The Supreme Court decision in Afroyim v. Rusk was a key decision in the evolution of US citizenship law, leading to the current policy that, in order to lose one’s citizenship when performing a potentially relinquishing act, one must have the intent to lose it when so doing.  Previously, a person performing such an act could lose their citizenship regardless of intent.  In this decision, the Court refers to depriving a person of their US citizenship involuntarily as “forcible destruction of citizenship.”  John Richardson discusses the Afroyim decision and questions whether the punitive taxation of US citizens abroad also results in the “forcible destruction of citizenship.” (posted with permission)

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Prologue

The United States of America is the ONLY country in the world that both:

1. Confers citizenship by birth inside the country; AND

2. Imposes worldwide taxation and regulation based on citizenship.

Therefore, it is reasonable to conclude that:

US citizenship is the world’s only true “taxation-based citizenship”.

Afroyim – Should extending constitutional status to US citizenship be understood as a new gift or exacerbating an old curse?

US Citizenship Stripping Before 1967 – The Significance Of Afroyim

The US government was stripping US citizens of their citizenship if they committed various “expatriating” acts. This was codified in statutes that mandated that certain kinds of conduct would result in the loss of US citizenship. At various times the expatriating conduct included (but was not limited to): naturalizing as a citizen of another country, voting in a foreign election, serving in the armed forces of a foreign country and even marrying a non-citizen.

US Citizenship Stripping After 1967 – Afroyim

The 1967 US Supreme Court decision in Afroyim clarified that Congress lacked the power to strip US citizens (who were born or naturalized in the United States) of their citizenship. The Afroyim ruling clarified that:

1. US citizenship belonged to the citizen and could be lost by the citizen only if the citizen voluntarily relinquished US citizenship by voluntarily committing an expatriating act with the intention of relinquishing US citizenship; and

2. Congress cannot enact laws or engage in practices that result in the forcible destruction of citizenship.

How this happened

1967 – Beys Afroyim Visits The Supreme Court Of The United States

On May 29, 1967 the Supreme Court of the United States delivered its judgment in Afroyim v. Rusk. It is inconceivable that Mr. Afroyim, his lawyers, the Supreme Court justices or the public could have foreseen the monumental consequences of the decision. Although citizenship taxation was never mentioned in the ruling, the truth is that Justice Black’s majority decision in Afroyim planted the seed which grew into the FATCA and citizenship taxation problems leading to the renunciations of today.

John Richardson previously wrote of how some of the tax changes proposed in the 2023 Biden Green book would impact US citizens who live outside the United States, pointing out examples of how, as long as the US continues to employ citizenship taxation, any changes in US tax law will continue to have unintended consequences on Americans abroad.” In this article, he examines the reverse situation, how changes in the laws of one’s home country impacts their “tax relationship” with the United States and drains money from their home country’s economy. Examples include Extradition, FATCA IGAs, Capital Gains on Sale of Principal Residence, Reduction in Corporate Tax Rate, and Reducing the Tax Rate in the Home Country Increasing the Tax Due to the US. (Posted with permission.)

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Prologue

The purpose of this post is provide five simple examples. Some of the examples are based on Canada’s tax laws and others are of a more general nature.

1. Enhancing US Criminal Enforcement – Extradition

An article that appeared on the Reuters site on October 6, 2022 by David Lawder began with:

WASHINGTON, Oct 6 (Reuters) – The Internal Revenue Service’s Criminal Investigation unit said on Thursday it has located 79 tax evasion fugitives in Mexico, Belize, El Salvador, Guatemala and Honduras in the first year of a new extradition initiative.

The effort was made possible by a change in Mexico’s tax laws in 2020 that made tax evasion a felony offense as part of a crackdown to improve weak tax collection. The reclassification paved the way for tax fugitives to be extradited to the United States.

(See the Appendix for my interpretation of how this happened.)

It is likely that the number of extraditions for tax and other financial crimes will increase.

The use of extradition treaties demonstrates why the value of citizenship by investment programs is inversely correlated with the treaties (tax or other) the country has with the United States.

2. Legislating US Tax Law As Domestic Law – The FATCA IGAs

In 2014 Canada and many other countries entered into FATCA Intergovernmental Agreements with the United States. The purpose of the FATCA IGAs was for countries to legislate the US FATCA law (Internal Revenue Code 1471 – 1474) as the domestic law of those countries. Canada made specific amendments to the Income Tax Act of Canada to enact the US FATCA law on Canadian soil. A general description of the Canada US FATCA IGA and the constitutional challenge against it is here. FATCA has had the effect of expanding the US tax base into Canada and other countries.

3. Revealing US taxation – Enhancing The Payment of US Capital Gains Tax On The Sale Of A Principal Residence in Canada

In Canada (and many other countries) the tax free gain on the sale of a principal residence plays a significant role in retirement planning. In 2016 the Government of Canada amended its tax laws to require the reporting of the sale of a principal residence. Many US citizens living in Canada have their US tax returns prepared from their Canadian

John Richardson discusses how the Saving Clause in tax treaties with the United States prevents persons with US citizenship domiciled abroad from benefiting from tax-advantaged savings accounts in their home countries. (Posted with permission.)

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Prologue – The Circumstances Of Your Birth Should Not Determine The Outcome Of Your Life …

This link references a “human interest” story where US citizen children are denied benefits in their country of residence that are available to all people who are NOT US citizens.

The description includes:

New Zealand children born to parents’ who are citizens of the United States face a difficult KiwiSaver choice: Give up your US citizenship, or face a KiwiSaver tax compliance bill of $750​ or more a year courtesy of the US taxman.

A petition has been started at Parliament asking MPs to change the KiwiSaver Act to allow people with KiwiSaver accounts facing the unreasonable demands from US tax authorities to close their KiwiSaver accounts.

The issue surfaced as a result of the plight of Auckland dual national Kira Bacal and her four New Zealand-born children, Harper, 13, Rowan, 10 and twins Malachi and Elias, 8.

It appears that the poor (New Zealand born) Bacal children are finding that the US (or at least US tax preparers in New Zealand) consider their KiwiSaver to be a possible vehicle for US tax evasion! Not only is the KiwiSaver a “trust”, but it’s a “foreign trust” which comes with all kinds of penalty laden reporting obligations and no tax advantages. An excellent analysis of the US tax implications of the New Zealand KiwiSaver is here. The story is somewhat comical in that one gets the feeling that the blame should be placed on New Zealand (and not the United States) for New Zealand’s failure to legislate special exceptions for US citizens living in New Zealand.

So what! They’re Americans and therefore they deserve it (you say)!

A previous post explained that for Americans abroad, changes in the laws of their country of residence can change their tax relationship with the United States. The purpose of this post is to expand on that theme by demonstrating that:

US tax treaties presumptively prevent the treaty partner country from establishing tax advantaged retirement programs which will benefit ALL of their residents (US citizens are always left out).

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)