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Part 7 – Understanding “Exit Taxes”



John Richardson 15
Why 2015 is a good year for many #Americansabroad to relinquish US citizenship – It’s the “Exchange Rate”

The purpose of my series of posts on the S. 877A “Exit Tax” has been to explain how the tax actually works. I have provided actual examples. The results have been enlightening and have demonstrated how arbitrary the results have been. In “Part 5” of this series you will find the actual examples and draft tax returns. I provided examples of how much the S. 877A “Exit Tax” could be. The examples were based on one consistent set of financial circumstances and demonstrated how that one set of financial circumstances would apply to five different people. We learned that there were wide variations in the amount of the “Exit Tax” payable. A person who was a “dual citizen” from birth may have paid on “Exit Tax” of $0.00. A person who was born ONLY a U.S. citizen might have paid as much as $365,000. (All amounts are in U.S. dollars.) But, wait the person was born a dual Canadian citizen, but was living in the UK when he renounced would pay an “Exit Tax” of $365,000.

Refreshing your memory

10-22-2015 3-25-19 PM

 

 

 

and…

10-22-2015 3-33-16 PM

 

 

 

 

 

 

 

 

 

 

 

These visual reminders strongly suggest that …

he US “Exit Tax” S. 877A rules show that in America: “Circumstances of your birth determine outcome of your life” https://www.facebook.com/groups/AmericanExpatriates/permalink/450081755157902/?comment_id=450173761815368& 

As one commenter observed:

I find this to be a very important study. The inclusion of sample completed Forms 8854 and 1040s is really helpful to understanding how the exit tax can affect people differently. The unfairness of the exit tax under 877A and its dependence on accidents of birth, over which a person has no control, is breathtaking. The article makes a convincing case for calling the exit tax “evil”.

Note the reference to “dependence on accidents of birth, over which a person has no control”. How about “dependence on other things over which one has on control?” For example, how about dependence on the U.S. dollar exchange rate?

U.S. tax returns are to calculated in the U.S. dollars

The fact that U.S. tax returns must be done in U.S. dollars creates unique challenges for U.S. citizens abroad. Some of you may have heard the phrase “phantom gains”. A “phantom gain” could result by converting Canadian dollars to their U.S. dollar equivalent.

How US Foreign Exchange rates can turn Canadian dollar losses into US dollar taxable gains https://www.facebook.com/groups/AmericanExpatriates/permalink/421742634658481/  – FX rates matter

Here is an example.

Interesting situation from a FATCA/FBAR tax seminar I attended last night: A Canadian dual national who lost money on the sale of her home in Canada ended up owing the IRS for a capital gain on that house (no capital gains are assessed on a primary residence in Canada). The reason? Exchange rates. She bought when the Canadian dollar was at 70 cents US and sold when it was at par. She loses money on her sale in Canada, but according to the IRS she had a 30 per cent gain. This is what happens when America imposes incompatible tax law on citizens in another country and is another reason why citizen-based taxation must end.

For additional comments see the discussion here.

A reminder, only “covered expatriates” are subject to the S. 877A “Exit Tax”

We have seen that one of the most common ways to be a “covered expatriate” is if, on the day before you renounce citizenship. your net worth exceeds two million U.S. dollars. Note again this is two million U.S. dollars.

How do “exchange rates” affect whether you are a “covered expatriate”?

Video: Canadian dollar could tumble to 83 cents next year http://fw.to/oanoEKf  – The winners are those wishing to renounce US citizenship

Understanding the Canada U.S. Exchange rate …

exchangerates

 

One of the most frustrating aspects of U.S. “citizenship taxation” is that all transactions and numbers must be calculated in U.S. dollars. Because, the exchange rate varies on a daily basis, your “net worth in U.S. dollars” would vary on a daily basis. To put it simply:

variations in the Canada U.S. dollar exchange rate will make a difference in your U.S. dollar net worth.

A two part explanation explaining how it all works

1. For the purpose of U.S. taxes, all transactions are converted to U.S. dollars (using the applicable rate at the time of the transaction);

2. The result is that fluctuating exchange rates can generate “phantom” capital gains and losses, which can generate U.S. tax liability for Americans abroad.

As the Canadian dollar rises in value, fewer Canadian dollars are needed to purchase a U.S. dollar. The capital gains measured in U.S. dollars would increase.

As the Canadian dollar falls in value, more Canadian dollars are need to purchase a U.S. dollar. The capital gains measured in U.S. dollars would decrease.

The Canadian dollar has fallen by about 20% in the last two years. The above tweet references a video suggesting that, the decline of the Canadian dollar or (as a Homelander would say), the strengthening of the U.S. dollar is EXCELLENT for Americans in Canada considering renouncing U.S. citizenship.

2015 is a very very good year to renounce U.S. citizenship!!!

Q. Why is 2015 a very very good year to renounce U.S. citizenship?

A. Because the Canadian dollar is fallen sharply relative to the U.S. dollar.

An example …

Let’s imagine a Toronto resident with a net worth of $2,400,000 million Canadian dollars (a common scenario if you own a home in the City of Toronto).

The question is:

Would this individual be a “Covered Expatriate” and be subject to the S. 877A “Exit Tax”?

Actually, it depends. It depends on the U.S. Canada exchange rate. It depends on how many U.S dollars that $2,400,000 Canadian dollars is worth.

Let’s find out. Begin by doing a google search on “Canada U.S. exchange rate”.

Here is what appeared:

canadausexchangerate

Okay, not the best graphic, but what it shows is that for a period of a few years (2011 to 2013) the exchange rate was approximately:

1 Canadian dollar = 1 U.S. dollar

Notice that it has fallen to:

1 Canadian dollar = .80 U.S. dollar

To put it another way, today:

1 U.S. dollar = 1/.80 = 1.25 Canadian dollars

The strengthening of the U.S. dollar create winners and losers.

The winners – “Covered Expatriates” …

Here we go. Let’s see how the “exchange rate” affects ones status of being a “covered expatriate”.

2012

$2,400,000 million Cdn = $2,400,000 million USD

Bad news. He is covered. He will lost a lot of that courtesy of the S. 877A Exit Tax.

2015

$2,400,000 million Cdn = 1.920,000 USD – Not covered.

Whenever I think about U.S tax problems, I am reminded of the phrase:

“You can’t make this stuff up!”

Now you see why 2015 is a very good year to renounce U.S. citizenship. (I am working with people who monitor the Canada U.S. exchange rate daily!)

Notice that you are exactly the same person in exactly the same house with exactly the same job. Nothing in your life has changed. Yet, some have to pay an “Exit Tax” and some don’t. (Well, that is if your were born ONLY a U.S. citizen.)

The “losers” – “non-covered expatriates” …

The % increase in the fee to renounce U.S. citizenship in Canada is NOT 421%. It’s actually 553% https://fatcalawyer.wordpress.com/2015/04/03/why-2015-is-a-very-good-year-to-renounce-us-citizenship-its-the-exchange-rate/  – Magic of FX rates

The $2350 USD renunciation fee just got more expensive in Canadian dollars.

Renunciation fee in 2012 – $450 USD + $450 Canadian dollars

Renunciation fee in 2014 – $450 Renunciation fee raised to $2350 USD to compensate the U.S. Government for “Form Retention and Completion”

Renunciation fee in 2015 – $2350 USD = $2937.50 Cdn dollars

You can see that the exchange rate makes a difference.

Actual percentage increase in the “Renunciation Fee”

1. In U.S. dollars – 422%

2. In Canadian dollars (what you really pay) – 553% increase

Those who think the percentage increase in the renunciation fee is only 422% don’t understand arithmetic and exchange rates!


 

Appendix: Exchange rates and U.S. taxes

This is a huge problem from both an administrative and from a fairness perspective. The requirement that U.S. citizens abroad calculate every aspect of their lives in U.S. dollars leads to huge complications.

For those who want to learn more, here are some discussions that are quite enlightening:

How Fluctuating FX Foreign Exchange Rates Generate Capital Gains on the Sale of Property and the Discharge of Debt.

The above article demonstrates how it is common for Americans abroad to have no capital gain (or even a loss) in their country of residence, but STILL U.S. capital gains tax.

“You can’t make this stuff up!”

Conclusion:

California lawyer Phil Hodgen coined (I believe) the phrase:

Get out while the getting out is semi-good.

This phrase predates the fall in the Canadian dollar. The phrase should be updated to be:

“Get out while the exchange rates are very good!”

Original Post By:  John Richardson

Next:  Part 8 – Understanding “Exit Taxes” – “The U.S. “Exit Tax vs. Canada’s Departure Tax – Understanding the difference between citizenship taxation and residence taxation”

 

The Reality of U.S. Citizenship Abroad

My name is John Richardson. I am a dual citizen. I am a lawyer – member of the Bar of Ontario. This means that, any counselling session you have with me will be governed by the rules of “lawyer client” privilege. This means that:

“What’s said in my office, stays in my office.”

I am also a member of the American Citizens Abroad Professional Tax Advisory Council (PTAC). This is an advisory panel focused on assisting American Citizens Abroad in an FBAR and FATCA world.

The U.S. imposes complex rules and life restrictions on its citizens wherever they live. These restrictions are becoming more and more difficult for those U.S. citizens who choose to live outside the United States.

FATCA is the mechanism to enforce those “complex rules and life restrictions” on Americans abroad. As a result, many U.S. citizens abroad are renouncing their U.S. citizenship. Although this is very sad. It is also the reality.

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