Once upon at time (well back in the last century) I knew a person who – along with three other people – shared the rental of a house. The agreement was that they would split the rent equally and that they would split the utilities equally. The agreement also stated that on the last day of each month the group would meet and each contribute their 1/4 share of the utilities owing. The agreement further stated that in the event that any person did not pay his share of the utilities in cash that his property could be used (fair market value assessment) to pay his share. One week prior to the last day of the month one of the four realized that he would not have the money to pay his share of the utilities. As a result, two days before the last day of the month, that individual:
1. Removed all of his belongings; and
2. Moved out of the house.
The legend was that the remaining three had to pay his share of the utilities and his property remained intact. By moving out and removing his property he was able to avoid paying a debt that he owed to the group.
Unsurprisingly the Internal Revenue Code contains provisions to prevent individuals from leaving the United States or removing property from the United States to defeat the payment of tax debts. This is of particular concern to the United States if the individual is an “alien”. The requirement to obtain a “sailing permit” to leave the United States is neither well known nor enforced. That said, the “sailing permit” (even with the existence of “withholding taxes”) remains the law!
Part I – Summary of post:
The proposals for Americans abroad include:
1. A provision to (and presumption of) heighten enforcement of the 877A exit tax through changes in the Internal Revenue Code
2. A possible “carve out” from the 877A exit tax for certain Americans abroad with limited ties to the United States (under rules prescribed by the Treasury Secretary)
3. NO RELIEF whatsoever from U.S. citizenship taxation and the way that the rules apply to Americans abroad. This assumes a continuation of U.S. citizenship taxation with no evidence of change.
In other words: Either comply or renounce!
On November 2, 2022 the Supreme Court of the United States heard arguments in the Bittner FBAR case. I have previously written about this case here and here. An audio of the oral argument at the Supreme Court (along with commentary) is here. On February 28, 2023 the Court issued it’s ruling.
The issue was whether:
In assessing non-willful civil FBAR penalties the government is restricted to imposing one penalty for failing to file an accurate FBAR form or may the government impose a separate penalty for each mistake related to each account. In other words, is the penalty based on the failure to file a correct form or is a separate penalty allowed for each mistake in relation to the form?
Interestingly and notably the Gorsuch majority decision specifically notes that the period in which the FBAR penalties were assessed were for years that Mr. Bittner was living in Romania. There is no acknowledgment of this in the Barrett dissent!! In addition, Ms. Boyd (of 9th Circuit fame) was also assessed penalties for the years she was living in the UK! To be clear: this decision is very relevant for Americans abroad!!
The court’s decision
Part I – Prologue – A Tweet Worth A Thousand Posts
For a “Readers Digest” version of the post that is to follow, simply click on the link in the above tweet!
To see examples of the deemed income inclusions and the U.S. tax owing click on the links to Appendices, B, C and D below.
Outline And Structure
This post is for the purpose of alerting Americans abroad and their advisors to a particularly difficult and unjust aspect of renouncing U.S. citizenship. The punitive treatment of the non-U.S. pension is a reason for many Americans abroad to consider renunciation earlier (when they are not “covered expatriates”) rather than later (when they may be subject to the confiscatory rules applied to “covered expatriates”).
Part I – Introduction – The General Message
Part II: Relinquishment and the confiscatory case of the “ineligible” (non-U.S.) pension … A Deeper Dive
Part III: Relinquishment and the retention of the “eligible” (U.S.) pension … A Deeper Dive
Part IV – Conclusion
Appendix A – How Internal Revenue Code Sections 877A and 877 Lead To The Confiscation Of The Non-U.S. Pension
Appendix B – Dual Status tax return with a 1 million USD income inclusion on the day before expatriation
Appendix C – Dual Status tax return with a 1 million USD income inclusion on the day before expatriation with a $100,000 tax credit carry forward
Appendix D – Dual Status tax return with (1) a full actual distribution of the pension in Canada on the day before expatriation (generating a foreign tax credit in the current year)
Part I – Introduction – The General Message
Introduction – Responding To Canada’s Underused Housing Tax
Canada’s Underused Housing Tax is NOT a tax imposed because the “foreign owner” doesn’t spend enough time in the property. Rather Canada’s Underused Housing Tax is a tax imposed because the “foreign owner” doesn’t make the property sufficiently available to non-owners!!
This is the fourth in my series of posts about Canada’s “citizenship-based” Underused Housing Tax.
The first three posts are:
1. US Residents Who Own Residential Property In Canada May Be Subject To Various Vacant And Underused Property Taxes
2. NY Congressman Brian Higgins Draws Attention To The Injustice Of Citizenship Taxation By Challenging Canada’s Underused Housing Tax
3. U.S. FBAR And Form 8938 Penalties May Be A Bigger Problem For U.S. Residents Than Canada’s Underused Housing Tax
The purpose of this post is two-fold:
First: to explain what “Canada’s Underused Housing Tax” really means for “foreign owners” of certain Canadian property:
Conclusion: It means that foreign owners who own property that is NOT in a designated recreational location and who do NOT release their property into the rental market will be forced to pay the 1% tax.
Second: to explain that owners of most Canadian residential property that is not in a designated recreational location, who are neither Canadian citizens nor permanent residents of Canada can avoid releasing their property into the rental market ONLY if they either:
This is a continuation of the first post discussing the applicability of Canada’s vacant home taxes to U.S. residents. The first post is here.
You can see the complete twitter thread here.
A recent post describes how various Canadian Underused and Vacant property taxes might apply to unsuspecting U.S. residents (Toronto, Vancouver and Ottawa) and U.S. citizens (Canada’s Underused Property Tax).
Taxes that apply to ALL owners of property
The Toronto, Vancouver and Ottawa taxes apply to ALL owners (regardless of citizenship or residence) of residential property. Although these taxes apply to all owners, some U.S. citizen/residents have argued that they are disguised taxes on being American. The broad scope of these taxes makes them difficult to challenge.
Taxes that apply to property owners based on citizenship or immigration status
Interestingly Canada’s Underused Property Tax, by its express terms applies based on “citizenship” and/or “immigration status”. Specifically, it applies to people who are neither citizens nor permanent residents of Canada. In the same way that the United States imposes taxes on people based on and only on the status of being a U.S. citizen or permanent resident of the United States (Green Card holder), Canada’s Underused Vacant Property Tax is based on NOT being a citizen or permanent resident of Canada. Significantly, certain provincial human rights codes (presumptively) prohibit discrimination based on citizenship. The first case decided by the Supreme Court of Canada (Andrews) interpreting S.15 of Canada’s Charter of Rights struck down a British Columbia statute requiring Canadian citizenship to practise law in British Columbia. In 1974 – In Re Griffiths – the U.S. Supreme Court struck down a similar Connecticut provision requiring U.S. citizenship to be admitted to the bar in Connecticut. In the United States, classifications based on citizenship/alienage are “suspect classifications” and presumptively unconstitutional. Canada’s laws and judicial decisions are generally hostile to classifications based on citizenship.
To be clear: classifications based on citizenship clearly attract judicial scrutiny!
Introduction And Purpose
Many Canadian cities are experiencing the combined effects of a shortage of affordable housing and a rise in housing prices. In short housing (whether to own or to rent) has become less available and more expensive. Factors contributing to this include: Investors preferring to “rent” their investment properties on short term rental platforms rather them releasing them into the rental market, Provincial Landlord and Tenant laws which impose laws on small landlords which are perceived as unfair, increases in property values (caused by low interest rates) which have caused an imbalance between the cost of buying residential real estate and the amount it can be rented for. (It makes no sense for a person to purchase a property for one million dollars and rent it for $2000 per month.)
Canadian Cities – Clear Laws And Easy To Understand And Significant Discontent From U.S. Owners
The above tweet references a fascinating article Wall Street Journal article written in 2017 by a U.S. owner of a Vancouver, BC condominium claiming that the tax was directed at Americans. It’s a fascinating read.
A reply to the above tweet pointed out that:
Introduction, purpose And summary
It is clear that US citizens, who are tax resident of countries outside the United States are generally subjected to a more punitive system of taxation than US residents. That said, the U.S. has different tax treaties with different countries. Some treaties (example Australia) make living outside the United States very difficult. Other tax treaties (Canada and the UK) make living outside the United States easier in a relative sense. The relative difficulty is somewhat dependent on the extent to which the treaty contains provisions for U.S. citizens who are “resident” in the treaty partner country. These treaties are an additional recognition of U.S. citizenship taxation.
If a U.S citizen contemplating a move abroad asked the following question:
Q. How will I be taxed if I move outside the United States and live as a tax resident of another country?
The answer will be:
A. I don’t really know. It depends what country you are considering moving to.
Not only are US citizens living outside the United States taxed more punitively than U.S. citizens living inside the United States, but their taxation by the United States depends on the country they move to! (In addition, both income and estate tax treaties may contain provisions that affect the way U.S. citizens may be taxed by the treaty partner country!)
The curious case of the U.S. France Tax Treaty and U.S. Citizens resident in France
Introduction And General Context
On Friday January 6, 2023 the State Department announced its intention to reduce the administrative fee for issuing CLNs (“Certificates Of Loss Of Nationality”) for US citizenship relinquishments from the current $2350 to $450. Notably in 2015 the State Department increased the fee from $450 to $2350.
The precise language found in the Declaration of Assistant Secretary For Consular Affairs Reena Bitter was:
3. Under 31 U.S.C. 9701, 22 U.S.C. § 4219, and Executive Order 10718, the Department has the authority to establish fees to be charged for official services provided by U.S. embassies and consulates. The Department intends to pursue rulemaking to reduce the fee for processing CLN requests from the current amount of $2350 to the previous fee of $450, as set in 75 FR 36522 on June 28, 2010. The Department will consider any necessary changes to this fee, as appropriate, in a future rulemaking.
The reduction was announced in conjunction with a lawsuit launched by the Association Of Accidental Americans arguing that the $2350 renunciation fee is unconstitutional. The announcement and general context is described in the article at the American Expat Finance News Journal.
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Those wishing to better understand the lawsuit might be interested in a 2020 podcast I did with the lawyer Marc Zell.
The American Expat Financial News Journal reliably reports information about the “Name and Shame List”. The report generally includes information about the number of people on the list and people who are reported more than once. The report often attempts to determine whether those on the list are citizenship relinquishers or green card abandoners.
The purpose of this brief post is to explain the statutory basis for the reporting obligations, identify the relevant statutes and clarify some common misconceptions.
A summary of the analysis is that:
1. All individuals renouncing (whether “covered expatriates” or not) US citizenship during the relevant period are to be included on the “Name and Shame List”.
2. Green Card holders that are “long term” residents” are required to be included on the list
It is common knowledge that the lists contain many inaccuracies on the list.
Which statutes are relevant to determining the reporting obligations?
IRC 6039G – https://www.law.cornell.edu/uscode/text/26/6039G
IRC 877 – https://www.law.cornell.edu/uscode/text/26/877
IRC 877A – https://www.law.cornell.edu/uscode/text/26/877A
Prologue – Before The Supreme Court – The Background To The Toth FBAR Case
This Is Post 7 in a series of posts describing the statutory and regulatory history of Mr. FBAR.
These posts are organized on the page “The Little Red FBAR Book“.*
Historically the strength of America has been found in its moral authority. As President Clinton once said:
“People are more impressed by the power of our example rather than the example of our power…”
The FBAR penalty imposed on Ms. Toth is an example of the legal power to impose penalty and NOT an example of the restraint on power and the application of law in a just way. I have heard it said that when a person (and by extension country) loses its character it has lost everything.
The Story Of Monica Toth – Three Perspectives
Perspective 1: The story of Ms. Toth’s encounter with Mr. FBAR as described by Justice Gorsuch in his dissent:
In the 1930s, Monica Toth’s father fled his home in Germany to escape the swell of violent antisemitism. Eventually, he found his way to South America, where he made a new life with his young family and went on to enjoy a successful business career in Buenos Aires. But perhaps owing to his early formative experiences, Ms. Toth’s father always kept a reserve of funds in a Swiss bank account. Shortly before his death, he gave Ms. Toth several million dollars, also in a Swiss bank account. He encouraged his daughter to keep the money there—just in case.
Ms. Toth, now in her eighties and an American citizen, followed her father’s advice. For several years, however, she failed to report her foreign bank account to the federal government as the law requires. 31 U. S. C. §5314. Ms. Toth insists this was an innocent mistake. She says she did not know of the reporting obligation. And when she learned of it, she says, she completed the necessary disclosures. The Internal Revenue Service saw things differently.
Summary – The Reader’s Digest Version …
Although FATCA was clearly motivated by the behaviour of US citizens resident in the United States, Treasury did NOT interpret the “purpose” as being limited to prevent abuses by “residents of the United States”. Rather Treasury appears to have interpreted the purpose of FATCA (very broadly) to target residents of other countries.