Here is a scenario, not unrealistic, which should explain to reigning Canadian government how they have failed in their duty to stand on guard for Canada by betraying Canadian citizens to the IRS.
Jake is a businessman in Canada who employs 50 people at his workshop in the Toronto area. He is nearing retirement age. He has made a decent living but has put so much of his company’s profits back into his business that he has basically lived a frugal, middle class lifestyle. He paid for his kids’ educations, but they went to Canadian universities not elite US Ivy League schools. His wife died a couple years ago, and he inherited her half of the house and her RRSP. Consider the following:
- Toronto Home: $1.3 million, unrealized capital gains of 1.1 million.
- Business: $3 million, retained earnings of 2.5 million
- RRSP: $1.5 million
- Unregistered stock portfolio: $1 million; unrealized capital gains of $750,000
Jake, however, was born in the United States to American parents. His parents brought him home to Canada three years later and he’s been living here ever since. At age 8, his parents and he became naturalized Canadians. He has no Social Security number and has never paid taxes in the United States. He has heard of FATCA and is thinking of renouncing US citizenship, even though he’s never acted on his citizenship–it has only been a novelty to him which he thought was kind of neat. He must renounce but he’s never done anything that the State Department would recognize as a relinquishing act.
What would the exit tax be in his case? His net worth is 6.8 million and his unrealized capital gains is as follows:
- RRSP 1.5 million
- House: 1.1 million
- Business: 2.5 million
- Investment Portfolio: 0.75 million
- Total: 5.85 million
Now after $600,000 exit tax exemption, Jake would owe taxes on $5.2 million. At 30% tax rate, the IRS assesses Jake $1.56 million in exit taxes. But where is he going to get this money?
Jake sells his investment portfolio and kicks in a 15% Canadian tax rate on his investment portfolio’s capital gains. He now has $887,500 and still lacks $672,500. So he begins to deregister his RRSP, on which he will pay the top tax rate in Ontario of 42.16%. He withdraws $1.163 million from his RRSP and pays $490,000 in Canadian taxes. By destroying his RRSP and his personal savings, Jake can now be free of United States tyranny. Now Jake’s personal savings are gone, except about $300K in an RRSP. However, his business has a couple bad years and he loses money and has to close down his shop. Fortunately, from the Canadian perspective, he had no more retained earnings in his business–the bad years took care of that. But he has virtually no savings and he has had to lay off 50 Canadians from their jobs. If he had been able to keep his stock portfolio, he would have been able to save his business until the economy improved and none of his employees would have suffered unemployment. By the way, he also lost the house because he took a HELOC on his house to keep his business running for a few more months. He managed to clear $300,000 on the sale of his house and so he has $300K in a savings account and 300K in his RRSP.
This scenario is oversimplified. It doesn’t even take into account the bills from cross border accountants and lawyers, nor PFIC penalties or any taxes owed to the US on his five years of filing to be able to certify tax compliance on his Form 8854. In addition, it is nearly impossible to know how his business corporate tax would affect his personal taxes in the US.
Jake is an avid reader of the Isaac Brock Society. He decides that he will donate $200,000 to C3F Charter Challenge. He decides that he is Canadian only and that his birth in the United States does not define who he is. The CRA eventually sends his stock portfolio account information to the United States, and the IRS assesses him $500,000 FBAR penalty every year, but he refuses to pay it. At first Jake just throws their letters in the garbage, but later he begins to write on them, “Addressee deceased, return to sender”. When the bad years happen to his business, he liquidates the remaining part of his stock portfolio and uses a HELOC to weather the storm. In the end he retires at 75, sells his business which now employs 75 people, and he clears after taxes about 50% of the sale of $5 million. He lives happily ever after, except that he never travels to the United States but takes his vacations elsewhere. In the meantime, his $200,000 along with the donations of several other Canadians results in a victory, and the Canadian government can no longer discriminate against so-called US citizens in Canada.
Now, dear readers, what do you think Jake should do? What is fair?
My wife’s family owns a business. Our personal savings have gone on the line over the last year in order to improve the working conditions of the business. Had things gone badly, we could have lost our house and/or a substantial part of our life savings. My wife didn’t need me to screw things up by being an American. I am glad that I relinquished in 2011. I am a free man.