If you have clients who hold U.S. citizenship or are green-card holders, you know they must prepare two tax returns every year – a Canadian and a U.S. return – and keep up with a host of other U.S. filing obligations.
It’s a burden that is, in part, leading an increasing number of Americans who live abroad, including those in Canada, to cut ties permanently to the U.S.
Last year, 3,415 Americans around the globe chose to renounce their U.S. citizenship, up from 2,999 in 2013 – an increase of almost 14%. The numbers are rising, even though the process is not easy and the fee was jacked up to US$2,350 last year from US$450.
“You’d have much bigger numbers of expatriates in Toronto, except there’s a backlog at the U.S. consulate,” says Kevyn Nightingale, a partner with MNP LLP in Toronto, and leader of the firm’s expatriate tax practice.
The U.S. tax system is based on citizenship, not residency, meaning that U.S. citizens must report on their worldwide income annually wherever they happen to reside. For U.S. citizens and green-card holders in Canada, a tax treaty between Canada and the U.S. usually prevents double taxation, but the compliance obligations – filing a U.S. tax return and other material every year – remain.
“Most Americans abroad live in high-tax countries, such as Canada, the U.K., Japan, France, and Germany. Very few of them are affected by the actual U.S. tax in any meaningful way,” Nightingale says.
“However, they’re all affected by the enormous paper burden that the U.S. imposes,” he continues. “[To comply], you have to hire a person who’s probably far more expensive than your normal tax preparer in whatever country you live in. It’s complicated, expensive, difficult, time-consuming and, overall, just a pain in the butt.”
This trend appears to be directly related to the 2010 passing into law of the U.S. Foreign Account Tax Compliance Act (FATCA), which effectively compels foreign financial services institutions to report to the U.S. on their American citizen clients. FATCA is designed to prevent offshore tax evasion by U.S. taxpayers.
Last year, the Canadian and U.S. governments signed an intergovernmental agreement (IGA) to implement FATCA. Under the IGA, Canadian firms report information on American accountholders who have an aggregate balance of US$50,000 or more, excluding balances in some tax-sheltered accounts, to the Canada Revenue Agency, which shares the data with the U.S. government.
FATCA has left many Americans in Canada feeling targeted, knowing that their data is being shared by the Canadian government with the U.S.
The process to expatriate requires a number of steps, including: booking an interview at a U.S. consulate or embassy and making a formal oath of the intention to renounce citizenship; filing the previous five years of U.S. tax returns and other tax reporting; and paying any taxes and penalties owing. For wealthy expatriates, there also can be significant exit taxes.
Finally, there is a US$2,350 fee, and the names of expatriates are published in the U.S. federal register every quarter.
In general, the U.S. government has offered precious little in the way of relief to Americans abroad who are facing a significant U.S. tax compliance burden. However, in a 2016 budget proposal released in February, the Obama administration offered limited relief to certain dual citizens who have been lifelong citizens of the U.S. and another country, and who have had minimal contact with the U.S. These individuals may be able to expatriate from the U.S. without filing previous years’ U.S. tax returns or paying an exit tax.
However, this change is only a budget proposal at this stage, so it is too early to consider it anything but a long shot to become law, tax experts say.
The bigger message might be that the U.S. government seems to have begun to understand the consequences that both FATCA and the U.S. citizenship-based tax system have had on Americans abroad.
“[The budget proposal] is evidence that the unenviable predicament faced by dual citizens living abroad has been heard in Washington, D.C., and there may be political will to affect change,” wrote Roy Berg, director, U.S. tax law, with Moodys Gartner Tax Law LLP in Calgary, in a blog posting on the development.
© 2015 Investment Executive. All rights reserved.