What follows is a post that I wrote for the Isaac Brock Society. It has broad application. I thought I would provide it on this blog as well.
The Saga Continues – What To Hold And What NOT To Hold In A TFSA Or ISA
Introduction/background:
Denunciation of U.S. Citizenship – From the perspective from a U.S. Senator
.@SenGillibrand thinks Americans "Denounce" US citizenship in order to "escape taxes". As JFK once said the great enemy of the truth is NOT the lie but the "myth". #FATCA is #Americansabroad don't "Renounce" bc they want to, but bc they feel they have to! https://t.co/2NbVTUfTbh pic.twitter.com/WWcSXyQHCC
— John Richardson – Counsellor for US persons abroad (@ExpatriationLaw) November 14, 2023
Renunciation of U.S. Citizenship – From the perspective of a U.S. journalist
.@AnaTeresaSola Please contact me if you are open to discussing your article about cit renunciation. It seems to be based on: 1. Retirees abroad with US income sources 2. Bad info about how tax treaties help US citizens. – Perhaps write a Part 2? https://t.co/l0wg4YAR95
— John Richardson – Counsellor for US persons abroad (@ExpatriationLaw) November 13, 2023
It’s hard to have a discussion about why Americans abroad are renouncing U.S. citizenship. There are many different perspectives about renunciation. There is very little “shared reality”. Tax academics (who have the resources to know better), “pensioned intellectuals”, politicians and most journalists see this from a “U.S. resident perspective”. They don’t understand the reality of the lives of Americans abroad. But, Americans abroad are NOT a monolith. The ONLY thing they have in common is that they live outside the United States. Their circumstances vary widely. There is little “shared reality” among Americans abroad of what the issues are. AT the risk of oversimplification, I have attempted to divide “Americans abroad” into four categories (as defined below). The categorization will explain why different groups of “Americans abroad” experience the U.S. extra-territorial tax regime differently.
Hint: Americans abroad aren’t renouncing U.S. citizenship because they want to. They are renouncing U.S. citizenship because they feel they have to.
Politicians, tax academics, “pensioned intellectuals” and many journalists deal in the world of opinions. The opinions they hold are often “myths”. They are not “facts”. They are entitled to their opinions (as misguided and ignorant as they may be). They are NOT entitled to their “facts”.
This post is to describe the facts about how the extra-territorial application of the Internal Revenue Code and the Bank Secrecy Act pressure many Americans abroad to renounce U.S. citizenship. Interestingly a large percentage of those renouncing owe ZERO taxes to the U.S. government. They renounce anyway!
First, a bit of background to the problem – what is the problem and who is affected?
They do NOT meet the test of being “nonresident aliens” under the Internal Revenue Code
As SEAT cofounder, Dr. Laura Snyder explains, in the first of her 16 “working papers” describing the problems of Americans abroad:
The people most affected by the U.S. extraterritorial tax system are not a monolithic group. Some left the United States recently, some left years or decades ago. Some left as adults (some young, some middle-aged, and some retirees), while others left as children (with their families), and some have never lived in the United States (they are U.S. citizens by virtue of the U.S. citizenship of at least one parent). Some intend to live in the United States (again) in the near or distant future, while others do not intend to ever live in the United States (again). Some identify as Americans while others do not. Many are also citizens of the country where they live (dual citizens) while others hold triple or even quadruple citizenships. In referring to this group, there is no one term that sufficiently reflects its full diversity. What unites them is that they do not meet the test of “nonresident alien” under the Internal Revenue Code. Depending upon the context, this series of papers will use terms such as “persons,” “individuals,” “affected individuals,” and “overseas Americans.” The latter term has a drawback, however: it emphasizes connections to the United States while minimizing the important connections that such persons have to the countries and communities where they live.
That said, what divides Americans abroad may be greater than what unites Americans abroad!
Introducing Canada’s “First Home Saving Plan”
.@IRS_Medic, @Expatriationlaw and @Keith__Redmond discuss: "How To Use Canada's First Home Savings Account – #FHSA – Even When You Are A US citizen living in Canada https://t.co/m9n19VmAwA via @YouTube
— John Richardson – Counsellor for US persons abroad (@ExpatriationLaw) March 29, 2023
The purpose of this post is NOT to provide an extensive analysis of the FHSA. Rather the purpose is to acknowledge the U.S. tax issues for U.S. citizens resident in Canada. My conclusion is that U.S. citizens resident in Canada SHOULD consider the FHSA.
A Tweet by Tweet Explanation Of The FHSA
The following twitter thread introduces the FHSA and includes thoughts on the advisability on the plan for Canadian residents who are U.S. citizens.
Canada’s new #FHSA has different kinds. US citizens resident in Canada should avoid those administered by trustee (possibly creating foreign trust for US tax purposes). Stick with the basic “bank account” FHSA with no trustee and no (#PFIC) mutual funds. https://t.co/Ul1VuuusMq https://t.co/b8mx2QOTBQ
— John Richardson – Counsellor for US persons abroad (@ExpatriationLaw) March 29, 2023
https://threadreaderapp.com/thread/1640892103592124416.html
Into The Weeds …
Update March 29, 2023 …
On March 28, 2023 the Government of Canada officially announced that the Canadian “First Home Saving Account” will be available to Canadian residents as of April 1, 2023. As explained in this description of the “FHSA”, this will be of value to U.S. citizens who are resident in Canada. The circumstances surrounding the TFSA are similar to the FHSA. Here is a more complete discussion of US citizens residing in Canada and the use of the FHSA.
Introduction And Purpose
Government employment is the road to an employment pension in Canada: “How many people are covered by a workplace pension plan?” /via @globeandmail https://t.co/2nzx9wJJac
— John Richardson – Counsellor for US persons abroad (@ExpatriationLaw) December 7, 2022
As the article referenced in the above tweet makes clear, a very small percentage of Canadians can expect their retirements to be funded by pensions. The message is that individuals have an obligation to themselves and to their families to engage in responsible financial and retirement planning. Governments have a clear, important and sustainable interest in assisting their residents to achieve and maintain financial stability. The tax laws in every country have provisions in their tax codes to both incentivize and facilitate this planning. They facilitate planning planning vehicles through provisions in their tax codes. Almost all of these planning vehicles are based on “before tax” advantaged vehicles (RRSP or Conventional IRA) or “after tax” vehicles (TFSA or ROTH IRA) which allow for tax free growth. Canada is home to many people who are dual Canada/US citizens. Canadian residents who are also U.S. citizens are subject to the U.S. tax code. This means that they are required to comply with the tax codes of both Canada and the United States (two of the most complex tax regimes in the world). But, what happens when the financial planning provisions in Canada’s tax law are not recognized in the tax code of the United States? What Canada giveth, the U.S. (possibly) taxeth.
The purpose of this post is to take a “deeper dive” into the mechanics financial planning and investing for U.S. citizens who reside in Canada. Most U.S. citizens feel completely disabled by U.S. tax laws. I don’t believe that this is necessarily true in all cases. This is intended to be one of a series of posts to address the specific issue of:
“Retirement And Financial Planning For U.S. Citizens Living Outside The United States”
If you have an idea for a topic send me an email. I encourage you to subscribe to this blog.
U.S. Citizens In Canada And The TFSA
I am frequently asked by Canadian residents who are US citizens whether they should open a TFSA (“Tax Free Savings Account”) in Canada. The purpose of this post is to discuss this very issue. As usual there is no “one size fits all answer” that is correct for everybody. In order to analyze this question I am joined by Oliver Wagner of “1040 Abroad” who has provided his thoughts, experience, commentary and some sample tax US tax returns which illustrate the various principles.
Prologue: In search of a tax haven …
Q. What are the best known tax havens? What do you think? A. I strongly advise my clients that the best tax haven, by far, is the ownership of after-tax US dollars. by Andrew Weill https://t.co/BRzjrcC8OX
— John Richardson – Counsellor for US persons abroad (@ExpatriationLaw) April 8, 2022
Where to find that tax haven – let’s start with a ROTH IRA
Give your child a jump-start on retirement. Open a Roth IRA as soon as they start earning money to take advantage of compound interest and favorable tax treatment. https://t.co/ZFUDoKH5ps
— GW Carter, Ltd., CPAs (@gwc_ltd) February 25, 2022
The above tweet from CPA Gary Garter leads to a discussion that includes:
2018 Prologue
It's 2022 and time to revisit the issue the US taxation of the #TFSA: "Canada U.S. Tax Treaty: Why the 5th protocol of the Canada US Tax Treaty Clarifies that the TFSA is a pension within the meaning of the Canada U.S. Tax Treaty" https://t.co/1qVKlrz0Po via @expatriationlaw
— John Richardson – Counsellor for US persons abroad (@ExpatriationLaw) March 10, 2022
In 2018 I wrote a post arguing that it is reasonable to conclude that the text of the Canada US Tax Treaty should be interpreted to mean that a Canadian TFSA is – like a US ROTH IRA – a pension within the meaning of the Canada US Tax Treaty. The 2018 post was arguing for equal treatment without the intervention of the respective Canadian and American Competent Authorities.
The Punitive Taxation Of US Citizens Living Outside The United States Continues
I have previously and repeatedly made the point that:
Raymond James Crossing Borders Wealth Management Solutions
___________________________________________________
Mr. LJ Eiben is a Financial Advisor at Raymond James.
The information in this podcast was obtained from sources RJA and believed to be reliable; however, we cannot represent that it is accurate or complete. It is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell securities. The views expressed are not necessarily those of Raymond James (USA) Ltd. Raymond James (USA) Ltd. (RJLU) advisors may only conduct business with residents of the states and/or jurisdictions for which they are properly registered.
Raymond James (USA) Ltd. is a member of FINRA / SIPC
_________________________________________________________________
This post has been co-authored by Diane Gelon* (see “Reflections Of An Expatriation Lawyer“) and John Richardson
Prologue
From @HelenBurggraf: "As AAA announces its new legal challenge to go ahead, expats echo its call for renunciation to be made easier" – AAA also argues that renunciations need not take place inside a US Consulate or Embassy https://t.co/s74Lqh0tJr pic.twitter.com/3nyKbjoWEO
— John Richardson – Counsellor for US persons abroad (@ExpatriationLaw) December 30, 2021
In September of 2021 the Paris based “Accidental Americans Association” filed a lawsuit against the US State Department. The lawsuit was brought in an attempt to force the State Department to allow individuals to renounce their US citizenship. (A prior lawsuit by the “Accidental Americans Association” was based on the excessive $2350 renunciation fee.)
The lawsuit is evidence of the extreme frustration that many Americans abroad are experiencing because they (1) are unable to renounce US citizenship and (2) justifiably feel that they are prisoners of the circumstances of their birth.
It was recently announced that “The US Department of State (DOS) is suspending in-person interview requirements at local consulates for a year for numerous non-immigrant work visa categories and their families (spouse and dependent children“. In London the US Embassy is conducting telephone meetings to deal with Social Security issues. (Prior to Covid this would have required an in person meeting at the Embassy.) The State Department is clearly reducing the number and kinds of services that require “in person” Consulate visits.
The purpose of this post is to argue that renunciations of US Citizenship need not take place through in person interviews at a US Embassy or Consulate. Rather renunciations of US citizenship can and should take place through video conferencing. The backlog in processing renunciations is explained as being related to the Covid-19 pandemic. A response to the pandemic has been that more and more legal proceedings are taking place through video conferencing. Both Canada and the UK (and certainly other countries) are conducing citizenship ceremonies by video, entire court cases are held via video conferencing, and documents can be witnessed and certified by video. We have discussed various aspects of this issue with each other over a long period of time as well as benefiting from discussions with Dubai based lawyer Virginia La Torre Jeker and Esquire Founder Jimmy Sexton.
There is no law that requires that renunciations of US citizenship take place inside a US Consulate or Embassy!
This post is composed of the following seven parts leading to the following conclusion:
Americans abroad and their representatives should pressure the State Department to use their statutory authority to allow renunciations by video conferencing. The State Department has the statutory authority to do so. The fact that the State Department does not currently allow renunciations through video conferencing doesn’t mean that it cannot allow renunciations through video conferencing!
Part I – Introduction: Why Americans Abroad Are Renouncing US Citizenship
Part II – An appointment to renounce US citizenship is hard to find
Part III – Why there is NO legal requirement that renunciation appointments must take place inside a US Embassy or Consulate
Part IV – The State Department website does not specifically state that renunciations must take place inside the US Consulate or Embassy
Part V – Americans abroad and their organizations must push the Biden administration to allow renunciations of US Citizenship through video conferencing
Part VI – Interesting Bobby Fisher anecdote supporting the view that renunciations are not required to take place inside US Consulates
Part VII – Diane Gelon and John Richardson update their November 29, 2020 podcast with a December 29, 2021 podcast
Prologue
Do you recognise yourself?
You are unable to properly plan for your retirement. Many of you with retirement assets are having them confiscated (at this very moment) courtesy of the Sec. 965 transition tax. You are subjected to reporting requirements that presume you are a criminal. Yet your only crime was having been born in America (something you didn’t even choose) and attempting to live as a U.S. tax compliant American outside the United States. Your comments to my recent article at Tax Connections reflect and register your conviction that you should not be subjected to the extra-territorial application of the Internal Revenue Code – when you don’t live in the United States.
The Internal Revenue Code: You can’t leave home without it!
I have previously explained how the Canada U.S. Tax Treaty allows a U.S. citizen to move to Canada and continue the deferral of taxation (in both Canada and the United States) on his existing Roth.The treaty allows for deferral with respect to the existing balance in the Roth. It does NOT allow for deferral with respect to contributions made after the person becomes a tax resident of Canada.
That post concluded with:
Conclusions:
1. The owner of a ROTH who moves to Canada can will continue to not pay tax on the income earned by the ROTH and will not pay tax on distributions from the ROTH. We will see that this can prevent a tremendous investing opportunity; and
2. Contributions made to the ROTH after moving to Canada will cease to be “pensions” within the meaning of of Article XVIII of the Treaty! This means that post “resident in Canada” contributions will NOT be subject tax “tax deferral” (as per paragraph 7) and will be subject to taxation (as per paragraph 1).
Possible Additional Conclusion:
3. Because a Canadian TFSA is the same kind of retirement vehicle as a U.S. ROTH IRA, and the ROTH IRA is treated as a “pension” under Article XVIII of the treaty:
A TFSA should be treated as a pension under Article XVIII of the Canada U.S. Tax Treaty.
But, moving back to the U.S. citizen who moves to Canada with a Roth IRA.
How a U.S. citizen who moves to Canada can maximize use of the Roth and the Canada U.S. Tax Treaty
Q. How does this work? A. It takes advantage of the “stretch” principle
The general “stretch” principle is described at Phil Hogan as follows:
How US plans can “stretch” to Future Generations
Chris discusses the often overlooked benefits of US plans for Canadian residents. Under US tax laws IRA (and sometimes 401k) plans can be “stretched” or transferred to future generations tax free. Pursuant to Canada-US treaty provisions the same treatment can be had for Canadian tax purposes.
Unlike RRSP accounts, US IRA accounts can be transferred to a second generation (non-spouse) tax free under the Canada-US tax treaty. The impact of the tax free transfer and compounding investment over the lifetime of the beneficiary can be significant. This is outlined in detail in Chris’ new white paper report Roth IRAs in Canada – The gift that keeps on giving. How $250,000 can turn into $35 million TAX FREE to an heir.
Here is the full video …
Chris Stooksbury of @BeaconHillWM explains the "stretch" feature of the Roth IRA which may make the Roth IRA a superb investment vehicle for Americans living in Canada https://t.co/Njkiq3GkXz
— John Richardson – Counsellor for US persons abroad (@ExpatriationLaw) January 18, 2019
And the written explanation …
Chris Stooksbury of @BeaconHillWM explains how Americans moving to Canada can (with the help of the Canada U.S. Tax treaty) use the Roth IRA in Canada – "How $250,000 can turn into $35 million" – see his analysis here https://t.co/23ZfWvsL5t pic.twitter.com/eKHi2jvek8
— John Richardson – Counsellor for US persons abroad (@ExpatriationLaw) January 18, 2019
See the link in the above tweet here …
roth_IRA_in_Canada_compliance_approved-1 (1)
Bottom line:
The features of a Roth IRA coupled with certain provisions of the Canada U.S. tax treaty may provide for better financial planning options for U.S. citizens who move to Canada than are available to Canadian residents who have not lived in the United States.
John Richardson Follow me on Twitter @ExpatriationLaw