This post appeared at reddit. It is interesting that while the Consulate in Montreal asked “why we did not want to apply for citizenship of our son” several years later, there had been no efforts to impose or force it. This gentleman explains it as pressure however, the lack of any follow-through by the Consulate suggests strongly that the U.S. simply cannot or will not impose citizenship on persons born outside the U.S., simply because they are eligible for it.

It should also be considered that while it is commonly understood that the INA establishes certain situations that define when one can be a citizen, it does not say that one must. The underlying assumption is that one would automatically want to be a U.S. citizen but this does not constitute a “law.” There is no reason to assume U.S. law has power over individuals who are citizens and residents of other countries.

 

Pressure to have kids become US citizens by consulate in Montreal (self.expats)

submitted 14 hours ago * by UncutExpat American living in Montreal
 

I’m a US expat living in Montreal for many years. My wife is Canadian and we have two kids born here (who have Canadian passports). My wife’s also an accountant who does tax returns (Canadian and US). She told me that if our kids are also US citizens, then our paperwork for US tax returns is more complex.

We have education funds for both kids, so we need to legally declare that revenue to the US. They need at least a tax ID number, so we want to fill IRS W-7. That form requires certified copies to the of the supporting documents, and the information shown on the form is as follows:

You may be able to request a certified copy of documents at an embassy or consulate. However, services may vary between countries, so it is recommended that you contact the appropriate consulate or embassy for specific information.

For our first son, several years ago, we were able to get the certified copies in Montreal (for $50), but it was not easy. We had to speak with three different people at the consulate who asked us why we did not want to apply for citizenship of our son. At first I thought it was really none of their business, but by the end of the last meeting, I politely said I would do the US citizenship application if someone paid for my wife’s time with the additional paperwork that would be required for the next 18 years at least! The whole deal took more than 3 hours.

This time, for our second son, we only had to see two people (who asked us the same pressuring questions as before). The second person finally told us (after speaking to a colleague when we explained it was for accounting reasons that we did not want to apply for citizenship now) that since the form was 4 pages, it would cost $200.00 for the certified copies ($50 per page). We asked why it was so much, and they told us the policy had changed since the last time. We politely declined and left, realizing the whole episode was a waste of time. We often visit Boston or other cities, and it can be done there in an IRS office.

Just wondering if anyone else had such annoyances, and how they solved the problem. Needless to say, I’m not happy with this policy of the consulate (and actually wonder what is the benefit to the US, given that immigration is a big issue these days).

EDIT: the Tax ID is needed mostly for me to claim them as dependents (it’s not much of a deduction, as we don’t pay much income tax to the US now — however, it could be worth it in the future and my accountant says it’s a red-flag to suddenly claim children as dependents when they weren’t on last year’s return). Also, if my kids grow up in Canada and never want to move to the USA, they’ll be stuck with an obligation to declare their income every year as long as they have a US passport (huge paperwork burden with no real benefit).

 

 
cross posted from Quora
 

If I have an American citizenship, am I stuck paying taxes to them for life unless I get rid of the citizenship? How do you get rid of the citizenship?
 


by John Richardson
 

U.S. Citizens are subject to extreme regulation wherever they live in the world…
 


 
U.S. AKA American citizenship is very different from all other citizenships in the world. It is a difficult citizenship to maintain if you do NOT actually live in the United States. The reason is that the United States is the only (I am not counting Eritrea) country that requires ALL if its citizens to abide by the rules in the Internal Revenue Code, regardless of where they live in the world. I note that some of the answers to this question confirm that U.S. citizens are subject to U.S. taxation whether they live in the United States or not. Although U.S. citizens are subject to U.S. taxation regardless of where they live in the world, the requirements in the Internal Revenue Code are about much more than taxation. Here are some ways that the Internal Revenue Code imposes requirements that are not specifically about taxation:

  1. The requirements of the Internal Revenue Code also include a very large number of “penalty laden” reporting requirements. (A U.S. citizen resident in Canada was recently fined $120,000 by the IRS for failing to disclose that he was running a small consulting business through a Canadian corporation.) Furthermore, although this requirement is found in the Bank Secrecy Act and not the Internal Revenue Code, U.S. citizens living outside the United States are required to report their “local” bank accounts (including those shared by a non-U.S. spouse) to the Financial Crimes Division of U.S. Treasury (FinCEN).
  2. The rules of the a “foreign” mutual fund and subject to punitive (in some cases the gains could be taxed at rates approaching 100% of the gains).
  3. The rules of the Internal Revenue Code treat “non-U.S. citizen” spouses differently from U.S. citizen spouses. Although not specifically stated the effects of this differential treatment appears to assume that a spouse who is NOT a U.S. citizen exists only at best as an opportunity for money to leave the U.S. financial system and at worst a form of tax evasion.

I could go on, but you get the point. The Internal Revenue is NOT only about taxation. It is about enforcing life and investment choices (and ultimately U.S. cultural values) that do NOT recognize that U.S. citizens living in other countries also have tax obligations to those other countries. The effect of (1) being subject to the restrictions imposed by the Internal Revenue Code and (2) being subject to taxation in their country of residence.
 
How is U.S. citizenship obtained …

One can become a U.S. citizen by either “birth” (either born in the USA or in certain cases born to a U.S. citizen outside the United States) or by “naturalization” (a choice made after birth). Most countries do NOT confer citizenship simply by virtue of birth in the country.

Interestingly, the United States is the ONLY country that both:

Imposes citizenship because one was born in the United States; and
Imposes a comprehensive tax code based on citizenship.

Therefore, those born in the United States are required to obey ALL the rules of the Internal Revenue Code (whether based directly on taxation or reporting …) for life.
 
 
In a Global World, there are many U.S. citizens who are citizen/residents of other countries …

The big problem is that under the guise of “citizenship-based taxation” the United States is imposing full taxation (and the requirements of the Internal Revenue Code) on people who are citizens and tax paying residents of other countries. Think of it! For more discussion of this issues see:

Why is the United States imposing full U.S. taxation on the Canadian incomes of Canadian citizens living in Canada?
 
 
But, there are actually two kinds of U.S. citizenship and ALL U.S. citizens are “dual citizens” …

The first kind of U.S. citizenship is citizenship for the purposes of nationality. This is the what most people understand citizenship to be. This is what is meant when one enters a country with a passport. U.S. citizenship for nationality purposes gives one the right to “enter the United States”, to live in the United States, to vote in the United States, etc.

The second type of U.S. citizenship (first created in 2004) is citizenship for the purposes of the Internal Revenue Code. Let’s call this “tax citizenship” which means that you are considered to be subject to regulation and taxation by the Internal Revenue Code. Significantly one can cease to be a U.S. citizen for the purposes of “nationality” (no right to live and work in the United States), but still be a U.S. citizen “tax citizen” meaning that you are still subject to the requirements of the Internal Revenue Code. (This is a very difficult situation to be in. Incidentally Green Card holders have exactly the same kind of problem. They can lose their right to live in the USA but still be subject to the rules in the Internal Revenue Code.)
 
 
Relinquishing both kinds of U.S. citizenship – breaking the bonds of nationality and the requirements of the Internal Revenue Code …

Since June 16, 2008 (there was a different set of rules prior to that date) a “Certificate of Loss of Nationality” (“CLN”) is required to cease to be both a U.S. citizen for the purposes of “nationality” and for the purposes of “taxation”. A CLN is acquired by either formally renouncing U.S. citizenship or by applying to the State Department for a (“CLN”) based on another kind of relinquishing act. Here is a blog post that I wrote about that describes the issue in a general way:

Renunciation is one form of relinquishment – It’s not the form of relinquishment, but the time of relinquishment
 
 
Are U.S. citizens renouncing U.S. citizenship to avoid the payment of U.S. taxes?


 
In my experience no. Because of various tax mitigation rules (foreign tax credits and foreign earned income exclusion) many U.S. citizens abroad do NOT owe U.S. taxes. In fact very few of the people who I assist with renunciation owe U.S. taxes. Therefore, the notion that people renounce U.S. citizenship to avoid U.S. taxes is a a myth. As Ted Sorenson wrote for President Kennedy:

“For the great enemy of truth is very often not the lie–deliberate, contrived and dishonest–but the myth–persistent, persuasive, and unrealistic.”

People do renounce U.S. citizenship to escape the regulatory aspects of the Internal Revenue Code that make it very difficult to live productive lives outside the United States
 
 
Caution!!! Caution!! – Since June 16, 2008 relinquishing U.S. citizenship may subject you to the draconian Exit Tax rules found in S. 877A of the Internal Revenue Code!!!

Anybody contemplating relinquishing U.S. citizenship needs to be cautious. You need to understand what the possible U.S tax implications of renlinquishing/renouncing U.S. citizenship would be FOR YOU with YOUR SPECIFIC tax and FINANCIAL PROFILE. This is NOT a “one size fits all” kind of exercise. To learn how the S. 877A Exit Tax rules work see:

Renouncing US citizenship? How the S. 877A “Exit Tax” may apply to your Canadian assets – 25 Parts
 
 
Do you have to be compliant with the requirements of the Internal Revenue Code to relinquish/renounce U.S. citizenship?

The answer is NO YOU DO NOT! But, a failure to be compliant with the rules in the Internal Revenue Code for each of the five years prior to renouncing/relinquishing would make you subject to the S. 877A Exit Tax rules.
 
 
In closing …

As you might have guessed, I spend a significant part of my professional life helping people terminate their relationship to the United States (both citizens and Green Card holders). I have written this detailed answer to correct a lot of the incorrect information found in various sources. That said:

Under NO circumstances should this answer construed to be legal advice or any other kind of advice. Furthermore, laws are subject to change and you should NOT assume that the information I have given is even correct. You should NOT relay on this answer and absolutely should seek a competent advisor who will help you understand your situation and come to an appropriate decision for you.
 
Further information:

Citizenship Counselling For U.S. Citizens in Canada and Abroad
 
*****
 
About the Author John Richardson

John Richardson
Toronto citizenship lawyer: FATCA U.S. tax + renunciation of citizenship
Lawyer 1982-present
B.A., LL.B., J.D. (Of the bars of Ontario, New York and Massachusetts)
Co-chair of the Alliance for the Defence of Canadian Sovereignty and the

 

Cross-posted from Quora

I was born in Canada by an American mother, so am I an American citizen?

 
Answer by John Richardson , Lawyer (1982-present)

Anybody concerned with the answer to this question should (1) do the appropriate research and (2) get the appropriate advice.

Unless you live in the United States or want to live PERMANENTLY in the United States, you would NOT want U.S. citizenship. U.S. citizens are subject to U.S. taxation on ALL OF THEIR WORLDWIDE INCOME, even if they do NOT live in the United States. In fact U.S. citizens living outside the United States who are “tax residents” of other countries are always “subject(s)” (pun intended) to two tax systems.

The question is: “I was BORN IN CANADA to an AMERICAN mother, so am I an American citizen?” Note that if you were born in Canada you are born in another country where U.S. laws (as much as they would like them to) do NOT presumptively apply. The U.S. Immigration and Nationality Act is the statute that defines who is an American citizen and who is NOT an American citizen.

Here is my answer which is written in a way to encourage caution and to NOT just listen to the first “accountant” (what would an accountant know about this anyway?) or lawyer or immigration consultant.

The answer is “maybe”. It depends. Your approach to this question depends on whether you want to be a U.S. citizen or do not want to be a U.S. citizen.

For those born in Canada and who WANT to be U.S. citizens:

The U.S. Immigration and Nationality Act has specific rules that say under what circumstances a person born to an American mother outside the USA “shall” be a U.S. citizen. The answer is dependent on the mother having a certain number of years of actual physical presence in the United States. (The one year “continuous presence” test was struck down by the U.S. Supreme Court in the 2017 decision of Morales-Santanya).

Therefore, if you want to be an American citizen you would have to establish the existence of specific facts and present those facts to the U.S. State Department and ask them to issue you a U.S. passport. Note that you are NOT entitled to a U.S. passport until those specific facts are proven to the satisfaction of the State Department.

For those born in Canada who do NOT want to be U.S. citizens:

There are some in the tax compliance industry (what do they know about citizenship law anyway?) who have marketed the idea that U.S. citizenship can be imposed on people born in Canada (and other countries) even if they have never considered themselves to be U.S. citizens.

Can the USA forcibly impose U.S. citizenship on people who were NOT “Born In The USA”? What if one was born to an American mother in China (a country that does NOT allow “dual citizenship”). Can the USA forcibly impose U.S. citizenship on that citizen of China?

If you have accepted that you are a U.S. citizen and have traveled on a U.S. passport (and that kind of stuff) then you would NOT be able to defend the accusation of U.S. citizenship. But, if you have done NONE of those things and just happened to have been born outside the United States to an American mother, then your situation is probably different. You are arguably in a position where you would have the “right” to U.S. citizenship (under U.S. law if you want) but NOT the obligation to accept U.S. citizenship (because you were born in a country where the USA does not have jurisdiction).

I am not aware of a single instance where a U.S. court has ruled that people born outside the United States are required to be U.S. citizens.

In any case, if you were NOT born in the USA, you do not have the objective characteristics that would raise the question of “U.S. citizenship” anyway.

This issue has been discussed at the Isaac Brock Society and other sites. The following post provides some of the “analytical tools” to consider the question.

Help: Can the United States IMPOSE US citizenship on those born outside the US?

If you have read this far you might find the following video of interest:

U.S. citizenship and the Government of Australia

The question of “dual citizenship” and whether somebody IS a “dual citizen” was of practical relevance in Australia in 2017. Basically, seven (at least) Australian politicians were accused of being “dual citizens” (making them ineligible to serve in Australia’s legislative body). This “farce” provides a real world example of why it would matter if somebody born outside the USA to an American other would be an American citizen. See the following:

Australian Greens Senator @LarissaWaters resigns because of her CANADIAN place of birth. Too bad she was born in Canada (with images, tweets) · expatriationlaw

 

repealFATCA

This Is an Urgent Campaign to Repeal FATCA ALERT!

Support the Paul Amendment to Repeal FATCA!
 
 
 

November 29, 2017

This week the Senate version of the tax reform bill will come to the Senate
floor. The Campaign to Repeal FATCA has learned that Senator Rand Paul
(R-Kentucky) plans to offer as a floor amendment his bill S. 869 to repeal
the so-called “Foreign Account Tax Compliance Act (FATCA).

The Campaign to Repeal FATCA is asking everyone immediately to contact your
Senators with this simple message:

“Support the Paul Amendment to Repeal FATCA!”

You can find the contact information for your state’s two Senators
here. Given the partisan divide
in the Senate, it is especially important to contact Republican Senators. If
your state has one from each party, contact the Republican first!

Here is a suggested draft message you can use via the email contact. (NOTE:
If you are contacting a Democratic Senator, please delete the sentence in
red referring to the Platform.):

Dear Senator [Name]:

As your constituent, I strongly urge you to support the floor amendment to
be offered by Senator Rand Paul to repeal the so-called Foreign Account Tax
Compliance Act, or FATCA. Despite the claims of its sponsors when it was
passed in 2010, FATCA is a failure in its supposed aim to recover offshore
tax assets hidden by “fat cats.” Instead, it has imposed massive costs on
middle class Americans, violated Americans’ privacy without probable cause,
and led to a huge increase in U.S. citizenship renunciations. The 2016 GOP
Platform called for the repeal of this wrongheaded Obama-era law – and the
Republican Party should keep its promises! Please support the Paul Amendment
to repeal FATCA!

[Name, location]

In addition, if you represent an organization, please issue a statement in
support of the Paul Amendment to repeal FATCA and send it to Senate offices
and distribute via social media.

Time is of the essence. Thank you for your help at this critical moment!

Nigel Green and Jim Jatras

Co-Leaders, Campaign to Repeal FATCA

www.RepealFATCA.com

Further information points on why FATCA must be repealed follow:

The GOP called for repeal in its 2016 Platform. “The Foreign Account Tax
Compliance Act (FATCA) and the Foreign Bank and Asset Reporting Requirements
result in government’s warrantless seizure of personal financial information
without reasonable suspicion or probable cause. Americans overseas should
enjoy the same rights as Americans residing in the United States, whose
private financial information is not subject to disclosure to the government
except as to interest earned. The requirement for all banks around the world
to provide detailed information to the IRS about American account holders
outside the United States has resulted in banks refusing service to them.
Thus, FATCA not only allows ‘unreasonable search and seizures’ but also
threatens the ability of overseas Americans to lead normal lives. We call
for its repeal and for a change to residency-based taxation for U.S.
citizens overseas.”

FATCA fails in its stated purpose of recovering tax revenues. On enactment
in 2010, FATCA was scored as raising about $800M per year. According to
Texas A&M law professor William Byrnes, actual recoveries are closer to
$100-200M per year and falling. FATCA will soon cost more than it brings in.

FATCA is an indiscriminate violation of privacy. FATCA data reporting
requires no probable cause or even suspicion. Unlike domestic 1099s and W2s,
no taxable event is required. Compliance burdens fall disproportionately
upon people of moderate means, few of whom are engaged in evasion or owe any
tax. Foreign banks’ denying services to Americans leads to increased U.S
citizenship renunciations.

FATCA is costly. Estimates of global compliance spending rely on aggregation
of per-institution costs: millions for each small bank, hundreds of millions
for a big one. One projection puts cumulative cost at $58 to $170 billion.
This is an order of magnitude greater than any recoveries from FATCA.

FATCA relies on Obama-era Executive overreach. Because of other countries’
privacy laws, FATCA is unenforceable without so-called “intergovernmental
agreements” (IGAs) invented by Tim Geithner’s Treasury Department. The IGAs
are not authorized by statute or submitted to the U.S. Senate as treaties.

FATCA threatens our domestic financial industry. Reciprocal “Model 1” IGAs
promise “reciprocity” from U.S. domestic banks. This threatens massive
FATCA-like costs on U.S. banks and consumers.

Keeping FATCA on the books risks future harm. The OECD, which for years has
sought to extinguish personal financial privacy and create a worldwide
financial data fishbowl, has praised the IGAs as a “catalyst” to that end.
If FATCA remains on the books, the next Democrat Administration and Congress
may press reciprocity on domestic American financial firms to create a
global FATCA – or “GATCA.” This is the opposite of what the GOP Platform
promised.

Transparency is when citizens monitor government.

When government monitors citizens, that’s tyranny.

 

 

There is a very good discussion going on over at Brock regarding the “Transition Tax” and the unintended consequences that may be passed on to expats. Fortunately, this cross-posted comment by USCitizenAbroad demonstrates how we have moved from the complicated verbiage of statutes/IRS Code to something understandable. (!!!!!)

@Plaxy

First, there has never been ANY background discussion that suggests that a transition tax would apply to individual shareholders (whether in the US or abroad) of non-U.S. corporations.

Second, ALL of the discussion has been in the context of finding a way to impose taxation on the offshore trillions supposedly owed by the corporate shareholders of foreign corporations,

Third, notice that some of the discussion (for example in the two Morse articles) raises the question of how the tax should be designed (inside the income tax system, outside the tax system, subpart F, etc.).

What I think has happened is that, by making a subpart F inclusion the mechanism for taxing the “offshore trillions”, it has theoretically drawn individuals (and by extension Americans abroad) into harm’s way.

Because the subpart F rules do apply to the individual shareholders of Canadian Controlled Private Corporations (even though originally intended for corporations), and the mechanism to capture the “offshore trillions” is subpart F, individuals have been drawn in.

Had the mechanism for inclusion been something other than subpart F, I suspect that we would not even be having this discussion. But, what discussion? What is generating the discussion?

Interestingly, the ONLY discussion of the impact of this on individual Americans abroad comes from the tax compliance industry in Canada (because they are the only group considering individual Americans abroad) and probably tax people in other countries.

There is no final legislation and the rules are complex. So, what happens is that one tax person says: “These rules apply to Americans abroad” and the rest follow. They have few (if any) independent thoughts on this. It is very difficult to read and understand this proposed legislation. They read legislation literally. They don’t read contextually. They in effect “make up the law”. We have seen this happen time after time.

Now, what are individuals to do? It’s obvious that this tax was NEVER intended to apply to them. But, (I expect) the tax compliance industry will work hard to force people to pay up. What is clear is the tax compliance community will NOT (if they adopt the “party line”) tell people that the tax does not apply to them. They won’t be willing (and understandably so) take the risk. But, they don’t know any more about this than you or I.

So, what should be done? What should the response be?

At the present time there are still many unknowns. But, I really don’t see how people can pay a tax that

  1. was never intended for them
  2. will confiscate their retirement plans
  3. is in effect a retrospective tax – they are (possibly) going back in time and deeming income that was not taxable at the time to be taxable now.
  4. is not based on any “event” whatsoever – this is why it is pure confiscation. Even if it were 1 cent it would be pure confiscation because there is no event triggering a tax.
  5. (5) reaches directly into the tax base of Canada.

Since July the Government of Canada has been discussing this same pool of Canadian capital. This whole discussion is confusing theory, reality and practicality. This cannot and should not be paid.

My suggestion I guess is:

Get your tax preparer to reveal his/her position on this before work on the returns commences. If the preparer will not sign the returns without paying this tax – then find another preparer or do them yourself or don’t file at all. Obviously the pressure to renounce has become even more intense.

What you cannot due is let the tax compliance community turn your retirement savings over to the IRS based on a law that was never intended to apply to you.

Furthermore, I think that tax preparers have a moral obligation to make their position on this known in advance.

 

 


 
This comment from the Isaac Brock Society makes basic points to be made with regard to the proposed “Transition Tax” in both the House and Senate Tax Reform Bills.
 
Every expat who knows there are private individuals who are incorporated in their country should be contacting relevant government representatives giving them the information that U.S. Tax Reform may impose a “transition tax.” As it is widely surmised that this is an unintended consequence, now is the time to bring it to the forefront and create awareness/resistance to this. We have appealed to the U.S. government to change the relevant sections (or give some clarification); if this does not occur, we cannot allow the compliance community to decide what the law is. In the past this HAS occurred with regard to the treatment of PFICs, applying the Exit Tax retroactively to people who renounced prior to 2008 and putting “minnows” into OVDP/OVDI. Time to stand up and say “NO!”
 
The following points would work for any country; just change the numbers in point 1 and “Canadian” to your country (generally) and the ministers’ names to yours.
 
1. There are approximately one million Canadian citizens who are resident in Canada and are also U.S. citizens (mostly Canada/U.S. dual citizens – with the U.S. citizenship conferred on them because of a U.S.
birthplace).

2. It’s safe to say that a significant number of these “dual citizens” are “small business owners”, who carry on business through Canadian Controlled Private Corporations.

3. It is possible and likely that many of these “small business” owners have (since 1986 or the date of incorporation) accumulated earnings.
These accumulated earnings operate as their “retirement pensions” ( a fact that has been widely discussed with Finance Minister Morneau and Prime Minister Trudeau as part of their discussions on Canadian tax reform).

4. The United States imposes taxation on individuals based ONLY on U.S.citizenship (even if the person lives in Canada). The United States is the only advanced country in the world to impose “citizenship-based taxation”. The United States is the ONLY country in the world that BOTH:
1. Confers citizenship based on birth in the country AND 2. imposes “worldwide taxation” based on citizenship.

5. Many of the Canadian Controlled Private Corporations owned by Canadians with dual citizenship are deemed under the Internal Revenue Code of the United States, to be “U.S. shareholders”, of what are called “controlled foreign corporations”. To repeat, from a U.S. perspective the Canadian shareholders of Canadian Controlled Private Corporations, may be considered to be the “U.S. shareholders” of “Controlled Foreign Corporations”.

6. The United States is in the middle of a process of amending the Internal Revenue Code. It appears that both the House and Senate versions of the bill, include a provision that would require the “U.S. shareholder” of a “controlled foreign corporation” to include directly in his/her personal income, a percentage of the total amount of the “retained earnings” of the “controlled foreign corporation” (which could well be a Canadian Controlled Private Corporation”). This percentage would be based on the amount of the retained earnings which have accumulated since 1986. See for example Sec. 14103 of
The Tax Cuts and Jobs Act

(See the section starting on page 375 with Sec. 14103 beginning on page391.)

7. Although it is not completely clear that this provision would apply to the Canadian shareholders of Canadian Controlled Private Corporations, the “literal reading of Sec. 14103 suggests that it may.

Certainly there have been (and this is where the danger lies) some tax professionals who are adamant that this would apply.

Conclusion:

It is extremely important that this danger be understood by all “stake holders” in Canada. This would include Finance Minister Morneau and members of the small business community in general.

Some discussion of this problem may be found here.

.

 

This provision is not designed to catch individuals (I think), and certainly not Americans abroad – they are collateral damage. it’s incredibly unfair.

A little more than 10 days ago, an article by a Canadian tax lawyer claimed the proposed House Bill contained two very startling changes that would affect #AmericansAbroad:

BAD NEWS FOR BUSINESS OWNERS
If your cross-border client owns a business, his tax position “may get substantially worse,” Reed says, noting two areas of concern:

a one-time 12% tax will be imposed on all income previously deferred from U.S. tax in Canadian (foreign) corporations; and
new complex rules make it difficult for U.S. citizens who own Canadian (foreign) corporations to defer active business income.
The 12% tax is part of the transition to a territorial corporate tax system.

“Although perhaps unintentional, since U.S. citizens will not benefit from a territorial model, the new rules impose a 12% tax on any cash that has been deferred since 1986,” says Reed.

He offers the example of a U.S. doctor who moved to Canada in 1987 and has since deferred income from personal tax in her medical corporation, and invested it — resulting in a potentially significant tax bill.

Deferring active business income

New punitive rules that apply to US citizens who own a business. Currently, most US citizens who own a Canadian corporation that is an active business don’t pay tax on the company’s profits until they take the money out. The House plan changes this. It imposes a new, very complicated, set of rules on US citizens that own the majority of a foreign corporation. The proposal would tax the US citizen owner personally on 50% of the entire income of the Canadian corporation that is above the amount set by an extremely complex formula. At best, this will make the compliance requirements for US citizens that own a business extremely complicated and expensive. At worst, this will cause double tax exposure for US citizens who own a Canadian business on 50% of the profits of that business.
 

This post was a response to the issues raised.

 

Today, another Canadian compliance professional made similar observations about the proposed Senate bill.

 

Kevyn Nightengale published an article on LinkedIn; excerpts below:

American? Own shares in a foreign corporation? Get ready for a pain in the wallet

Published on November 10, 2017
by Kevyn Nightengale

Accumulated deferred foreign income

One thing they will do is apply an immediate tax (well, sort of immediate – it’s to be paid over 8 years) to the retained earnings of those foreign subsidiaries. And there’s some logic to this as well. Those earnings have been tax-deferred until now. If they fell into the “exempt” system in future years, US multinationals will have effectively gamed the system by keeping them offshore long enough to completely escape tax.

One problem is that if you’re an American individual, and you own shares in a foreign corporation directly, this provision will create an immediate tax in your hands.

You won’t get a foreign tax credit for the corporate tax (like a US domestic corporate parent). You won’t get a special deduction (like a US domestic corporate parent). You just have to pay tax on the retained earnings.

It’s a double whammy if you live abroad

If you live in a country where it’s common to run a small business through a corporation (say, Canada), you already have enough double-tax issues to worry about (Subpart F, filing forms 5471, FINCEN 114, etc.). This new provision will probably lead to double taxation. And even if you can pay out dividends to limit that, it probably will create extra tax in your country. The US tax probably isn’t creditable in your country (in Canada, it isn’t).

Global intangible low-taxed income (“GILTI”)

…… The shareholder (yes, including a US citizen living abroad, in the same country as the company) has to include an amount in his income.

The amount is the company’s total income less a deemed return (10%) on tangible assets. This means that any type of income is caught. Companies that provide services are especially vulnerable, because they typically have only a small amount of tangible assets. Incorporated professionals are going to be hit hard. They’ll be taxed on their companies’ incomes, even if the company doesn’t distribute it to them. And that tax will apply at full tax rates, not qualified dividend rates.

Can this be avoided?

This provision is not designed to catch individuals (I think), and certainly not Americans abroad – they are collateral damage. it’s incredibly unfair.

*******
 
I find it puzzling that both gentlemen indicate these policies are not intended to include #AmericansAbroad, yet act as if they have no choice but to “enforce” this if it becomes U.S. law. Haven’t the “unintended” consequences of #FBAR caused enough grief for #AmericansAbroad? Why does everyone assume there is nothing that can be done to stop this from extending to expats? If the law is not meant to be applied that way, does not specifically indicate they are to be included, how can they claim they must do so because it is “U.S. law?” That is clearly not the correct position to take. And what will the result be if people are mad/scared enough to simply not deal with this U.S. situation any longer?

 

*******

John Richardson comments:

There are many who interpret the proposed changes, to include a provision that would lead to the confiscation of a significant portion of the retained earnings of small business corporations, owned by Americans abroad. I wrote the above referenced post and used the example of a U.S./Canada dual citizen living in Canada who owns a small business corporation. By the way, it is very common for Canadians to utilize small business corporations to carry on their businesses.

This specific provision is found in Sec. 4004 of the Proposed tax bill.
The way it would operate (after identifying those who own small Canadian Controlled Private Corporations in Canada) would be to:

1. Focus on the retained earnings of the corporation since 1986. Note that these earnings were either NOT subject to U.S. taxation at the time or were already included in the income of the shareholder via the subpart F provisions.

2. Impose a tax of either:

House Bill: 14% (cash) or 7% (non-cash)

Senate Bill: 10% (cash) or 5% (non-cash)

on the retained earnings by including those earnings in Subpart F income.

Understand that for many Canadians these small business corporations contain their retirement savings. So, the bottom line is the the United States proposed to literally confiscate these assets.

Understand also that Sec. 4004 is part of the section that creates the system of territorial taxation for U.S. corporations. The idea is that the “transition tax” is a way to repatriate the earnings which have not returned to the USA (obviously because of confiscatory taxation). After paying this “transition tax” those U.S. corporations will get the benefit of territorial taxation.

Understand also that U.S. individual shareholders of Canadian Controlled Private Corporations do NOT get the benefit of “territorial taxation”
but (if this is interpreted correctly) are still required to pay this.

What the USA, in it’s great wisdom is doing, is to:

1. Retroactively go back and deem income that was NOT taxable at the time to be taxable; and

2. Use the mechanism of subpart F inclusion (I am not going to dignify this by calling it a tax) to CONFISCATE the asset.

Understand also that this is one more of a long line of indignities inflicted on Americans abroad that includes:

– the virtual confiscation of Canadian pensions (via the Sec. 877A Exit Tax rules applied to some who renounce U.S. citizenship) that were earned in Canada while the individual was NOT living in the United States; and

– the application of the 3.8% Obamacare surtax to distributions of from Canadian RRSPs (the equivalent of U.S. IRAs) and excluding distributions from IRAs.

I suspect that this will be the “straw that breaks the camel’s back”.

And “The Band Played On ….””

 

UPDATE November 9, 2017

Today Chairman Brady concluded the “Mark Up” period of his proposed tax legislation. The “Mark Up” period contained NO move to “territorial taxation” for individuals. It did increase increase the “proposed confiscation” of the retained earnings of certain Canadian Controlled Private Corporation, from 12% to 14%.

See the “Manager’s Amendment” here:

summary_of_chairman_amendment_2

Now back to our regular programming …

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cross-posted from citizenshipsolutions

by John Richardson, J.D.

US tax reform bill appears to confiscate 12% of retained earnings of certain Canadian Controlled Private Corporations

 
Kudos to Max Reed for his quick analysis of the how the proposed U.S.
tax reform bill might affect Canadians citizen/residents who also have hold U.S. citizenship. You will find the bill here. His analysis, which has been widely discussed at the Isaac Brock Society (beginning here) includes provisions that are very damaging to those who are the owners of Canadian Controlled Private Corporations (noting they are also under assault from Messrs Trudeau and Morneau). The damaging provisions are both prospective and retrospective.

Continue reading “US tax reform bill appears to confiscate 12% of retained earnings of certain Canadian Controlled Private Corporations”

 

 

Barbara left the following comment at Brock earlier today. Her story is different in that she lives in a lower-tax based country (easier to owe US tax) where gaining citizenship is very difficult, if not impossible. I think this situation has come up far less often in public discussions and all of us should be aware of all the ways US tax policy is abusive to expats.

Barbara
2017/10/31

Agree with Mike : Renouncing is not only not easy, it’s excruciating. On that annual Greenback Tax expat survey, they often come up with a number like 37% of expats “considering renunciation”. My husband and I are two of those. I’ll bet the majority our fellow would-be renunciants have not taken the plunge, not because they don’t want to bother, but because the obstacles are just too extreme.

Sure, if you’re a lifelong Canadian, it may be administratively simple to renounce. Sure, you have to deal with is the boo-hoo emotional part, and 5000 bucks; I get that. But if you’re one of the tens or hundreds of thousands of Americans living in Saudi or Korea or Nigeria or China or Iceland, or other such places where it is either nearly impossible, or extremely unattractive, to take on local citizenship–even if we choose to or even enjoy living there–then renunciation is one of the most difficult decisions one can face.

We took years to make the decision. It isn’t costing us $2350 plus a few tears. It’s costing us our entire life’s savings to buy a passport of convenience through a property purchase, one which seems safe, but certainly not the best of all potential financial investments. Then we get to wait three years. Then we get the passports, we think. Then we deal with whether or not changing citizenship might affect our permanent residency status where we live. Only then do we face the pleasure of renouncing.

No matter what happens with the current tax reform, we’re determined to go through with it. We’ve lost all faith in the US government. There’s no doubt in my mind that the next administration will be a reaction against this one, and will be all Democrats, out for blood. And there’s no question the economy and national deficit will be in a worse mess than it is now. And us rich squillionaires hiding money abroad will be the first to be roped right back in.

Anyone who claims renouncing is easy, try thinking outside your own borders.

And I too hate all Homeland Americans. I find it hard to talk to them at all anymore. Who gives a damn about talking about Harvey Weinstein? I want to talk about TTFI.

 

Persistence pays off!
Suzanne Herman, a long-time Brocker, never gives up & look at the result!
We need more of this kind of thing!
BRAVO!!!

See the original here

letterhead image of Posey letter to Mnuchin
 
 

September 29, 2017
The Honorable Steven Mnuchin
Secretary of the U.S. Department of the Treasury
1500 Pennsylvania Avenue, NW Washington, DC 20220

Dear Secretary Mnuchin,

I am writing to you regarding the Foreign Account Tax Compliance Act (FATCA) [26. U.S.C. § 1471-1474; 26 U.S.C. § 6038D]. As discussed below, FATCA is an invasive, costly failure that I strongly suggest must be repealed at the soonest possible opportunity, hopefully in the context of tax reform enacted this year. In addition, the means adopted during the tenures of your predecessors Jack Lew and Timothy Geithner to implement FATCA via a series of legally dubious and constitutionally infirm non-treaty agreements with other countries must not be allowed to stand. I ask your assistance in assuring that FATCA repeal is part of any relevant legislation, and that the Treasury Department takes prompt action to cease the implementation of FATCA via Intergovernmental Agreements (IGAs).
FATCA’s proponents claim that it is simply a “transparency” measure – similar to a domestic 1099 – to ensure greater tax compliance for assets held offshore. This characterization is misplaced. Domestic tax law requires reporting of taxable events, such as income (a W-2 Wage and Tax Statement) or bank interest (a 1 099-INT). U.S. law, based on a presumption of innocence, does not generally require inquiry into asset principle unless there is reason to suspect wrong-doing. By contrast, FATCA requires wholesale reporting of Americans’ assets and transaction history absent any such suspicion, solely because the asset is held outside the United States. This is despite the fact that the IRS’s own Taxpayer Advocate Service reports that “the vast majority” of Americans residing abroad “actually appear to be substantially more compliant than a comparable portion of the overall U.S. taxpayer population.”

Despite such an invasion of privacy, FATCA has failed in its stated purpose of recovering revenue lost to offshore tax evasion. Last year the Internal Revenue Service (IRS) credited FATCA for “collecting” $10 billion from “taxpayers coming back into compliance, ,2 but that figure conflates genuine tax revenues with penalties for filing deficiencies and recoveries from all offshore enforcement programs, not just FATCA. In the estimate of Professor William H. Byrnes of Texas A&M University School of Law, the real net tax recovery of FATCA alone is about $200 million annually and may be only half of that. Professor Byrnes projects that FATCA may “soon cost more money than it brings in.”‘ Indeed, his view may actually be overly optimistic in light of the IRS’s commendable enforcement standard of recovering seven dollars for every dollar spent.4

By contrast, because of the IRS’s need to try to discern indicators of evasion within a sea of indiscriminate personal information belonging to non-evaders, W. Gavin Ekins of the nonpartisan Tax Foundation suggests that, under FATCA, finding “a dollar of tax evasion may cost us $5 of actually sifting through the data and compliance costs.”5 FATCA’s unsatisfactory ratio of return must also be weighed against the impact on taxpayers saddled with burdensome reporting paperwork. The Tax Foundation estimated in 2016 that these requirements cost individuals nearly four and half million hours and more than $165 million,6 an amount comparable to FATCA’s likely proceeds. This does not even take into count the massive compliance costs imposed 011 financial institutions.
The above summarizes the good and sufficient reasons why FATCA must be repealed and enforcement dollars spent on more effective programs to detect and punish actual tax evasion. While your support for that effort will be appreciated, it is a task primarily of Congress. But I now turn to a matter almost entirely within your purview, on which I ask your prompt and decisive action. This relates to IGAs invented by the Department in consultation with five European governments for the purpose of enforcing FATCA.

While the IGAs read like treaties and have the effect of treaties in purporting to create mutual obligations between sovereign states they are not submitted to the United States Senate for that body’s advice and consent to their ratification, though the non-U.S. “partner” country is required to do so under its necessary internal procedures for entry into force. In July 2013, I wrote7 to Secretary Lew with a specific request for the statutory authority for the IGAs. The Department responded, after a delay of nearly a year, with the following statutory justification: 8
 

“The United States relies, among other things, on the following authorities to enter into and implement the IGAs: 22 USC Section 2656; Internal Revenue Code Sections 1471, 1474(f), 6011, and 6103(k)(4) and Subtitle F, Chapter 61, Subchapter A, Part III, Subpart B (Information Concerning Transactions with Other Persons).”

 

None of the sections cited above confers on the Treasury Department any authority for making agreements with foreign governments for the furnishing of private financial information. In particular, there is nothing in the cited sections that allows the Department to promise (under the so-called “Model 1” IGA) on behalf of the United States FATCA-“equivalent” reporting to foreign tax services of private information obtained from domestic American financial institutions. Following through with this unauthorized promise would impose on American banks, credit unions, insurance companies, and other institutions crushing compliance costs of the magnitude already suffered by foreign institutions – costs that would inevitably be passed on to American consumers.

The IGAs represent a prime example of the kind of executive overreach that unfortunately typified the previous administration. I ask you to rein in this abuse by ceasing the negotiation of new IGAs and freezing the implementation of existing ones. This action should include a freeze on enforcement of FATCA regulations on taxpayers and financial institutions. Further, I ask that you notify IGA jurisdictions that these dubious pseudo-treaties are under legal review and that their nullification or abrogation from the U.S. side can be expected pending FATCA’s anticipated repeal.

Nothing in the foregoing should be construed in any way as being “soft” on tax evasion. Quite to the contrary, in addition to its other flaws FATCA is a distraction and a diversion of resources from effective tax enforcement based on standard investigatory techniques. As a member of the Financial Services Committee I look forward to working with the Department on measures to ensure effective tax enforcement that targets the guilty, without penalizing the innocent or
compromising our cherished American constitutional and legal norms. In the meantime, FATCA and the IGAs must go.

Thank you for your assistance on this critical matter.

posey signature

___________________________________

1 Taxpayer Advocate Service, 2016 Annual Report to Congress, Vol. 1; “FOREIGN ACCOUNT TAX COMPLIANCE ACT (FATCA): The IRS’s Approach to International Tax Administration Unnecessarily Burdens Impacted Parties, Wastes Resources, and Fails to Protect Taxpayer Rights,” page 221; See:https://taxpayeradvocate.irs.gov/Media/Default/Documents/2016-ARC/ARC16 Volumel MSP 16 FATCA.pdf

2 IRS press release, “Offshore Voluntary Compliance Efforts Top $10 Billion; More Than 100,000 Taxpayers Come Back into Compliance,” Oct. 21, 2016; See: https://www.irs.gov/newsroom/offshore-voluntarv-comphance-efforts-top-10-billion-more-than-100000-taxpayers-come-back-into-compliance

3 “Background and Current Status of FATCA” Texas A&M University School of Law Legal Studies Research Paper No. 17-31, pages 1-34, 35; See: https://paers.ssrn.com/soI3/papers.cfm?abstract id=2926 119

4 IRS press release, “National Taxpayer Advocate Delivers Annual Report to Congress; Focuses on Tax Reform, IRS Funding and Identity Theft,” Jan. 9, 2013; See: https://www.irs.gov/newsroom/national-taxpayer-aclvocate-delivers-2012-annual-report-to-congress

5 “Why Americans are giving up citizenship in record numbers,” Washington Post, June 1; 2016: See:

6 Tax Foundation, “The Compliance Costs of IRS Regulations,” June 15, 2016; See: https://taxfoundation.org/compliance-costs-irs-regulations/

7 See: http://www.repealfatca.com/downloads/Posev letter to Sec. Lew July 1, 2013.pdf

8 See: http://federaltaxcrimes.blogspot.com/2014/07/irs-letter-to-congressman-defending-its.html
For a definitive section-by-section demolition of the Department’s response, see Professor Allison Christians, McGill University Faculty of Law, “IRS claims statutory authority for FATCA agreements where no such authority exists,” http://taxpol.blogspot.com.au/2014/07/irs-claims-statutory-authority-for.html