Tag Archives: IRS Canada

Part 1 – “Facts are stubborn things” – The possible effect of the US “Exit Tax” on Canadian residents

This is Part 1 of a 9 part series on the Exit Tax.

The 9 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 the “Exit Tax” is 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 – “The two kinds of U.S. citizenship: Citizenship for immigration and citizenship for tax”

Part 8 – April 8, 2015 – “I relinquished U.S. citizenship many years ago. Could I still have U.S. tax citizenship?”

Part 9 – April 9, 2015 – “Leaving the U.S. tax system – renounce or relinquish U.S. citizenship, What’s the difference?”

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

factsarestubbornthings

This post will demonstrate how the U.S. “Exit Tax” affects “middle class Canadians who  have U.S. citizenship and wish to relinquish it. You will see how the “Exit Tax” imposes punitive taxes on Canadian assets and on income earned in Canada. You will also see how some U.S. assets are (in effect) exempted from the “Exit Tax”. We will learn from the example of a “Middle Class Canadian” with an average house in Toronto, a pension plan from the University of Toronto and a low value RRSP who decides that he no longer wishes to be a U.S. citizen.

This person has lived in Canada most (or perhaps all) of his adult life. You will see that he has NO U.S. assets and NO U.S. income. He was born in the United States, never officially relinquished U.S. citizenship and is therefore considered to be a U.S. citizen.

The U.S. imposes charges fees/taxes to NOT be a U.S. citizen. Everybody is required to pay an administrative fee of $2350 to no longer be a U.S. citizen. Others will have to pay an additional premium in the form of an “Exit Tax”.

In this particular case our “middle class Canadian”  would have be required to  pay the United States an additional fee in the form of an “Exit Tax”.

The amount of the “Exit Tax” is approximately $400,000 Canadian dollars.

Note that this “Exit Tax” is paid NOT on U.S. assets but completely on Canadian assets. It could very easily have been much more! Of course, if he had NOT been born ONLY a U.S. citizen he might not have to pay any Exit Tax (unless he was NOT living in Canada when he renounced) ….

This is all possible because of U.S. “citizenship (place of birth)” taxation.

The problem will be exacerbated by FATCA and by the agreement by the Government of Canada to assist the U.S. in the enforcement of FATCA in Canada

“Citizenship (place of birth) taxation” and FATCA are logically distinct but contextually related. The purpose of FATCA is to enforce “citizenship (place of birth) taxation.

This post will demonstrate  the graphic and horrific tax consequences of a middle class person in Canada who relinquishes  U.S. citizenship. If you understand this post, you will see that the claim that U.S. citizens abroad renounce citizenship to avoid taxes is absurd. In fact, it’s the exact opposite. Renouncing U.S. citizenship is more likely to subject a “long term, middle-class American abroad” to tax consequences that are horrific and unjust in the extreme.

How this works – the S. 877A “Exit Tax” rules in action  …

In order to see the graphic and brutal confiscatory effects of the U.S. Exit Tax in action I asked a licensed U.S. CPA who specializes in International Tax to consider the following factual scenario:

Relinquishment date: A person who renounced U.S. citizenship on November 1, 2014.

Profile: He was a “middle class” person who was completely tax compliant in Canada – his country of residence. He was a saver and investor. He had worked hard for this money.

The CPA was asked to calculate the Exit Tax based on the following “Financial Facts”. Note that the persons assets do exceed the $2,000,000 dollar U.S. threshold. Notice also that this example is representative of a typical “middle class” person.

Financial Facts – All amounts were in Canadian dollars.

– pension income from Canadian sources of $50,000

– principal residence bought in 1985 for $100,000 with a fair market value on November 1, 2014 of $1,200,000. The CPA calculated the taxes under the assumption that the relinquisher WOULD be entitled to the $250,000 capital gains deduction that would  normally be available under S. 121 of the Internal Revenue Code. It is NOT clear that he would be entitled to this deduction under the S. 877A rules. Note that if the S. 121 deduction does NOT apply the taxes owing will be significantly higher.

– pension from the University of Toronto with a present value of $900,000

– RRSP with a value of $500,000

– 500 shares of Telus common shares with a deemed sale on November 1, 2014 and a cost basis of half that. In other words the shares doubled.

Note that this person clearly exceeds the $2,000,000 U.S. threshold and is therefore subject to the Exit Tax. Yet he is a person with a “middle class” life style. The CPA graciously calculated the amounts to go on the Form 8854 (mandatory asset disclosure form) and calculated the Exit Tax (amount payable to the IRS to no longer be a U.S. citizen).

Our CPA calculated the “Exit Tax” based on the following five different fact patterns.

1. U.S. citizen only at birth – living in Canada – Canadian source INELIGIBLE (meaning Canadian source) pension

Exit Tax payable: $363,954 USD

2. Dual U.S./Canada citizen from birth – living in Canada

Exit Tax payable: $00.00 USD

3. Dual U.S./Canada citizen from birth living in U.K. – Canadian source INELIGIBLE (Canadian source) pension

Exit Tax payable: $363,954 USD

4. U.S.  citizen only at birth – living in Canada – U.S. source ELIGIBLE (U.S. source) pension

Exit Tax payable: $69,926 USD

5. U.S. citizen only at birth – billionaire – living in Cayman Islands – relinquishes before the age of 18 1/2

Exit Tax payable: $00.00 USD

A picture is worth a thousand words:

Exit tax chart_final

And more …

exit-tax

 

It’s because of the exacerbating factor of “citizenship (place of birth) taxation”

Notice that the most brutal and confiscatory effects of the U.S. Exit Tax are born by Americans abroad who have built their careers abroad and acquired their assets abroad. It is because of “citizenship taxation” that the U.S. is able to lay claim to income and assets earned in other countries. This results in (governments take note) U.S. confiscation taxation of capital earned in other countries.

As Ronald Reagan, remembering the wisdom of John Adams, used to say:

“Facts are stubborn things.”

The perverse application of the U.S. S. 877A “Exit Tax” is a graphic example of the immorality of a tax system that taxes people based on “place of birth”.

On April 2, 2015, in Part 2 of this series I will explore:

““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”

When renouncing U.S. citizenship may be a smart retirement planning tool for #Americansabroad

On October 10, 2014 Kelly Phillips Erb (AKA @TaxGirl) published a “Guest Post” on the question of whether one one would give up U.S. citizenship because of taxes. It was a very will written post which detailed the horrors that Americans abroad experience in attempting compliance with a tax code that “puts most of their lives in the penalty box”.  I recommend the post to you. There are a number of comments about the post at the Isaac Brock Society.

The post concludes with:

So will I renounce to avoid taxes? Not exactly, because I DON’T OWE taxes due to my very low income. BUT IN ORDER TO AVOID THE CONSTANT THREAT, like a huge hammer hanging over my head, of “INFORMATION FILING PENALTIES” as I grow older and less able to cope. To protect my executors from those same things?

YES, I’m afraid I shall have to. I have put off taking this step until now, partly because of the cost and my fear of the long journey to the embassy in a distant city; but mainly in the hope that my beloved homeland would regain its wisdom and fix its mistakes by switching to an equitable system of residence-based taxation with penalties that reflect only a percentage of tax actually owed.

And now it seems I have waited too long. A price increase from $450.00 to $2,350.00 was just announced. I may be trapped. I am becoming desperate to escape, but unable to afford it.

What a silly situation this would be, if it weren’t so very tragic.

Oh my dear, sad homeland. I do so wish you happiness and a return to shared prosperity. Please do the same for me. Thank you.

*Tisha (who prefers not to be identified by last name) remembers fondly her years in Pennsylvania and its wonderful people. She now feels she is too old to start over again, and so remains in her mother’s country.

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For those born in the U.S. – Circumstances of your birth affect the outcome of your life and retirement

 

This Global News video shows the sad story of of a Canadian who was subject to U.S. taxes. What is not clear in the video is the reason for the tax. It appears that this was a result of the U.S. Estate tax. Therefore, In infer that her late husband must have been a U.S. citizen.

Whatever the reason, this story is one more example of the pain and unfairness that takes place when U.S. citizens attempt to live outside the United States.

 

Once upon a time, before #FATCA people wanted US citizenship

Interesting article by Patrick Cain of Global News – How To Get Rid Of An Unwanted U.S. Citizenship. This article is significant for two reasons:

1. The very fact that it was written at all – America’s practice of taxing residents of other countries is starting to get out;

2. Non-U.S. citizens may be starting to get interested in this issue.

The article includes:

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What you should consider before contacting a lawyer

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The Reality of U.S. Citizenship Abroad

Nobody denied that the unintended targets of Congressional legislation aimed at those who supposedly “owe allegiance” to the USA, now assisted by craven foreign governments anxious lest their financial services entities lose access to the US market, are mostly unlikely to do anything at all. But the whole idea of universal self-assessment of taxation is to keep the taxpayer in an anxious condition, to make him overpay if possible, but at least not to underpay. Those now faced with an unprecedented, even retroactive, enforcement campaign and who must, if they wish to become compliant and avoid penalty or even prosecution (should they be identified in the future), sacrifice much of their wealth, even become insolvent.

Comment at the Isaac Brock Society blog – July 29, 2013

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