Category Archives: Little Red Exit Tax Book

The teaching of Topsnik 2 – 2016: #Greencard expatriation and the S. 877A “Exit Tax”

What! You want to abandon your Green Card and leave the USA!

Introduction – Introducing Gerd Topsnik – The World According to Facebook

“This case will be seen as the first of an (eventual) series of cases that determine how the definition of “long term resident” applies to Green Card holders. The case makes clear that if one does NOT meet the treaty definition of “resident” in the second country, that one
cannot use that treaty to defeat the “long term resident” test. A subsequent case is sure to expand on this issue. Otherwise, the case confirms that the S. 877A Exit Tax rules are “alive and well” and that the “5 year certification” test must be met to avoid “non-covered status”

Topsnik may or may not be a “bad guy”. But even “bad guys” are entitled to have the law properly applied to their facts. It would be very interesting to know how the court would have responded if Topsnik had been paying tax (a nice taxpayer) in Germany as a German resident.”

A nice summary of Topnik 1 and Topsnik 2

This is part of a series of posts on: (1) “tax residency“, (2) the use of “treaty tiebreakers” when an individual is a “tax resident” of more than one jurisdiction and (3) how to use “treaty tiebreakers” to end “tax residency” in an undesirable tax jurisdiction.

This is the second of the two Topsnik posts.

Topsnik 1 focused on the “tax residence” of Green Card Holders. The decision in Topsnik 1 is here:

topsnikdiv.halpern.TC.WPD
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US Taxation of the Australian Superannuation? – No, #DontMessWithTheSuper!

I recently engaged in a discussion with people who are worried that they might be “U.S. Persons” living in Australia. Their primary concern (and understandably so) is the possible U.S. taxation of their Australian Superannuations. For many, the “Super” is considered to be their most important retirement planning asset.

In a FATCA world, where  possible “USness” is now an issue, one must consider whether U.S. tax laws, effectively disable a group of Australians from effective retirement planning. But, hey! Even Americans should have the right to plan for retirement? Shouldn’t they?

There have been a number of recent articles attempting to understand the possible U.S. taxability of the Australian Super. I don’t know whether this is good or bad.

Most of these articles (what would you expect?) attempt to analyze the issue from the perspective of U.S. law – specifically the Internal Revenue Code. Rightly or wrongly, this approach assumes that the USA has the right to impose taxation on the retirement plans created by other nations. I don’t believe that this should be assumed!

In any event, what follows is a presentation that I created to discuss this issue. It is NOT intended to be a legal analysis. (If you want trouble, call up a lawyer!) It is intended to be a “contextual” and “common sense” analysis. Sooner or later, all laws (if they are to survive) must move towards “common sense”.

My message to residents of Australia is this:

Your Superannuation is far too important to be left in the hands of the tax professionals!

You will find “my thoughts” by clicking on the following:

The Australia Superannuation For Dummies

Feel free to leave “your thoughts” as comments to this post.

John Richardson

False Form 8854 used as part of “willful” #FBAR prosecution

The primary story is of a U.S. professor who pleaded guilty to an FBAR violation and was subjected to a 100 million FBAR penalty.  Notably the “tax loss” was 10 million dollars and the FBAR penalty was 100 million dollars. It appears that Mr. FBAR is becoming an important tool in the arsenal used by the United States Treasury.

The more interesting (for the purposes of expatriation) was the role that a “false Form 8854 “Expatriation Statement”) may have played in the guilty plea.

The story has been reported at the following two sources:

and on Jack Townsend’s blog

What is most  interesting is the description from the Department of Justice site which includes:

Horsky directed the activities in his Horsky Holdings and other accounts maintained at the Zurich-based bank, despite the fact that it was readily apparent, in communications with employees of the bank, that Horsky was a resident of the United States.  Bank representatives routinely sent emails to Horsky recognizing that he was residing in the United States.  Beginning in at least 2011, Horsky caused another individual to have signature authority over his Zurich-based bank accounts, and this individual assumed the responsibility of providing instructions as to the management of the accounts at Horsky’s direction.  This arrangement was intended to conceal Horsky’s interest in and control over these accounts from the IRS. 

In 2013, the individual who had nominal control over Horsky’s accounts at the Zurich-based bank conspired with Horsky to relinquish the individual’s U.S. citizenship, in part to ensure that Horsky’s control of the offshore accounts would not be reported to the IRS.  In 2014, this individual filed with the IRS a false Form 8854 (Initial Annual Expatriation Statement) that failed to disclose his net worth on the date of expatriation, failed to disclose his ownership of foreign assets, and falsely certified under penalties of perjury that he was in compliance with his tax obligations for the five preceding tax years.

Horsky also willfully filed false 2008 through 2014 individual income tax returns which failed to disclose his income from, and beneficial interest in and control over, his Zurich-based bank accounts.  Horsky agreed that for purposes of sentencing, his criminal conduct resulted in a tax loss of at least $10 million.  In addition, Horsky failed to file Reports of Foreign Bank and Financial Accounts (FBARs) up and through 2011, and also filed false FBARs for 2012 and 2013.

The point is that the false Form 8854 (used primarily to provide information about whether one is a “covered expatriate” and to calculate the Exit Tax) was used as evidence of part of a conspiracy to evade taxes. This is an interesting use of the Form 8854,  which is primarily an “information return”.

Obviously this a “general interest” post with extremely unusual circumstances. But, it is an example of how associations with others, in the  “Wide and Wonderful World of U.S. Tax Forms” can become a problem.

This is also a reminder the “information returns” DO matter!

 

 

 

 

 

 

 

 

 

The Internal Revenue Code vs. IRS Form 8854: the “noncovered expatriate” and the Form 8854 Balance Sheet

Introduction: For whom the “Form” tolls …

I would not want the job that the IRS has. There are many “information reporting requirements” in the Internal Revenue Code. The IRS has the job (sometimes mandatory “shall” and sometimes permissive “may”) of having to create forms that reflect the intent of the Internal Revenue Code. The forms will necessarily reflect how the IRS interprets the text and intent of the Code. Once created, the “forms” become a practical substitute for the Code. If you look through your tax return you will “form” after “form” after “form”. The forms reflect how the various provisions of the Internal Revenue Code are “given meaning” (if the meaning can be determined).

The Form (in theory) follows the requirements of the Internal Revenue Code …

Every “form” is the result of one or more sections of the Internal Revenue Code. For example, Form 8833 is described as:

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Canada Pension Plan (and other “foreign social security”), The “net worth” test, Form 8854 and Form 8938

Q. How does the inability of the state of Rhode Island to pay its employee pensions help us understand the “net worth” of a U.S. citizen wanting to renounce U.S. citizenship?

A. The answer (like most wisdom in the modern world) is explained in the following tweet.

The article referenced in the above tweet helps us understand the difference between an “entitlement” created by statute and a “right” created by contract.

In most states, lawmakers or the courts have taken steps to make public pension systems creatures of contract law, as opposed to mere creatures of statute. This may sound obscure, but the difference is critical. Statutes are relatively easy to change — lawmakers just amend the law. But states that want to tear up pension contracts face an uphill fight, because of a clause in the United States Constitution that bars them from enacting any law that retroactively impairs contract rights.

Conclusion: Rhode Island’s Governor was able to change the Rhode Island pension benefits. The reason was that: the pension benefits were created by statute (the government can create the statute and the government can change the statute) and not by an enforceable contract (nobody can take the pension away) creating an enforceable right.

The article is fascinating. Other states have not been as fortunate and cannot legislate their pension obligations away. But, what does this have to do with anything?

For Americans abroad: “All Roads Lead To Renunciation“.

Renouncing U.S. citizenship – leaving the U.S. tax system …

“U.S. citizens” considering relinquishing U.S. citizenship or “long term residents” abandoning their Green Cards “may” be subject to the draconian S. 877A Exit Tax rules. I say “may”. Only “covered expatriates” are subject to the “Exit Tax”

Unless you meet one of two exceptions,* “U.S. citizens” and “long term residents” will be “covered expatriates” if they meet ANY one of the following three tests ..

1. Income test (well, based on “tax liability on taxable income”) – You have an average tax liability of approximately $160,000 for the five years prior to the year of relinquishment or abandonment

2. Net worth test – Assets totaling up to of $2,000,000 USD or more

3. Compliance test – Fail to certify compliance with the Internal Revenue Code for the five years prior to the date of relinquishment or abandonment

* See Internal Revenue Code S. 877A(g)(1) which describe the “dual citizen at birth” and the “relinquishment before age 181/2” exceptions.

Net worth is based on the value of all your property. Foreign pensions are included in property. Is non-U.S. “Social Security” included? “Social Security” is a creation of statute. “Social Security can be taken away by changing or repealing the statute.

Because “pensions” are based on a “contractual” right to receive the pension they are included as “property”. If your employer doesn’t pay the pension you are owed you have the right to sue.

Because “social security” is created by statute and can be taken away by statute it is NOT “property”.

Specified Foreign Financial ASSETS – “Non-U.S.” Social Security and Form 8938 …

When it comes to “non-U.S.” Social Security (think Canada Pension Plan) created by statute, the IRS says:

(This makes sense because “Social Security” which is created by statute is NOT property!)

But, when it comes to “foreign pensions” which were created by contract, the IRS says:

(This makes sense because the “pension” is a contractual right and is therefore property.)

Is the Australian Superannuation a Foreign “Social Security Type” plan? – Are Australian “Poorer Than They Think?”

See the post referenced in the above tweet.

Well, the “compliance industry” actually creates the law.** Perhaps the “compliance industry” in Australia should simply take the position that Australian Superannuation is the equivalent of “U.S. Social Security”. The U.S. Australian tax treaty would then exempt it from U.S. taxation.

Article 18(2) of the U.S. Australia Tax Treaty reads:

(2) Social Security payments and other public pensions paid by one of the Contracting States to an individual who is a resident of the other Contracting State or a citizen of the United States shall be taxable only in the first-mentioned State.

Important question indeed! Whether Australians are subject to asset confiscation the S. 877A “Exit Tax”,  may depend on the answer to this characterization/question.

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** In a recent post discussing the death of Dr. Pinheiro and the various “branches” of the U.S. tax compliance system, I identified brach 3 as follows:

Branch 3: The Tax Professionals – These include lawyers, CPAs, Enrolled Agents, and tax preparers. The latter two are specifically licensed by the IRS.

 What needs to be understood is that:

  1. U.S. tax laws are NOT enforced by the IRS as much as they are enforced by the “Tax Professionals”.
  2. The “Tax Professionals” “create” the interpretation of various laws by how they respond to them. (There is a reason that nobody knew about PFICs prior to 2009.) Is a TFSA really a “foreign trust”? Are the S. 877A Exit Tax rules retroactive?
  3. Tax Professionals are NOT independent of the IRS and depend on the IRS for their livelihoods.
  4.   Tax Professionals are also subject to Circular 230 which is the “Rules of Practice” before the Internal Revenue Service.

Understand that very very few “tax professionals” inside the United States know anything about U.S. taxation of its citizens abroad. This is a complex area that is highly specialized.

This is why your choice of tax professional matters very much! Tax Professionals  are NOT all the same. The fact that they are a licensed EA, CPA or lawyer is completely irrelevant. Some of them understand this stuff and some don’t. When it comes to “International Tax”, there is an exceptionally long learning curve. Regardless of their intention, tax professionals have, through their possible ignorance, possible incompetence and almost certain desire to “get along with the IRS”, the potential to completely destroy you!

Food for thought!

John Richardson

The US “expatriation tax” and the the incentive to apply for a Green Card and/or remain in the USA

America doesn’t really need skilled immigrants, or does it?

The above tweet references a post that references a comment by Victoria Ferauge:
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Relinquishing US citizenship: South African Apartheid, the Accidental Taxpayer and the United States S. 877A exit tax

Introducing this “guest post”

This guest post is written by Dominic Ferszt of Cape Town, South Africa. I first became aware of Mr. Ferszt when, in October of 2014, his post: “The Accidental Tax Invasion” was published in Forbes. I have discussed various aspects of “citizenship-based taxation” with him since. I am very pleased that he has accepted my invitation to write this “guest post” for publication at Citizenship Solutions. His post exposes an aspect of “citizenship taxation” and the S. 877A U.S. expatriation tax that has not (as far as I am aware) been discussed before. Those who did NOT acquire “dual citizenship” at birth because of discriminatory laws (example British and Canadian laws saying that citizenship could be passed down from the father but not from the mother) will find this post extremely interesting and relevant.

Without further adieu …

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Apartheid and the Accidental Taxpayer

How the United States Congress has passed legislation which imposes a tax obligation in accordance with the discriminatory policies of foreign nations; and how this might offer a glimmer of hope to millions around the world who feel unjustly targeted by FATCA or the IRS.

By Dominic Ferszt, Cape Town

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Tax Haven or Tax Heaven 5: How the 1966 desire to “poach” capital from other nations led to the 2008 S. 877A Exit Tax

Title 26, Subtitle A, Chapter 1, Subchapter N, Part II, Subpart A of the Internal Revenue Code is of great interest..

IRC871

IRC8712

The text of S. 871 of the Internal Revenue Code is here. The IRS interpretation of S. 871 along with the requirements for when the non-resident alien is required to file a 1040-NR return are here.

The above subsection of the Internal Revenue Code applies to “NON-RESIDENT ALIENS AND FOREIGN CORPORATIONS”. It contains rules for how those who are not “U.S. Persons” are taxed under the Internal Revenue Code. As is expected, the Internal Revenue Code imposes U.S. taxation only on those “aliens” who have income sources that are connected to the United States. The previous post explained that S. 871 (in its present form) was enacted in 1966. Internal Revenue Code S. 871 also provides strong incentives for “aliens” to bring their capital to the USA.

Interestingly this subsection of the Internal Revenue Code also includes the S. 877A and S. 877 Expatriation Tax provisions. Significantly, both S. 871 and S. 877 were enacted in 1966 as part of the Foreign Investors Tax Act of 1966, Public Law 89-809.

The combination of the inclusion of both Internal Revenue Code sections 871 and 877 suggests that the intent of the Foreign Investors Tax Act of 1966, Public Law 89-809, included:

1. The intent to attract “Foreign” capital to the United States by imposing either no or low taxes on that “Foreign” capital lured to the United States, as expressed in S. 871 of the Internal Revenue Code;

2. The intent to give “non-resident aliens” certain tax benefits that were NOT available to U.S. citizens;

3. A recognition that some U.S. citizens might wish to expatriate to avail themselves of the benefits of NOT being a U.S. citizen;

4. A “penalty” expressed in S. 877 of the Internal Revenue Code for those U.S. citizens who expatriated to receive the same tax benefits enjoyed by “non-resident aliens”.

For a pdf of the 1966 Foreign Investors Tax Act (a massive document), see …

Foreign Investors Tax Act 1966 809

My point is a simple one …

It is clear that the U.S.desire to establish itself as a “Tax Haven”, also resulted in the S. 877 Exit Tax, which gradually evolved into the S. 877A Exit Tax that exists today.

To put it another way: the desire to establish the United States as a “Tax Haven”, eventually evolved into the S. 877A Exit Tax rules that:

1. Impose confiscatory taxation on assets that are outside the United States; and

2. Impose confiscatory taxation on assets that were acquired after a “U.S. Person” abandoned residence in the United States.

To illustrate why this is so, please see:

The S. 877A Exit Tax in Action – 5 actual scenarios with 5 completed U.S. tax returns

You will be shocked by what you see!

Like the 1970 FBAR rules, S. 877 of the Internal Revenue Code has gradually evolved into a mechanism to confiscate the assets of Americans abroad. Think I am kidding? See the examples in the link above!

John Richardson

Part 10 – The S. 877A “Exit Tax” and possible treaty relief under the Canada US Tax Treaty

Introduction – The Canada U.S. Tax Treaty Does Not Always Prevent Double Taxation

When countries independently make major changes in tax law, double taxation can occur

The following comment from 5thSwiss on the Isaac Brock Society site explains why and how double taxation can be a reality. It also underscores the dangers of a U.S. citizen leaving the United States.

It’s not obvious that renunciation of citizenship will cure failure to report in the past, or forgive unpaid tax. (“a ‘disposition’ of PFIC shares can occur by redeeming them, selling them, gifting them away, or even by giving up one’s US resident status or citizenship”)

The increasingly complex, expensive and draconian US tax law as applied to “accidental” US Persons might be considered by some a “good thing”. The more draconian – disproportionate – tax laws and penalties become, the more costly it is for ordinary families living abroad to report and pay tax on concessionary funds (such as for minors and disabled dependents, and retirement and tax-sparing funds not envisaged in the relevant bilateral tax treaty) the more impossible of enforcement and outrageous in principle such unilateral and exorbitant laws are seen to be.

And the less likely it is that the country of residence of a noncompliant person deemed to be a US person will assist the USG in collecting tax, prosecuting an individual and pursuing others on the basis of “transferee liability”.

Canadians who faced double taxation of their inheritance in that decade after Canada moved to capital gains taxation of estates based on deemed sale at death vs US imposition of estate duty (there is now a credit of one against the other under a tax Protocol) will understand that individuals are cannon fodder for Governments, who when they negotiate tax treaties are mainly concerned with the interests of multinational firms as represented by lobbyists. It is no wonder that of the 6 million Americans said to be resident abroad (the State Department knows of only half of those), an increasing number, unable to pay for tax advice or preparation, for renunciation of citizenship or the incremental US tax itself, are simply remaining underground. A series of GAO reports has looked at this and found no solution. And, by and large, legislators and bureaucrats (including diplomats) don’t care.

For the time being, the Lord Mansfield Dictum protects. But the hostility towards tax evasion abroad translates into hostility to expatriates generally. That is not a good sign.

5thSwiss describes the creation of  “double taxation” after one country (in this Canada) moved from an Estate Tax to a deemed disposition of assets on death. We now have a problem of the U.S. creating a deemed disposition of assets on expatriation when Canada has no such tax. This is what happens when one country makes a major change to its tax system and the other does not. (In this case there is at a minimum a “timing mismatch” in the taxable event.)

The S. 877A “Exit Tax” and the Canada U.S. Tax Treaty

The primary purpose of this post is to explore whether the Canada U.S. Tax Treaty can be used to mitigate some or all of the effects of the “Exit Tax”. I don’t know the answer. Therefore, this post will “raise an important question”, but not “answer the important question raised”.

U.S. Tax Treaties 101 – The outline

I am also going to use this post to outline some VERY basic aspects of U.S. tax treaties.   There will  four parts to this post:

Part 1 – Tax Treaties and the U.S. Constitution

Part 2 – Tax Treaties and the “Savings Clause”

Part 3 – The S. 877A “Exit Tax” and possible treaty relief

Part 4 – The “Savings Clause” as an argument against “citizenship taxation”

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Renouncing US citizenship? How the S. 877A “Exit Tax” may apply to your Canadian assets – 25 Parts

Introduction:

usexittax

There is much discussion of the U.S. rules which operate to impose taxation on the residents of other countries and income earned in those other countries. You will hear references to “citizenship taxation”, “FATCA Canada“, PFIC, etc. It is becoming more common for people to wish to relinquish their U.S. citizenship. The most common form of “relinquishment is renunciation”. The U.S. tax rules, found in the Internal Revenue Code, impose taxes on everything. There is even a tax on “renouncing U.S. citizenship”. I don’t mean the $2350 USD administrative fee which everybody has to pay. (Isn’t that really a tax?). I mean a tax on your assets. To be clear:

You must pay a price to NOT be a U.S. citizen.

This tax is found in S. 877A of the U.S. Internal Revenue Code.

It’s defined as the:

Tax responsibilities of expatriation

Few people are aware of this tax. Fewer still understand how it works.  As FATCA operates to enforce U.S. taxation on many Canadian citizens, and increasing numbers wish to NOT be U.S. citizens, the importance of understanding the U.S. “Exit Tax” increases.

It is particularly important to understand what triggers the “Exit Tax”. You will be subject to the “Exit Tax” if you are a “covered expatriate”. You must know what that means and why, sooner or later, everybody will become a “covered expatriate”.

The “Exit Tax” is not a simple “token tax”. For Canadians, the tax can be a significant percentage of their net worth. Furthermore, the tax is payable NOT on actual gains, but on “pretend gains”. (Where would the money come from to pay the tax?)

Hang on to your seats. You will shocked, amazed and horrified by this.

Since the advent of FATCA in Canada, this issue is increasingly important.*

To be forewarned is to be forearmed!

This is a 22 part series which is designed to provide you  with some basic education on:

How the U.S. S. 877A Exit Tax rules work; and

How they particularly affect Canadians with a U.S. birthplace, who lived most of their lives in Canada.

This will be covered over a 9 day period in a “9 part” series. (It has since been expanded to 16 posts and counting.)

Although this series is beginning on “April Fools Day”, I assure that this is NOT a joke.

The 16 parts are:

Part 1 – April 1, 2015 – “Facts are stubborn things” – The results of the “Exit Tax

Part 2 – April 2, 2015 – “How could this possibly happen? “Exit Taxes” in a system of residence based taxation vs. Exit Taxes in a system of “citizenship (place of birth) taxation

Part 3 – April 3, 2015 – “The “Exit Tax” affects “covered expatriates” – what is a “covered expatriate“?”

Part 4 – April 4, 2015 – “You are a “covered expatriate” How is the “Exit Tax”  actually calculated

Part 5 – April 5, 2015 – “The “Exit Tax” in action – Five actual scenarios with 5 actual completed U.S. tax returns

Part 6 – April 6, 2015 – “Surely, expatriation is NOT worse than death! The two million asset test should be raised to the Estate Tax limitation – approximately five million dollars – It’s Time

Part 7 – April 7, 2015 – “Why 2015 is a good year for many Americans abroad to relinquish U.S. citizenship – It’s the exchange rate

Part 8 – April 8, 2015 – “The U.S. “Exit Tax vs. Canada’s Departure Tax – Understanding the difference between citizenship taxation and residence taxation

Part 9 – April 9, 2015 – “For #Americansabroad: US “citizenship taxation” is “death by a thousand cuts, but the S. 877A Exit Tax is “death by the guillotine”

Part 10 – April 10, 2015 – “The S. 877A Exit Tax and possible relief under the Canada U.S. Tax Treaty

Part 11 – April 11, 2015 – “S. 2801 of the Internal Revenue Code is NOT a S. 877A “Exit Tax”, but a punishment for the “sins of the father (relinquishment)

Part 12 – April 12, 2015 – “The two kinds of U.S. citizenship: Citizenship for “immigration and nationality” and citizenship for  “taxation” – Are we taxed because we are citizens or are we citizens because we are taxed?”

Part 13 – April 13, 2015 – “I relinquished U.S. citizenship many years ago. Could I still have U.S. tax citizenship?

Part 14 – April 14, 2015 – “Leaving the U.S. tax system – renounce or relinquish U.S. citizenship, What’s the difference?

Part 15 – May 22, 2015 – “Interview with GordonTLong.com – “Citizenship taxation”, the S. 877A Exit Tax, PFICs and Americans abroad

Attention: Parts 16 – 21 focus on the “dual citizen exemption in the context of Canada’s Citizenship laws.

Part 16 – February 16, 2016 – “Why the S. 877A(g)(1)(B) “dual citizen exemption” encourages dual citizens from birth to remain US citizens and others (except @SenTedCruz) to renounce” – Note that this module is composed of Parts 16 – 21 – six posts.

Part 17 – February 16, 2016 – The history of Canada’s citizenship laws: Did the 1947 Canada Citizenship Act affirm citizenship or “strip” citizenship and create @LostCanadians?

Part 18 – February 16, 2016 -The S. 877A “dual citizen” exemption – I was born before the first ever Canada Citizenship Act? Could I have been “born a Canadian citizen”?

Part 19 – February 16, 2016 – The S. 877A “Dual Citizen” exemption: The 1947 Canada Citizenship Act – Am I still a Canadian or did I lose Canadian citizenship? (The “Sins Of The Father”)

Part 20 – February 16, 2016 -The S. 877A “Dual Citizen” exemption: The 1947 Canada Citizenship Act and the requirements to be “born Canadian

Part 21 – February 16, 2016 – “The S. 877A “Dual Citizen” exemption: I was born a dual citizen! Am I still “taxed as a resident” of Canada?

Part 22 – February 29, 2016 – “The S. 877A “Dual Citizen” exemption: MUST certify tax compliance for the five years prior to relinquishment

More on the United States Expatriation Tax – ongoing miscellaneous:

Part 23 – “How the 1966 desire to “poach” capital from other nations led to the 2008 S. 877A Exit Tax

Part 24 – “Clinton Treasury representative Les Samuels explains why the U.S. Exit Tax SHOULD apply to the assets of Americans abroad

Part 25 – “Relinquishing US citizenship: South African Apartheid, the Accidental Taxpayer and the exit tax

 

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* Why this is of increased importance: The role of FATCA and U.S. taxation in Canada

A picture/video tells a thousand words. Have a look at the “Rick Mercer FATCA video” in the following tweet:

FATCA is U.S. law which is designed to identify financial assets and people, outside the United States, that the U.S. believes are subject to its tax laws. (It makes no difference whether the person is a Canadian citizen”.) This includes people who were:

– born in the U.S.

– Green card holders

– people born to U.S. parents in Canada

– “snow birds” who spend too much time in the United States

The Government of Canada is assisting the United State to implement FATCA in Canada. To be specific:

– on February 5, 2014 the Government of Canada formally agreed to change Canadian law to identify “U.S. connected” Canadians in Canada

– in May of 2014, the Government of Canada passed Bill C 31 which contained the implementing legislation

– on July 1, 2014 FATCA became the law in Canada

– since July 1, 2014 many Canadians have received a “FATCA Letter” (can the U.S. claim you as a taxpayer?)

The Alliance For The Defence Of Canadian Sovereignty has sued the Government of Canada in Federal Court on the basis that the participation of the Canadian Government in FATCA, is in violation of the Charter Rights of Canadians. You can keep up with their progress on the Alliance blog” which is here.

FATCA is a tool to enforce “U.S. taxation in Canada”. The result is that more and more Canadian citizen/residents  will be forced to pay U.S. taxes. But, U.S. tax rules include much more than tax. They are source of comprehensive information gathering and “information returns”. Typical returns required by U.S. taxpayers in Canada include: FBAR, FATCA Form 8938, Form 5471, Form 3520, Form 3520A and many more.

In addition, U.S. tax rules are different from Canadian tax rules. The most painful example is that when:

– Canada allows a “tax free” capital gain on your principal residence

– the U.S. imposes a 23.8% tax on the sale of your principal residence (you get a $250,000 deduction)

Sound horrible?

It is, but:

It’s only Canadian citizens with a past “U.S. connection” who will be subject to these taxes. It is estimated that approximately one million Canadians may be subject (as “U.S. Subjects”) to these rules. But, Canadians with a “U.S. connection” are members of families. Therefore, U.S. taxation in Canada will impact all members of a Canadian family which has at least one “U.S. connected” member.

 

John Richardson