The following post appeared on the RenounceUSCitizenship blog. It discusses an issue which, if true, makes it impossible for Canadian citizens resident in Canada, who are also U.S. citizens to retain U.S. citizenship.
I intend to do a good bit of research on this topic (and I urge those of you with a background in this area) to provide comments. It is clear that U.S. citizenship-based taxation is a form of evil, the Exit Tax and FATCA are on a par with the most vile in history.
Furthermore, it is clear that the U.S. is using the taxation of “Americans abroad” to attack the “tax base” of other countries.
The claim/assumption that the U.S. has the “sovereign right” to tax its citizens in any way that it chooses is the same as the claim that the neighbor next door has the right to rape your wife. Of course that may be exactly what those Harper backbenchers actually believe.
Analysis suggests that Cdn retirement accounts of those Cdn #Americansabroad always subject to double taxation http://t.co/pkv1P95Zs2
— U.S. Citizen Abroad (@USCitizenAbroad) July 6, 2014
The above tweet references a comment to the Allison Christians revelation that the U.S. Treasury has no authority to enter into IGAs. Although I have not had time to research this specific issue, the questions it raises are so important that discussion must begin now. I have reproduced the comment in its entirety. See also the comments responding to this comment. If this is true, the effect is that: The retirement plans of Canadian citizens who are considered to be U.S. taxpayers will be subject to taxation in both Canada and the U.S. – pure double taxation. In other words, you work you whole life for retirement only to see the plan subject to double taxation. Assuming the truth of this (and I intend to do further extensive investigation) it is absolutely essential that you renounce U.S. citizenship at the earliest possible moment. It is my sincere hope that this commenter is incorrect. But, I will find out. I hope you are sitting down before you read this.
JC says July 5, 2014 at 10:41 pm @Bubblebustin; @Just Me; @Polly; @Moaner –
The Canadian IGA makes FATCA Canadian law ; The Canada-U.S. Tax Treaty makes US CBT permissible under Canadian law.
While there is momentum to upend the Canadian IGA, upending the Canadian IGA should be the focus. However, revision of the Canada-U.S. Tax Treaty needs focus as well.
Example, as the Canadian-U.S. Tax Treaty does not exempt from U.S. taxation Canadian retirement accounts, the U.S. laws in regards to these accounts extend over Canadian territory as if Canada were a sovereign part of the United States. Canadian retirement accounts – incentivised by the Canadian government to help Canadians save for their retirement – get their benefit neutralised and penalised when treated by the IRS as “unqualified pension plans” as if Canadians have a choice of putting money in these “unqualified pension plans” and plans deemed qualified under U.S. Law ( 401K savings and IRA and Keogh may only be accessible by U.S. residents).
Generally, the best tax breaks of either country get cancelled out by the other, under the tax treaty. The Canada-U.S. Tax Treaty needs revision to include specific mention for Canadian tax residents: exemption from US taxation of Canadian retirement accounts, Canadian family home, proceeds of Canadian life insurance, Canadian mutual funds, and include a very significant exemption threshold from taxation – a blanket exemption – for other Canadian income and assets.
Exemption may also be made against FIBAR and nonfiling penalties for Canadian tax residents.
The existing Canadian-US Tax treaty has many holes in it. One example is the new ObamaCare tax which gets put on top of all other taxes paid (and your gain in your pension account over the year gets included on top of your income to reach the threshold for this tax). This Obamacare tax law was written in a way to be exempt from any tax treaty credits!
The retirement account taxation is another example. If your income is over $105,000 you are considered a “high earner” and get taxed on the change in account value each year which gets put on top of your other income to determine a U.S. marginal tax rate that the U.S. wants to tax it at every year. If you are below US$105,000 income the U.S. wants to tax these accounts at the marginal rate when the money is taken out- similar to U.S. 401K and IRA. (Who knows what happens if you are a “high earner” one year but not the next or next many years). Here is the rub: the Canadian-US Tax Treaty does not have provision for credit against Canadian tax for any U.S. tax paid on Canadian retirement accounts – as the U.S. tax is not considered on “foreign” income.
Nor is there any credit against U.S. tax with any Canadian tax paid on Canadian retirement accounts. Plus Canadian law does not have special provision for withdrawals from retirement accounts to pay for the U.S. tax liability.
The way the tax treaty works is that each tax is considered its own silo.
For instance, with earned income the extra Canadian tax paid on income compared to the U.S. tax (as the Canadian income tax rates are higher than in the U.S.) may not be used as a credit against other taxes the U.S. has but Canada does not – such as U.S. tax on Canadian pension accounts, family home, and death tax.
In my opinion, the Canadian-U.S. Tax Treaty represents the Canadian government giving up some of its sovereignty to the U.S. government in regards to Canadians who happen to be U.S. citizens. It does not have to be this way. Canada should stand up to the U.S. in regards to its right as a sovereign country for self determination of its own people free from interference by another sovereign country.
Alarmingly, very small percentage of people know about all this hell. If there is 7 million US citizens living abroad and only 3000 of them renounced thats amounts to only 0.043%.
We shouldn’t forget about people whose dream is to immigrate to the U.S. , get green card and later become US citizen. 680 thousand people get naturalized every year. Those should be informed too.Those people actually keep multiple passports and have assets in foreign countries.
There is no separate Social Security payment in New Zealand. Government retirement payments are funded from general taxation. So, there is no social security agreement with the US and this is why self-employed USP in New Zealand will be required to pay full SS/Medicare taxes to the US on top of their local taxes. That is around 16% on top of the top marginal NZ tax rate of 33%. I doubt hardly anyone has been aware of this, or even if they are they wouldn’t pay it as it is daylight robbery. However, FATCA moves the goalposts and many will find this out in the near future.
Yes, there is double taxation (e.g. self employment income in NZ). But, even worse, there is US taxation on income and assets earned only in the domestic country that are not taxed by the home country (e.g. capital gains in NZ).
So, the USP gets the shaft all round. Firstly, they pay a full set of taxes under the laws of the country they live in. Secondly, The US taxes income not taxed by that country but is taxed under US law. Finally, in some cases, they apply true double taxation on income that has already been taxed in the local country. All under the threat of fines and penalties.
What a deal.
The New Zealand and Canadian governments were fully informed of the effect of CBT on their citizens and country by the submissions to the Select Committee and Finance Committee. Either they did not comprehend or believe the information submitted, or they are willfully blind while falling over themselves to bail out the banks with the IGAs.
Willfully blind, is all that can honestly be said with regards to their cooperation with the U.S.
The U.S.is also willful. There is no way that F.A.T.C.A.and the I.G.A. and C.B.T are in conformity with O.E.C.D. tax standards since all of the other member countries use R.B.T. You can’t feign that the anomalous practices of one member country is a standard. The U.S. needs to stop lying and repent of its sin. Expropriation is a sin against the rights of people.
Whether or not the income is taxed in your country of residence is immaterial to the issue of U.S. taxation of expats. Taxation is a purely internal matter relative only to the treasury whose currency is being taxed. Not taxing something does not leave an opening for the U.S. to tax it.
@Mr. A – pending the outcome of the court challenge, I see no reason why your life in Canada need change at all. the decision of whether or not to submit to US law in Canada is yours alone to make. If you elect not to, there are hundreds of thousands in the same boat. They are fully compliant with Canadian law. You can comply with the NEW Canadian law – until a court decides its legality – by declining to answer birthplace but self-certifying re citizenship. if you are not a US citizen, any Canadian bank should be satisfied with your sworn statement to that effect. If they persist in demanding birthplace, go elsewhere or wait for the court challenge. If that DOES happen:
1. Please report it here on this web site. We are trying to keep track of how the banks are approaching compliance on this subject.
2. Consider reporting them to the Privacy Commissioner – if you have offered to self-certify, any further information is quite arguably a violation of your privacy rights and goes beyond the information they are required by law to assemble.
Both facts would be useful for the Court Challenge team, so please report anything back here!
@Blaze – your story absolutely has me steamed. They have no shame but the worst is the compliance folks don’t have the common sense to just send her on her way. Unless she has property in the US (and I guess we have no idea of all the facts), what on earth are they (the IRS) going to do? I hope you are able to persuade her. If not, I fear that the IRS demands will be far greater once they get their teeth into her.
I see a glimmer of hope in all this. That the resolution will come from “a thousand points of light.” There are some brighter lights such as ADCS, Isaac Brock Society, Maple Sandbox, and U.S. Constitutional challenge to FATCA.
We need to be informed, methodical, and proceed with ingenuity, on both sides of the border, with these aims, and with acknowledging @Badger’s comment about FATCA multiplying the flaws in the Canadian-US Tax treaty:
* Get FATCA questioned and overturned on constitutional grounds in Canada.
* Get revision of Canadian-US tax treaty to provide more protections and clarity for USP in Canada, Australia, and other countries.
*Get FATCA questioned and overturned in the US on Constitutional grounds.
*Get US tax laws changed with special recognition for residents and long term residents in other countries.
Here is what I came up with overnight: As the Republicans have in their party platform the repeal of FATCA, and they are not positive about Obamacare and the 3.8% levy (which might apply to USP abroad starting in 2014); unless the Democrats adopt a similar position, everyone here on this website should ask their Republican friends and family living in the U.S. to vote in the upcoming midterm elections and vote Republican. And they should ask their Democrat friends and family in the U.S. to vote Republican as well as a favour to their friends and family resident abroad – even if they have never voted Republican in their lives. 7 million Americans abroad may have 28 million friends and family living in the U.S.
At minimum this would help spread the word that presently the the application of the Constitution of the U.S. is limited for those living abroad – and that if you live abroad the tax laws are substantially more punitive and excessive than if you live in the U.S. This is the story that should be told that Patricia Moon, a U.S. citizen who lived in Canada for 30 years, who never made more than $11,000 in a year, who paid all Canadian taxes and did not owe any U.S. tax: she figured that she could owe about $455,000 in U.S. penalties for the years she failed to file U.S. tax returns, as reported in an article in the Wall Street Journal. This excessive fine is far higher and unfair compared to a similar situation for a U.S. tax resident. Those abroad get their retirement accounts taxed by the U.S. which wants them to pay other taxes as well even if they live in a relatively high tax country.
This story needs to be honed.
If Republicans take the Senate and hold the House they could pass legislation for the repeal of FATCA. Then the spotlight would be on Obama if he contemplates a veto. If so, we need to hope for a half decent Republican candidate for the next presidential election, or an enlightened Democratic candidate on these issues. Or, failing political resolution, we may hope for success with the Constitutional challenge and other countries insisting on modification of their tax treaties.
@USCitizenAbroad. If I were to forecast the future, I imagine elements of FATCA would stay yet the fines and penalties would be adjusted, with exemptions of the 30% withholding penalties for those who live abroad. Hopefully, countries would wake up and insist on their sovereign rights with modification of their tax treaties to prevent double taxation, exempt from double taxation the family home, retirement accounts, life insurance payouts, and provide a high blanket threshold of exemption and clarity for their tax residents; plus the removal of any U.S. regulation that may hinder liberty and the pursuit of happiness in their own countries especially in regards to employment and investment choices – without the current excessive compliance — as long as they are legal in the countries in which they live.
Thank you Anne Frank for your helpful answer. I do not intend to submit to US law in Canada.
So let me get this right – the Australian Government would like the US Government to take money out “US persons” superannuation funds (privately funded retirement plans) in Australia. Therefore these “US persons” would be more reliant on the publicly funded Age Pension. The Australian Treasurer, Joe Hockey would like less people reliant on the publicly funded Age Pension. So the taxpayer would have to foot the bill and fund more people on the Age Pension. It doesn’t make sense.
@osgood, and your plan to get the tax treaty changed that your New Zealand government signed is? Have a go! You left out the part about that New Zealand does not give credit for the U.S. tax against Australian tax paid as it is not on “foreign” income.
@EllenDownunder. It is not about what makes sense it is about what is U.S. law that the Australian government does not challenge in the tax agreement that it signed.
Correction, if you are a “high earner” you get taxed on your annual superannuation account gain each year at your marginal U.S. rate. That is not taking money out as you can not by Australian law unless you turn 60. That is about taking money from elsewhere and hope that the market and AUD does not have a good run in a year (every year). Your annual gain in your super account then helps you reach the Obamacare 3.8% tax threshold level. So is that double taxation on double taxation?
That is truly devastating for self-employed NZ citizens with US taint. Thanks for that info.
The official numbers on renunciations are vastly understated by the State Dept. Many more have renounced than appear on that list. For example, I renounced in 2012 and was never on it (yet).
“I read somewhere that bankrupt governments first target the pension funds as a way to solve their problems.”
In 2010 Hungary announced that it was nationalizing private pension funds, valued at $14.6 billion, to shore up government finances. Argentina has nationalized its private pensions this twice since 2000 according to this Bloomberg article:
The USG has a higher percentage of government debt vs. GDP than Hungary did at the time it expropriated the private pension funds. On the other hand, the US can still obtain credit, its dollar still has reserve currency status and its also has more favorable demographics than Hungary.
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Sorry – I meant to say because I have a low income I have a low amount deposited into my super from my salary. I try to make up the difference by topping up my super with after tax income. If I have to spend hundreds if not thousands of dollars to accountants and fines to Uncle Sam just to prove that I owe no taxes to the US then there would be far less, if no money that I could use to deposit into my super.
What happens after retirement if I have two governments to deal with anyway?
It is best to stay under the radar. I am not a fat cat.
If you type in your search engine the words, U.S. borrows from Social Security, you will get a whole bunch of links. Here is just one: http://articles.philly.com/1989-01-27/news/26122926_1_lawrence-h-thompson-payroll-taxes-social-security
With seizing the pension funds, thats another good argument why people should avoid any FATCA, FBARs and OVDP, because thats only a good way of registering your assets for future nationalization by the USG.
It is not about Fatcats or thincats, the U.S. is after all the cats, and the Australia-US tax treaty only reduces double taxation, not prevents double taxation, in contradiction to what several Australian government websites say.
http://www.usexpattaxhelp.com/expat-tax-filing-requirement.php Shows if you are single and make $US10,000 or over income in 2013 then you should file U.S. tax, even if you will owe no U.S. tax.
Starting 1 July 2014, all Australian financial firms will ask if you are a U.S. citizen when opening a new account.
There is a $US97,600 earned income exclusion from U.S. Tax in 2013 (yet must still report to the U.S., and the exclusion excludes taxes paid against that income). As tax here on interest and earnings is higher than in the U.S. there is no extra U.S. tax.
It gets tricky in terms of investments, trusts, and retirement. I tried to look up quick what the treatment is on nonqualified pension fund (a.k.a. superannuation) if deemed not a “high earner.” I did not find it. Yet my tax person says the U.S. tax would then be on withdrawals at your then marginal rate. So like a U.S. IRA or 401K in this respect. Differences are with a US IRA and 401K there may be deductions from income for contributions – no tax going in. This is not recognised for nonqualified pension funds. Yet you are probably under the $97K earned income exclusion, so no loss here. However, you get no credits for the 15% Australian contributions tax and Australian 15% earnings tax, as you don’t pay this the fund does. On top of this you may be up for U.S. tax on withdrawals that are not taxed in Australia – if so taxed then that is what I would consider double taxation. Plus as the U.S. tax on Australian super is not considered on “foreign” income by the Australian government, there is no credit against Australian taxes paid in Australia.
Dividends. The U.S. has a flat 15% tax, where Australian dividends may come with a 30% credit on franked dividends (which the U.S. does not recognise). The way the tax treaty works is you end up paying the highest tax of the two countries for each individual little tax. If one country taxes something that the other does not (home residence, estate tax if applicable) then you lose out on the tax break. Australia has a much higher marginal tax rate than the U.S. and because of this we do not have some of the taxes the U.S. has. But wait, you still get those taxes too.
Please consider a bit more research and then writing to Joe Hockey asking for a revision of the Australia-US tax treaty to actually prevent double taxation on Australian income and investments of Superannuation, dividends, home, life insurance payouts, with blanket exemptions for perhaps 95% of US Persons tax resident in Australia. The way the tax treaty is written it gives Australian government consent to the double taxation from the U.S. Australia should look out better for its own residents protecting Australians and Australian families from taxes on top of the relatively “high” taxes we already pay in Australia. The double compliance and reporting is also a significant tax. The noncompliance penalties are much higher than for a U.S. resident person.
FBAR must be filed when your foreign accounts(when combined together at their highest balances during the year) exceed $US10,000 and covers not only bank accounts but arrangements outside the US that are virtually any type of financial account
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Detailed analysis of this new income tax – which is not addressed in the current Canada US tax treaty, and which those deemed to be ‘US taxable person’ Canadian citizens and residents have no protection from. Harper government hasn’t bothered even to complain that the US imposed it and didn’t care to inform their next door tax treaty partner. So much for Conservative MPs ‘respect’ for the US ‘right’ to make its own tax laws. Do they also ‘respect’ this newest US extraterritorial tax – which they haven’t bestirred themselves to address in the tax treaty and which cannot be offset re Canadian taxes assessed?
See detailed discussion here of the newest US second income tax:
‘Obama’s Trojan Horse; A 3.8% Medicare Surtax? No.
A Free-Standing Second Income Tax? Yes.
A Well-Kept Secret? You Bet.’
by Alvin D. Lurie
July 8, 2014
Preface and Premonition of Things to Come
……….”Section 1411 has all the signs of an income tax. It easily passes the tax law’s simple rule of thumb: If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck. Often erroneously called a Medicare surtax (even by some experts), it is in actuality not that at all, and, as I hope I have demonstrated, is in every respect a completely separate, full-blown, second income tax, casting its net over a vast stretch of the tax landscape and its targeted taxpayers: individuals, trusts and estates, indirectly on passive owners of interests in S corporations, LLCs and partnerships, and on recipients of interests in qualified pension and other qualified plans, and charitable remainder trusts, inter alia — an extraordinarily wide swath of taxpayers.
This is no ordinary piece of income tax legislation, but rather an extraordinarily complex tax that, as already observed, will prove very difficult and costly for taxpayers to comply with, and for their professional advisers to provide the requisite guidance, because of its dependence on facts that are difficult to ferret out and on regulations keyed with great exactitude to such facts…….”…….
‘Lurie: The ObamaCare 3.8% Tax on Investment Income: A Second Income Tax’
………….”……………..In truth, the tax, imposed specifically on “net investment income,” is a new income tax, now actually a part of the Internal Revenue Code (numbered section 1411), operating exactly the same as the long-standing regular income tax, calculated on a new form created for it and the total now reportable on a line added to Form 1040. It is, in fact, much more challenging to calculate than most of the long-time familiar ordinary, alternative minimum and capital gains components of the regular income tax, because of many new technical rules and difficult factual determinations necessary for its proper application. High rates of miscalculation by taxpayers are a certainty because of the difficulties inherent in the process, and because the rules themselves will be in flux for a lengthy period, until the Treasury, IRS and ultimately the courts put their respective stamps on the statute.”
The U.S. has always approached tax treaties with a high degree of cynicism and a disingenuous attitude. When it is convenient for them to adhere to the conventional understanding of residency as meaning an actual physical presence then it does so. When it serves their purposes to use a definition of residency that is mythical but allows them to extend taxation over people who don’t have actual physical residency then it does so. If the other country refuses to play ball then the U.S. won’t sign a tax treaty.
The U.S. is updating its treaty with Poland for the “avoidance” of taxation to include one of these new-fangled discriminatory “non-discrimination” clauses (what I’ve nicknamed “the second saving clause”). From the JCT explanation of the treaty:
Notice the double-speak at work: the JCT are trying to redefine the common phrase “taxation of worldwide income” to mean “taxation of non-residents’ foreign income” instead of its globally-accepted meaning of “taxation of residents’ local and foreign income”.
The non-discrimination clause of the current (1974) treaty makes no mention of these factors: