left)

John Richardson considers the question “Should Tax Residency be Based on the “Circumstances of Your Birth” or the :Circumstances of Your Life?” (posted with permission)

Panel session – US Expat Tax Conference from Deborah Hicks on Vimeo.

Should taxation be based on the “circumstances of your birth” or the “circumstances of your life”? President Obama doesn’t think (apparently) that the “circumstances of your birth” birth should determine the “outcome of your life”. Should the “circumstances of your birth” determine your tax residency?

This is a second post exploring what is the true meaning of U.S. citizenship-based taxation. In an earlier post – “Toward A Definition Of Citizenship Taxation” – I explored the contextual meaning and effect of U.S. “citizenship taxation”. The only “contextual effect” and “practical meaning” of U.S. citizenship taxation may be described as:

Therefore, the practical meaning of “citizenship taxation” is the United States imposing taxation on the non-US source income earned by people who live in other countries. To be clear: citizenship taxation means that the United States is claiming the residents of OTHER countries as US residents for tax purposes!

That’s amazing stuff! Most countries believe that they are sovereign and that includes sovereignty over matters of taxation. Yet, any country that is a party to a U.S. tax treaty has actually agreed that a subset of the treaty partner’s tax residents are ALSO U.S. tax residents! Although nobody questions the right of the United States to prescribe its own definition of tax residency, few would agree that the United States has the right to claim the residents of other countries as U.S. tax residents. Yet, this is what the U.S. citizenship taxation regime means. This U.S. extraterritorial claim of taxation is at the root of the FATCA administration problems and at the root of the the events that led to Treasury Notice 2023-11 (released on December 30, 20220).

The first post explained the meaning and effect of U.S. citizenship taxation. This second post is to argue that U.S. citizenship taxation is taxation based on “the circumstances of your birth” rather than the “circumstances of your life”.

John Richardson explores the concept that the term “citizenship tax” is abstract and meaningless without context” in an article entitled “Toward a Definition of US Citizenship Taxation.” (posted with permission)

Prologue

The term “citizenship tax” is abstract and meaningless without context. What does it really mean? In this short post I attempt to describe the defining aspect of US tax residency in simple terms.

Bottom line:

The ONLY contextual meaning of taxing based on citizenship is that it allows the US to impose tax on income earned outside the United States by people who live outside the United States.

Here is why … (continued see lower left)

An analysis of a recent FACTA enforcement development by John Richardson (posted with permission).

Welcome To 2023 – A Year Of Heightened FATCA Enforcement

On December 30, 2022 US Treasury released Notice 2023-11. The broad purpose of the Notice is to prescribe conditions that would allow non-US banks to temporarily avoid a designation of “significant non-compliance” under the FATCA IGAs. It is important to note that Notice 2023-11 is NOT simply a “stay of execution”. It is a “stay of execution” that is conditional on both non-US banks and their governments participating in a significant escalation of FATCA enforcement on US citizens who live outside the United States.

The purpose of this post is to comment on and analyze the provisions of Notice 2023-13 which strongly incentivize non-US banks to purge themselves of existing US citizen clients. In Part 2 I will explain why I believe that non-US banks may be forced to close the accounts of all their US citizen customers.

Prologue And Summary Of The Issue

Through a combination of FATCA (“Foreign Account Tax Compliance Act”) found Chapter 4 of the Internal Revenue Code and the FATCA IGAs (the mechanism for countries to comply with FATCA) the United States has created conditions where US citizen customers are a burden and risk to non-US banks. These provisions have created conditions that threaten punitive financial sanctions on non-US banks who cannot notify the IRS of a US citizen’s Social Security Number. Generally this is because the US citizen has lived abroad for many years and does NOT have a SSN. This situation has created worry for the banks and for their US citizen customers. The fact that the US citizen does NOT have a SSN is NOT relevant to the reporting obligation imposed on the bank. To be clear: The FATCA IGAs mean that non-US banks can easily be in “significant non-compliance” for the failure to comply with something that is impossible to comply with. (continued – see lower left)

Declaration of R. Bitter

Notice of Intent to Pursue Rulemaking to Reduce Fee Amount

Thanks to Mr. A for writing this letter and posting it as a comment, originally on the ADCS thread.

Dear Ms O’Brien,

You are quoted in a recent article in the The Lawyer’s Daily (“Federal Court of Appeal dismisses Charter challenge to CRA-IRS agreement to share banking info”, Oct. 4/22) as describing the appellants as “US citizens who happen to live in Canada”.

That may be one way to describe them, but it is distorted and misleading. What if the appellants are also Canadian citizens? What if they have lived in Canada for most or all of their adult lives? What if they have no meaningful connection to the US?

Should their US place of birth and (imposed) US citizenship take precedence over their Canadian citizenship?

People with these personal circumstances are a significant part of the group that the FATCA Charter challenge represents, and are more accurately described as “US born Canadians who live in Canada”.

Approximately 20% of Canadians were born outside of Canada. Should this minority of Canadians have their Charter rights violated just because they were not born in Canada? The Canadian government did not believe so when Eritrea tried to tax Canadians of Eritrean origin several years ago. The Harper gov. expelled an Eritrean diplomat from the country. And yet when the USA is the offender it is allowed.

https://www.cbc.ca/news/politics/eritrean-diplomat-ordered-out-of-canada-after-tax-on-ex-pats-1.1309691

Eritrean diplomat ordered out of Canada after ‘tax’ on ex-pats
Foreign Affairs Minister John Baird has ordered Eritrea’s consul general, Semere Ghebremariam O. Micael, to leave Canada by June 5, and said whoever replaces him must be prepared to play by the rules.
http://www.cbc.ca

FATCA violates sections 7, 8 and 15 of the Charter. And yet the perceived risk to our banking system (threat of 30% penalties on US source income to Canadian banks) is the reason that the Court has ruled against the appellants. The financial and economic power of the US takes precedence over the Charter rights of Canadian citizens living in Canada.

You acknowledge that the US is an “outlier in international taxation” with its system of taxation on the basis of residence and citizenship. Yet you are silent on the injustice of this citizenship taxation. Would you wish to have your personal private financial account information reported to a foreign tax service purely on the basis of your place of birth? Would you pay taxes (and accounting fees) on your Canadian earned and taxed income to a foreign country just because you were born there?

You call FATCA a “valid US law that has a legitimate purpose”. This is true when trying to prevent tax evasion by US citizens who reside in the USA. It is an unjust law when applied to citizens and residents of other countries. “Offshore” financial accounts for US residents are local accounts for residents of other countries.

Yet the most that you can do is suggest that FATCA may amount to “extraterritorial overreach”.

Look at the public uproar that forced StatCan to back down on its plan to collect data from some bank accounts anonymously.

https://financialpost.com/news/fp-street/statistics-canada-overreached-with-banking-info-collection-plans-privacy-czar

And yet the Court and people like yourself feel that FATCA account reporting of a minority of Canadian citizens/residents is not unconstitutional. You must be more forthright and honest, and admit that FATCA is unconstitutional for Canadian citizens living in Canada (who also may happen to be US citizens), but when it comes to American economic power and extortion, Charter rights are overridden.

Yours Sincerely,

As the holiday season approaches, we’re getting together for dinner and drinks on Tuesday, December 6^th, 6 pm, at The Lieutenant’s Pump pub, 361 Elgin Street (two blocks North of Gladstone).  Good food and drink and, important for us, it’s a good place for conversation, quiet early in the week and comfortable.  Hope you can join us!   Please RSVP by leaving a comment or e-mail pacifica.isaacbrocksociety@gmail.com