I am writing to express my concern regarding citizen based taxation. First, some background on my personal situation.
I was born in the United States. When I was 12 years old, my father was transferred by his employer to Canada, and moved the family to Canada as a result. Since the age of 12 (over 40 years ago) I have been educated and employed in Canada.
I have been a tax payer in Canada since I was 16. I receive my health care benefits from Canadian provincial governments. I graduated from the University of Waterloo, in Canada. I have no plans to return to the United States. I am a Canadian citizen and have been for over 20 years.
The decision to become a Canadian citizen was made with every expectation that I would not return to the United States. My only pension expectations are from the Canada Pension Plan. In anticipation of the fact that I have no other pension, I have saved diligently for my future retirement.
I recently renewed my US passport only because I was told by immigration officers that I must have a US passport to enter the United States. I have never voted in a US election, because I have never felt like I had the moral right to vote in the United States. I have voted in every Canadian election that I have been eligible to vote in.
Although I would like to relinquish my citizenship, I am unable to because of that push to obtain a US passport. I still have family in the United States that I would like to visit from time to time. But other than that I have no reason to visit the United States beyond tourism reasons that any other Canadian might have.
My concerns about citizen based taxation include the following:
- Unfair treatment of local (foreign to the US) mutual funds
- Financial impact for incorporation
- Inability to attract partners
- Loss of generally allowed tax deductions
- Loss of privacy, warrantless search of financial accounts
- Onerous filings, disproportionate penalties
- Lack of information regarding IRS regulations
Unfair treatment of local (foreign to the US) mutual funds:
Mutual fund investments are common, practical and generally considered an almost essential element of any investment strategy. They allow individuals to invest responsibly for their future. However, US tax law makes investments in something as relatively conservative as a mutual fund an absolute nightmare. The US treats foreign (i.e., not American) mutual funds as a passive foreign investment company (PFIC).
The US tax law is written to deter investment in these accounts –even though these accounts are not foreign to individuals resident outside of the United States. Frankly, the treatment of PFICs is so complex and confusing that I can’t be sure that I even understand the requirements.
However, my general understanding is: A foreign mutual fund investor may elect to treat the PFIC as a qualified electing fund. However, this requires coordination with the PFIC to obtain a PFIC Annual Information Statement, which may or may not be available, and the PFIC must have IRS approval to be treated as a PFIC.
Regardless it is not commonly available. Or the investor, may elect the Mark to Market election. This requires the investor to claim potentially unrealized capital gains / losses on the investment. Or if neither election is made, all income (including capital gains) is subject to taxation as ordinary income and is automatically taxed at the top individual tax rate (39.6%).
I believe this is on top of any local taxes paid on the investment.
All of which makes investing in local mutual funds for Americans that are not resident in the US basically impractical. Although I am unfamiliar with the treatment of ETFs, I believe the US tax treatment of foreign ETF’s is somewhat similar.
Financial Impact For Incorporation
I have been working for over 20 years as an independent consultant in Canada. The generally accepted method of working this way has involved the creation of a corporation that contracts with a third party for specific services. It is fairly common in Canada for independent contractors to work through a corporation. In fact, I am consistently required to work through a corporation in order to obtain these contracts.
In my case, the corporation has netted $0.00 in gross income for over 20 years. No income is hiding in this corporation. However the treatment of this corporation is far too complex for a lay person such as myself, to understand. Frankly I have no idea what to do with regards to the reporting requirements for this corporation. Although, Revenue Canada recognizes this corporation as a completely separate entity, somehow the US requires IRS declarations linking that corporation back to me.
Inability to Attract Partners
Because of the US treatment of foreign corporations that I have >10% ownership in, I have had to actively decline partnerships/opportunities with individuals that are Canadian citizens in order to exclude them from the complexities of IRS reporting. Loss of generally allowed tax deductions Boris Johnson recently shed some light on the tax of capital gains on a home that is charged in the US, but not charged in the UK. The same applies in Canada. In the US, mortgage interest is deductible from income tax, however it is not deductible in Canada. The two differences is a perfect example of situations where a US person living abroad is unable to take advantage of tax deductions afforded to individuals not subject to US citizen based taxation.
Loss of Privacy, Warrantless Search of Financial Accounts
The reporting requirements of FACTA are extensive. They include reporting of all of my foreign accounts, account balances and account transactions over a certain value. No US person living within the United States is subject to this type of reporting/search. There is no warrant for the transfer of my personal and very private financial information.In addition, there are no obligatory protections of any information that foreign financial institutions may collect with respect of my citizen and/or US person status.
In this era of digital privacy, this set of information would be invaluable to many. I do not believe that the collection of this information is constitutional in either the United States or Canada. The collection of this information for well over 7 million individuals worldwide is immoral and inconceivable for those of us that were raised in a free society. I am appalled by this collection of information.
Onerous Filings, Disproportionate Penalties
To provide an example of the disproportionate penalties, consider my set of 20 laddered Canadian GIC accounts. These accounts were started with a total of $20,000 invested quarterly over 5 years to build a 5 year GIC ladder where $1000 rolls over for re-investment in a 5 year GIC each quarter. Since I began this GIC investment, that $20K is now worth approximately $28K over approximately 15 years (due to the extremely low interest rate environment).
Potential penalties if those accounts are not reported to the IRS is $10K per account per year, for up to six years. Making approximately $28K subject to 20 * $10,000 * 6 = $1.2M – on an account total of $28K. That is, by far, enough to bankrupt me. That doesn’t include penalties for late filing, or penalties for FBAR failing to file requirements. If that is not a disproportionate penalty, I don’t know what is.
Consider The Fear and Loathing That The Penalties Are Instilling In The US Citizens Living Abroad
With regard to onerous filings – consider a US person, such as myself, living outside the United States. I’ve saved responsibly, looking forward to a point when I will be able to retire. While not even a millionaire, I have extensive investments in various stocks and mutual funds, not to mention several banking accounts.
The IRS estimates that Form 8938 can be completed in 1 hour and 5 minutes. My estimate:
- Understanding the Form –4 hours
- Part I –2 hours;
- Part II –2 hours;
- Part III –2 hours per asset;
- Part IV; Understanding Forms 3520 , 8621, 3520-A, 8865, 5471, 8891 –10 hours;
- Part V –4 hours per deposit;
- Part VI –6 hours per “other foreign asset.
Given the structure of my financial assets, my expectation is that the full completion of this could take up to 60 hours. That doesn’t include FBAR filing requirements for these accounts. It also doesn’t include general completion of Form 1040 and other additional forms that must be completed for non-residents.
Lack of information regarding IRS regulations
I am not a 20 year old with a small income. I am near the end of my career with relatively significant savings. I own a corporation in Canada. Although it has no net revenue year after year, it is still complicated understanding the filing obligations.
IRS materials explaining the filing obligations are indecipherable by the general US person living abroad. IRS phone support is difficult to reach. There are no local IRS offices where I live. Much of the information I know about filing US Tax returns is pulled from multiple internet sites offering various interpretations of US tax law.
It’s almost impossible to feel confident in filing a return.
Donald Rumsfeld famously writes a letter to the IRS to accompany his return each year. The letter explains how he has no idea whether his return is accurate because of the complexity of the tax code. As a US citizen living abroad, I concur with his concerns about the difficulties of filing an accurate tax return, and live in fear of exposing myself to severe penalties if I get it wrong.
Finally, I want to say that I feel that FACTA is an unprecedented display of American arrogance, and motivates other countries (China especially) to enter currency deals to the exclusion of the United States. I urge the Senate Finance Committee and US Congress to work toward immediate repeal of US citizen based taxation.
A US Citizen Living Abroad
Original Statement on April 9, 2015
United States Senate Finance Committee
Have a question? Contact John Richardson
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