Monthly Archives: April 2015

How the logic of the quantifiers: "All", "Some", and "Not All" apply to Canadian mutual funds

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What is a PFIC?

The acronym “PFIC” stands for “Passive Foreign Investment Corporation”. For your reading pleasure, I refer you to:

S. 1297 of the Internal Revenue Code which defines what a PFIC is; and

S. 1291 of the Internal Revenue Code which describes the “default taxation” of a PFIC.

Assuming that all Canadian mutual funds are PFICs, the results are horrific. I have written about this problem in two separate submissions to the U.S  Senate Finance Committee.
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Part 11 – S. 2801 of the Internal Revenue Code is NOT a S. 877A "Exit Tax", but a punishment for the "sins of the father"

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Updated September 12, 2015 – the IRS has issued “proposed rules”  governing the issue of “The sins of the father”.

Here the proposed rules from September 9, 2015:

IRS-Sec.-2801-2015-22574 (1)

2015-22574

IRS Sec. 2801 2015-22574

IRS S. 2801 Guidance 2015-22574

The above tweet references the following comment to Part 9 of this “Exit Tax” series.

I know many tax compliant, patriotic Americans who have renounced. Many have done so seeing the $2m threshold approaching, to protect their families and get on with their lives. All with heavy hearts.

You did not mention the additional burden on those who renounce who have US citizen relatives–the tax their relatives are supposed to pay on receiving a gift or bequest from a covered expatriate. More and more will be covered expatriates as the $2m gets smaller by reason of inflation and currency change. Although the IRS promises to give guidance on this unenforceable “succession” tax that punishes the children for the acts of their parents, so far, since 2008, we are still waiting for it. The reason for the delay is that there is probably no way of identifying those donors or deceased persons who were covered expatriates. Will the US take a FATCA approach and assume every foreign donor or deceased person is a covered expatriate unless the US recipient can demonstrate otherwise?? Certainly this law proves your point that an exit tax reflects the morality of a nation.

Thanks for the comment. S. 2801 is NOT part of the “Exit Tax” Regime. The “Exit Tax” punishes “covered expatriates” for relinquishing U.S. citizenship. S. 2801 is to inflict further punishment after relinquishment on both the “covered expatriate” and his heirs. You will see that S. 2801 exists for one and only one purpose – the punishment of “expatriation”.

The definition of “covered expatriate” is covered in Part 3 of this series of Posts about the S. 877A “Exit Tax”.

Yes, this post will focus on Internal Revenue Code S. 2801 punishment for the “Sins of the fathers“.

Exodus 20:1-26

And God spoke all these words, saying, “I am the Lord your God, who brought you out of the land of Egypt, out of the house of slavery. “You shall have no other gods before me. “You shall not make for yourself a carved image, or any likeness of anything that is in heaven above, or that is in the earth beneath, or that is in the water under the earth. You shall not bow down to them or serve them, for I the Lord your God am a jealous God, visiting the iniquity of the fathers on the children to the third and the fourth generation of those who hate me, …

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Part 10 – The S. 877A "Exit Tax" and possible treaty relief under the Canada US Tax Treaty

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Introduction – The Canada U.S. Tax Treaty Does Not Always Prevent Double Taxation


When countries independently make major changes in tax law, double taxation can occur
The following comment from 5thSwiss on the Isaac Brock Society site explains why and how double taxation can be a reality. It also underscores the dangers of a U.S. citizen leaving the United States.

It’s not obvious that renunciation of citizenship will cure failure to report in the past, or forgive unpaid tax. (“a ‘disposition’ of PFIC shares can occur by redeeming them, selling them, gifting them away, or even by giving up one’s US resident status or citizenship”)
The increasingly complex, expensive and draconian US tax law as applied to “accidental” US Persons might be considered by some a “good thing”. The more draconian – disproportionate – tax laws and penalties become, the more costly it is for ordinary families living abroad to report and pay tax on concessionary funds (such as for minors and disabled dependents, and retirement and tax-sparing funds not envisaged in the relevant bilateral tax treaty) the more impossible of enforcement and outrageous in principle such unilateral and exorbitant laws are seen to be.
And the less likely it is that the country of residence of a noncompliant person deemed to be a US person will assist the USG in collecting tax, prosecuting an individual and pursuing others on the basis of “transferee liability”.
Canadians who faced double taxation of their inheritance in that decade after Canada moved to capital gains taxation of estates based on deemed sale at death vs US imposition of estate duty (there is now a credit of one against the other under a tax Protocol) will understand that individuals are cannon fodder for Governments, who when they negotiate tax treaties are mainly concerned with the interests of multinational firms as represented by lobbyists. It is no wonder that of the 6 million Americans said to be resident abroad (the State Department knows of only half of those), an increasing number, unable to pay for tax advice or preparation, for renunciation of citizenship or the incremental US tax itself, are simply remaining underground. A series of GAO reports has looked at this and found no solution. And, by and large, legislators and bureaucrats (including diplomats) don’t care.
For the time being, the Lord Mansfield Dictum protects. But the hostility towards tax evasion abroad translates into hostility to expatriates generally. That is not a good sign.

5thSwiss describes the creation of  “double taxation” after one country (in this Canada) moved from an Estate Tax to a deemed disposition of assets on death. We now have a problem of the U.S. creating a deemed disposition of assets on expatriation when Canada has no such tax. This is what happens when one country makes a major change to its tax system and the other does not. (In this case there is at a minimum a “timing mismatch” in the taxable event.)

The S. 877A “Exit Tax” and the Canada U.S. Tax Treaty
The primary purpose of this post is to explore whether the Canada U.S. Tax Treaty can be used to mitigate some or all of the effects of the “Exit Tax”. I don’t know the answer. Therefore, this post will “raise an important question”, but not “answer the important question raised”.
U.S. Tax Treaties 101 – The outline
I am also going to use this post to outline some VERY basic aspects of U.S. tax treaties.   There will  four parts to this post:
Part 1 – Tax Treaties and the U.S. Constitution
Part 2 – Tax Treaties and the “Savings Clause”
Part 3 – The S. 877A “Exit Tax” and possible treaty relief
Part 4 – The “Savings Clause” as an argument against “citizenship taxation”
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Part 9 – For #Americansabroad: US "citizenship taxation" is "death by a thousand cuts, but the S. 877A Exit Tax is "death by the guillotine"

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1995 – The origins of the S. 877A Exit Tax – Video of House Oversight Committee
 

 
This testimony in this video covers a number of perspectives. It includes a consideration of whether the S. 877A rules are a “human rights violation”. This video should be watched in its entirety. It illustrates the viciousness of the Exit Tax and the attitude of the Clinton administration. There is a suggestion that the purpose of the S. 877A rules was to “keep people from leaving”. If you find any testimony or questions that address the problems of “Americans Abroad”, please leave a comment describing the speaker, time and the substance. It appears that there was little or no consideration of how this would affect “American Citizens Abroad”.
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Part 8 – “The U.S. “Exit Tax vs. Canada’s Departure Tax – citizenship taxation vs. residence taxation”

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The above tweet references the following comment:

At least the departure tax has a sliver of logic to it, and an appropriate name. To have to pay a US “exit tax” when I left empty handed over thirty years ago, beggars belief. Perhaps if they called it an escape tax or freedom tax that would make more sense.

Composing this series of posts about the U.S. S. 877A “Exit Tax” made me realize that “Exit Taxes” are a prism through which to view a country’s tax system. Any kind of tax imposed on leaving the “tax jurisdiction” of a country will reveal much about the fairness of a tax system. Yet there has been little discussion of “Exit Taxes”. In theory an “Exit Tax” is imposed when one emigrates from one country and immigrates to another country. This is how “Canada’s Departure Tax” works. It is NOT how the U.S. “Exit Tax” works.
I recently came across an interesting book written by Nancy Green and Francois Weil titled:
Citizenship and Those Who Leave: The Politics of Emigration and Expatriation
citizenshipandthosewholeavegreen
The description includes:

Exit, like entry, has helped define citizenship over the past two centuries, yet little attention has been given to the politics of emigration. How have countries impeded or facilitated people leaving? How have they perceived and regulated those who leave? What relations do they seek to maintain with their citizens abroad and why? Citizenship and Those Who Leave reverses the immigration perspective to examine how nations define themselves not just through entry but through exit as well.

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Part 7 – Why 2015 is a good year for many #Americansabroad to relinquish US citizenship – It's the "Exchange Rate"

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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
exittaxexamples
and
exit-tax
 
These visual reminders strongly suggest that …


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”.

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Part 6 – "Surely, expatriation is NOT worse than death! The two million asset test should be raised to the Estate Tax limitation – approximately five million dollars – It's Time"

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This is Part 6 of a 9 part series on the Exit Tax.
The 9 parts are:
Part 1 – April 1, 2015 – “Facts are stubborn things” – The results of the “Exit Tax”
Part 2 – April 2, 2015 – “How could this possibly happen? Understanding “Exit Taxes” in a system of residence based taxation vs. Exit Taxes in a system of “citizenship (place of birth) taxation”
Part 3 – April 3, 2015 – “The “Exit Tax” affects “covered expatriates” – what is a “covered expatriate”?”
Part 4 – April 4, 2015 – “You are a “covered expatriate” – How the “Exit Tax” is actually calculated”
Part 5 – April 5, 2015 – “The “Exit Tax” in action – Five actual scenarios with 5 actual completed U.S. tax returns.”
Part 6 – April 6, 2015 – “Surely, expatriation is NOT worse than death! The two million asset test should be raised to the Estate Tax limitation – approximately five million dollars – It’s Time”
Part 7 – April 7, 2015 – “The two kinds of U.S. citizenship: Citizenship for immigration and citizenship for tax”
Part 8 – April 8, 2015 – “I relinquished U.S. citizenship many years ago. Could I still have U.S. tax citizenship?”
Part 9 – April 9, 2015 – “Leaving the U.S. tax system – renounce or relinquish U.S. citizenship, What’s the difference?”
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Introduction
Many Americans abroad have had their lives turned upside down by the combination of FATCA and the enforcement of U.S. “place of birth” taxation. Those who are “long term” residents abroad find themselves caught between a “rock and a hard place”.
On the one hand they can’t afford the costs and complexity of filing U.S. tax returns.
On the other hand, many “middle class” Americans abroad cannot relinquish their U.S. citizenship (freeing themselves from the complexity of U.S. tax laws and the IRS) without paying the U.S. an “Exit Tax”.
Many Americans abroad can neither afford to comply with U.S. tax laws nor afford to relinquish U.S. citizenship.
The “Exit Tax”
Yes, many “long term” U.S. citizens abroad are in a position where they are forced to “buy their freedom from the U.S. Government”. I am reminded of one of Ronald Reagan’s great speeches where he noted, that when it comes to Americans:


 
“The price of our freedom has sometimes been high. But, we have never been willing to pay that price”.
I often wonder what President Reagan would have thought of the America today. Yes, the United States of America has joined some of the nastiest regimes in history with it’s “Exit Tax”. (Well, we all know, there must be a good policy reason for it. Just ask your Congressman.)
Not all Americans abroad are subject to the “Exit Tax”. Only “covered expatriates” are subject to the “Exit Tax”.
The obvious question is:
“How does somebody become a “covered expatriate?”
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Part 5 – "The "Exit Tax" in action – Five actual scenarios with 5 actual completed U.S. tax returns."

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This is Part 5 of a 15 part series on the Exit Tax.
The 15 parts are:
Part 1 – April 1, 2015 – “Facts are stubborn things” – The results of the “Exit Tax”
Part 2 – April 2, 2015 – “How could this possibly happen? Understanding “Exit Taxes” in a system of residence based taxation vs. Exit Taxes in a system of “citizenship (place of birth) taxation”
Part 3 – April 3, 2015 – “The “Exit Tax” affects “covered expatriates” – what is a “covered expatriate”?”
Part 4 – April 4, 2015 – “You are a “covered expatriate” – How is the “Exit Tax” actually calculated”
Part 5 – April 5, 2015 – “The “Exit Tax” in action – Five actual scenarios with 5 actual completed U.S. tax returns.”
Part 6 – April 6, 2015 – “Surely, expatriation is NOT worse than death! The two million asset test should be raised to the Estate Tax limitation – approximately five million dollars – It’s Time”
Part 7 – April 7, 2015 – “The two kinds of U.S. citizenship: Citizenship for immigration and citizenship for tax”
Part 8 – April 8, 2015 – “I relinquished U.S. citizenship many years ago. Could I still have U.S. tax citizenship?”
Part 9 – April 9, 2015 – “Leaving the U.S. tax system – renounce or relinquish U.S. citizenship, What’s the difference?”
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Part 5 – The “Exit Tax” in action – 5 actual scenarios and 5 actual tax returns
exittaxexamples
In order to see the graphic and brutal confiscatory effects of the U.S. Exit Tax in action I asked a licensed U.S. CPA who specializes in International Tax to consider the following scenario:

Relinquishment date: A person who renounced U.S. citizenship on November 1, 2014.
Profile: He was a “middle class” person who was completely tax compliant in his country of residence. He was a saver and investor. He had worked hard for this money.
The CPA was asked to calculate the Exit Tax based on the following scenario. Note that the persons assets do exceed the $2,000,000 dollar U.S. threshold. Notice also that this example is representative of a “middle class” person.
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Part 4 – "You are a "covered expatriate" – How the "Exit Tax" is actually calculated"

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This is Part 4 of a 9 part series on the Exit Tax.
The 9 parts are:
Part 1 – April 1, 2015 – “Facts are stubborn things” – The results of the “Exit Tax”
Part 2 – April 2, 2015 – “How could this possibly happen? Understanding “Exit Taxes” in a system of residence based taxation vs. Exit Taxes in a system of “citizenship (place of birth) taxation”
Part 3 – April 3, 2015 – “The “Exit Tax” affects “covered expatriates” – what is a “covered expatriate”?”
Part 4 – April 4, 2015 – “You are a “covered expatriate” – How the “Exit Tax” is actually calculated”
Part 5 – April 5, 2015 – “The “Exit Tax” in action – Five actual scenarios with 5 actual completed U.S. tax returns.”
Part 6 – April 6, 2015 – “Surely, expatriation is NOT worse than death! The two million asset test should be raised to the Estate Tax limitation – approximately five million dollars – It’s Time”
Part 7 – April 7, 2015 – “The two kinds of U.S. citizenship: Citizenship for immigration and citizenship for tax”
Part 8 – April 8, 2015 – “I relinquished U.S. citizenship many years ago. Could I still have U.S. tax citizenship?”
Part 9 – April 9, 2015 – “Leaving the U.S. tax system – renounce or relinquish U.S. citizenship, What’s the difference?”
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Part 4 – You are a “covered expatriate”, how is the “Exit Tax” actually calculated?
howtheexittaxiscalculated
How the Exit Tax is calculated in general – what is subject to the “Exit Tax”?
Remember that a person who relinquishes U.S. citizenship does not actually sell his assets or realize income from his assets. The Exit Tax is designed to ensure that the U.S. collects tax on assets as if they were sold OR as if generated an income stream (even though there is no sale). This means that one is forced to pay a massive tax when has not realized income to pay that tax!
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Part 3 – "The "Exit Tax" affects "covered expatriates" – what is a "covered expatriate"?"

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This is Part 3 of a 9 part series on the Exit Tax.
The 9 parts are:
Part 1 – April 1, 2015 – “Facts are stubborn things” – The results of the “Exit Tax”
Part 2 – April 2, 2015 – “How could this possibly happen? Understanding “Exit Taxes” in a system of residence based taxation vs. Exit Taxes in a system of “citizenship (place of birth) taxation”
Part 3 – April 3, 2015 – “The “Exit Tax” affects “covered expatriates” – what is a “covered expatriate”?”
Part 4 – April 4, 2015 – “You are a “covered expatriate” How the “Exit Tax” is actually calculated”
Part 5 – April 5, 2015 – “The “Exit Tax” in action – Five actual scenarios with 5 actual completed U.S. tax returns.”
Part 6 – April 6, 2015 – “Surely, expatriation is NOT worse than death! The two million asset test should be raised to the Estate Tax limitation – approximately five million dollars – It’s Time”
Part 7 – April 7, 2015 – “The two kinds of U.S. citizenship: Citizenship for immigration and citizenship for tax”
Part 8 – April 8, 2015 – “I relinquished U.S. citizenship many years ago. Could I still have U.S. tax citizenship?”
Part 9 – April 9, 2015 – “Leaving the U.S. tax system – renounce or relinquish U.S. citizenship, What’s the difference?”
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Part 3 – The “Exit Tax” affects “covered expatriates” – what is a “covered expatriate”?
Form8854
In a FATCAesque world, where “relinquishments” are becoming a form of “self defense”, it’s important that you understand:
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