Prologue: In the 21st Century, The Most Interesting Thing About A Person Is His/Her Tax Residency
Welcoming the world's most famous @USCitizenAbroad: "Little Archie's big tax problem" – https://t.co/Yt9YtVivwu https://t.co/bVGqaguuOb
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) December 28, 2019
Introduction – So, what’s this “tax residence” stuff about? What does “tax residence” mean?
During the #InvestmentMigrationForum 2018, @ExpatriationLaw discussed multiple #Tax residencies, tax treaties and tax treaty tier breakers in #CRS and #FACTA world. pic.twitter.com/Y3hJ1PlJBz
— Investment Migration Council (@IMCouncil) August 2, 2018
In 2014, as people started to receive “FATCA letters” I wrote a lengthy post describing “What to do if you receive a FATCA letter“. Information exchange under the Common Reporting Standard “CRS” has begun in 2018. As a result, I am writing this post which is to explain what the CRS is and how it relates to the FATCA letter. It is important to understand that the “CRS letter is actually a combined “CRS/FATCA” letter which is more likely to be received than the original FATCA letter. I urge that those who have received a letter of this type to read this post PRIOR to seeking professional advice!!!
The #OECD Common Reporting Standard combined with @FATCA is forcing people to reveal where they have @taxresidency: "Thousands of bank accounts closed due to foreign information sharing law" https://t.co/aOLhsYFzd0
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) July 29, 2018
You are reading this post because you have received a letter from your bank that is asking you to identify the countries where you are a “tax resident” and/or whether you are a “U.S. Person”.
The purpose of this post is to help you understand:
– why you are receiving the letter
– what the letter means
– what is the meaning of “tax resident”, “tax residence” and “tax residency” (terms which are used interchangeably)
– why “tax residency” is important to you
– the significance of being a U.S. citizen or Green Card holder
– how to identify where you may be a “tax resident”
Why are you receiving this letter?
The letter is intended to fulfill the bank’s due diligence obligations under both the OECD Common Reporting Standard (all countries of “tax residence” except the United States) and FATCA (whether you are a “tax resident” of the United States).
In other words, the letter is for the purpose of satisfying bank “due diligence” under two separate reporting regimes – FATCA and the OECD Common Reporting Standard “CRS”
A declaration of @taxresidency used in Canada asks questions relevant to both Common Reporting Standard ("CRS) and #FATCA. As a result any #CRS inquiry now includes a @FATCA inquiry! See the form. https://t.co/HGHFxLsj6H pic.twitter.com/S2y0K4paTm
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) July 29, 2018
This is long post which is broken into the following parts:
Part A – How does FATCA differ from the “CRS”?
Part B – The Combined FATCA/CRS Letter
Part C – “Tax Residency 101”: It’s about where you should be paying your taxes
Part D – Different definitions of “tax residence” – Not all countries define “tax residence” in the same way
Part E – Oh My God! I think I might be a “tax resident” of two countries – What is a “tax treaty tie breaker”? How does a “tax treaty” tie breaker work?
Part F – A “U.S. citizen” cannot use a “tax treaty tie breaker” to break U.S. “tax residence”. How then does a “U.S. citizen” cease to be a “U.S. tax resident”?
Part G – How a “permanent resident” of the U.S. – AKA “Green Card Holder” – ceases to be a U.S. tax resident
Part H – Are you, or have you ever been a U.S. citizen or Green card holder? Sometimes it’s not what it seems.
Part I – “Relinquishments of U.S. citizenship and loss of U.S. citizenship for tax purposes
Part J – Beware! You don’t sever “Tax Residency” From Canada or the United States without being subject to massive “Exit/Departure Taxes!” – You may have to buy your freedom!
Part A – How does FATCA differ from the “CRS”?
1. In 2014, we had the “U.S. person” FATCA inquisition, in 2018 we have the CRS “tax residence” search
Circa 2014 – In 2014 people were receiving #FATCA letters. In 2018 people are getting letter for both #FATCA and #CRS. My thoughts in 2014: "Have you received a #FATCA letter or been warned of the consequences of being a U.S. person?" https://t.co/4FPF4WK7vT via @ExpatriationLaw
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) March 30, 2018
2. The letter you have just received is about the CRS “tax residence” search, with a FATCA inquisition attached
Received a bank letter asking about @taxresidency? It's about #FATCA and the Common Reporting Standard (#CRS). "From the Canada Revenue Agency: Information for individuals holding accounts with Canadian financial institutions" – https://t.co/ApU6fAHYnf https://t.co/2N1aLIOSwE
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) March 30, 2018
3. Why the FATCA inquisition is different from the CRS “tax residence” search
Norman Diamond explains difference between #FATCA (asking for bank information where one DOES reside to go where he doesn't reside) and #CRS (asking about bank information where one DOES NOT reside to go where he does reside). Which makes more sense? https://t.co/F93BSAuCDc pic.twitter.com/X1hUtuKroF
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) March 30, 2018
4. Why the CRS “tax residence” search provides an opportunity for more FATCA inquiries
From @CDNBankers: Explains @taxresidency for both #FATCA and @OECD Common Reporting Standard #CRS. Because no $50,000 "balance threshold" under #CRS – use of single form for both #FATCA and #CRS inquiry means no $50,000 threshold for #FATCA reporting! https://t.co/wFn02e1WiQ pic.twitter.com/HWnyFAivoP
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) March 30, 2018
This is extremely important! The FATCA IGAs provide that (in general) CERTAIN accounts worth less than $50,000 USD are not subject to FATCA reporting. The “CRS” does NOT contain a monetary threshold. As a result, more people are receiving the combined “CRS/FATCA” letter than would have received a FATCA letter. In other words, the “CRS” inquiry has served to enhance the “FATCA Inquisition”!
Part B – The Combined FATCA/CRS Letter
This letter is particularly worrisome for Canadian residents (whether Canadian citizens or not) who were either born in the United States or are (otherwise) U.S. citizens or U.S. permanent residents (AKA Green Card Holders). Could this mean that they would be required to apply for a U.S. Social Security number?
What follows is a sample of a letter …
Dear Valued Customer:
We appreciate our relationship with you and we are committed to informing you about matters that affect you. We are writing today to inform you that changes have been made to the Canadian Income Tax Act (Part XVIII and Part XXIX), requiring TD to provide information about customers who have a tax residence in other countries to the Canada Revenue Agency (CRA). The CRA may then share information with other countries through existing provisions and safeguards under the Tax Convention.
To comply with this legislation, we have reviewed our records (eg. address) in order to identify customers who may be residents of other countries for tax purposes.”
Part C – “Tax Residency 101”: It’s about where you should be paying your taxes
In a #FATCA and #CRS world – the most interesting thing about a person is where has @taxresidency ESPECIALLY when he has > one. @Expatriationlaw interview with CPA @1040Abroad: ‘Episode 1 of: "A Tax Residency Primer"- Tax, Residency and #TaxResidency" https://t.co/6swfQmJO7i
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) August 8, 2018
Some Question and Answer …
Q. I don’t want to listen to the above interview. What is meant by “tax residence” or “tax residency”?
A. At the risk of oversimplification, your “tax residence” AKA country of “tax residency” is usually (with the exception of the United States which also imposes taxation based on citizenship) the country where you live or have another type of connection. It’s the country that has the right to impose taxation on your “worldwide income” BECAUSE you live in or have a sufficient other connection to the country. For example, if you live in Canada, sleep in Canada, work in Canada, raise your family in Canada, have a Canadian drivers license in Canada, etc. – you are a ““tax resident” of Canada“. For most people, “tax residency” is a “common sense” concept. It’s like this:
“I am subject to taxation on my “worldwide income”* in Canada because I live in Canada”.
or
“I am subject to taxation on my “worldwide income”* in ________ because I live in _______”
(*Most countries impose taxation on the “worldwide income” of their “tax residents”. A small number of countries impose “territorial taxation” on their “tax residents”. “Territorial taxation” is where a country imposes tax on ONLY the income sourced in the country of residence.)
Q. Does this mean that ONLY my country of “tax residence” can impose taxation on me?
A. No. Every country has the primary right to impose taxation on income sourced in that country. Maybe you receive income which is “sourced” in another country. Maybe you own property in another country. In these cases you might be subject to tax in the countries where you own the property or receive the income. In general, if you are not a “tax resident”, you would be taxed in another country ONLY on the income sourced in that other country. On the other hand, your country of “tax residence” would impose taxation on ALL of your income wherever its source.
Q. Is it possible that I could actually meet the conditions to be a “tax resident” of more than one country?
A. Absolutely yes! Different countries have different rules for determining tax residency. There is no reason why a person could not meet the definition of “tax resident” in more than one country. In fact, it is very possible that one could be a “tax resident” of more than country. (This is the reason for the existence of “tax treaty tie breaker” provisions.)
Q. If I meet the conditions to be a “tax resident” of more than one country, will I really be treated as a “tax resident” of more than one country?
A. Yes. Although it is possible to meet the definition of “tax resident” for more than one country, most countries have tax treaties that (1) identify those “instances” where an individual is a “tax resident” of more than country and (2) use the tax treaty to deem the individual to be a “tax resident” of only one country. It wouldn’t be fair for an individual to be treated as a “tax resident” of more than one country, would it? (U.S. citizens living outside the United States are always tax residents of the United States even if they are also “tax residents” of another country.)
Q. What do you mean by “unless you are a U.S. citizen”? As a “U.S. citizen” am I a “tax resident of more than one country?
In a #FATCA and #CRS world: There's "residence", "#taxresidence" and "@taxresidency American style (where you reside in the USA even if you don't) – @1040Abroad and @Expatriationlaw: ‘Episode 2: "A Tax Residency Primer"- Tax, Residency and #TaxResidency": https://t.co/n2xjvHDhqy
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) August 8, 2018
A. Well, if you are a “U.S. citizen” (or Green Card holder) you are ALWAYS a “tax resident” of the United States.
It doesn’t matter whether you actually live there or not. As long as you are a U.S. citizen, you are subject to the full force of the Internal Revenue Code. This includes a variety of “Taxes, Forms and Penalties”. It includes a number of very specific reporting requirements including (but not limited to): FBAR, Form 8938, Form 3520 and Form 5471. For this reason, it is very difficult for a U.S. citizen to move from the United States, become a “tax resident” of that other country and engage in effective financial and retirement planning. See for example:
The biggest cost of being a “dual Canada/U.S. tax filer” is the “lost opportunity” available to pure Canadians
“How To Live Outside The United States In An FBAR And FATCA World”
Q. I understand that as a “U.S. citizen” I am always a “tax resident” of the United States. But, if I move to Canada, does that mean that I am a “tax resident” of Canada too?
A. Absolutely YES!!! You are an American. “To whom much is given, much is expected.” U.S. citizens living in Canada (who meet the definitions of Canadian “tax residency”) are ALSO “tax residents” of Canada (or any other country where they may live). In other words, U.S. citizens living abroad are generally “tax residents” of at least two countries! How cool is that?
Part D – Different definitions of “tax residence” – Not all countries define “tax residence” in the same way
Q. What is the criteria that different countries use to define who is a “tax resident” of the country?
A. The circumstances that constitute “tax residence” will differ from country to country. Generally speaking “tax residence” is based on definitions of (1) “residency” (deemed and actual), (2) “domicile” and (3) (in the case of the United States and Eritrea) “citizenship”. Note that different countries may define “tax residency” differently.
Q. How can I learn the definition of “tax resident” for the OECD countries?
A. In an earlier post about “OECD tax residency” I referenced the following chart which summarizes the definitions of “tax residency” in OECD countries. (I suggest that you use these definitions as a “start” to your research and not as the “last word”.)
Q. What is the significance of the “OECD” and why does “OECD tax residency” matter?
A. About the “CRS”: “OECD” tax residency matters because the “OECD” has implemented what is called the “Common Reporting Standard” (“CRS”). The purpose of the “CRS” is to require members to exchange information about the existence of financial accounts, owned by individuals in countries where they do NOT have “tax residence”. For example, if a “tax resident” of Germany had a bank account in Canada, then the German Government would want to know about it! Ultimately this is to ensure that all “individuals” pay their “fair share” of taxes. (By the way, the salaries of OECD employees are generally tax exempt. See an interesting post by Dan Mitchell on the OECD. Seems pretty clear that if OECD employees do not pay tax, that they are not paying their “fair share”.)
Q. About FATCA: Tell me more about the requirements to be a “tax resident of the United States”.
A. The United States has a system of “deemed tax residency”. In other words, the rules are very clear. At a minimum both U.S. citizens and “permanent residents” of the United States (“Green Card Holders”) are U.S. “tax residents” (Note that unless you are a U.S. citizen or “permanent resident” – a physical presence in the United States is necessary make one a U.S. “tax resident”. Here is a post I wrote describing what it means to be a “tax resident of the United States“.
Q. Tell me more about the requirements to be a “tax resident” of Canada.
A. The definition of “tax resident” in Canada includes both “deemed tax residency” and “tax residency based on facts and circumstances”. Here is a post I wrote describing what it means to be a “tax resident of Canada“.
Q. What about South Africa? The way that South Africa imposes taxation on its expats has been in the news lately. Can you tell me about the definitions of “tax residency” for South Africa? Is it true that South Africa is considering “citizenship-based taxation” just like the United States has?
A. No, South Africa has NOT considered “citizenship-based taxation”. But, it doesn’t require much to meet the test of “residence” for tax purposes in South Africa. To understand the “South Africa issue”, see:
Part 1: South Africa is NOT attempting to compete with the USA by enacting “citizenship-based taxation”; and
Part 2: The problem is NOT “worldwide taxation”. The problem is imposing “worldwide taxation” on people who don’t live in the South Africa or the USA and are “tax residents’ of other countries
Part E – Oh My God! I think I might be a “tax resident” of two countries – What is a “tax treaty tie breaker”? How does a “tax treaty” tie breaker work?
Q. I am a U.S. citizen and a “tax resident” of Canada who actually lives in Canada and not the United States. Can I use the “tax treaty” to become a “tax resident” of only Canada?
A. Absolutely, positively NOT. U.S. citizens CANNOT use a tax treaty to break “tax residence” with the United States. The reason is that almost all U.S. tax treaties includes what is called a “savings clause“. The purpose of the “savings clause” is two-fold:
First, to ensure that U.S. citizens can never (without relinquishment or renunciation) cease to be U.S. tax residents; and
Second, to force other countries to agree that the U.S. can impose U.S. taxation (according to U.S. tax rules) on people who are actual residents of those other countries (because those residents are deemed to be U.S. citizens). To understand how this impacts the lives of U.S. citizens living outside the United States see: “How to live outside the United Staes in an FBAR and FATCA world“.
Q. I am a U.S. “permanent resident” (Green Card Holder) and a “tax resident” of Canada who actually lives in Canada and not the United States. Can I use the “tax treaty” to become a “tax resident” of only Canada?
A. Yes, the “savings clause” does NOT apply to Green Card holders. A “Green Card holder” is a “tax resident” of the United States. Therefore, a “Green Card” holder who actually lives in Canada and is a “tax resident” of Canada, may use a “tax treaty tie breaker” to cease to be a U.S. tax resident. But, this decision must be made VERY CAREFULLY because the use of the “tax treaty tie breaker” by a Green Card Holder “may” have the following NEGATIVE implications:
- it may (depending on whether the individual is a “long term resident”) subject the person to the Sec. 877A Expatriation Tax rules (this can be a significant asset confiscation)
- it may “jeopardize” your status as a “lawful permanent resident” of the United States
- it may interfere with your eligibility for U.S. citizenship
On the other hand, there are many reasons why a Green Card Holder might want to use a “tax treaty tie breaker” to cease to be a “tax resident” of the United States. These reasons include (but are not limited to):
- you may be relieved from the requirement to file Form 8938
- you may be relieved from the requirement to file Form 8621
- you may be relieved from PFIC and Subpart F income in general
- you may be relieved from the new Sec. 965 U.S. transition tax and S. 951 GILTI
- you will be required to declare ONLY your U.S. source income on your 1040NR
Note: If you are a Green Card holder, the decision to use a “tax treaty tie breaker” should be made only after consultation with an appropriate advisor! I am not kidding! The fallout from making this election can be enormous!
Q. I am a “tax resident” of Canada. I am not a U.S. citizen. I am a pure Canadian! Can I use a “tax treaty tie breaker” to break “tax residence” with another country!
A. Thankfully (as long as you are a “Tax resident” of both Canada and that other country), the answer is YES! Canada (apparently) has more than 90 tax treaties that include a “tax treaty” tie breaker provision. Here is a post that describes how the “tax treaty tax tie breaker” can be used to break “tax residence” with another country.
Part F – A “U.S. citizen” cannot use a “tax treaty tie breaker” to break U.S. “tax residence”. How then does a “U.S. citizen” cease to be a “U.S. tax resident”?
Q. I am a U.S. citizen. I do not live in the United States. I live in Canada. I am a Canadian citizen. How do I stop being subject to the all of the FBAR and other reporting rules, tax rules (including PFIC), life restrictions and inability to effectively invest and plan for retirement imposed by the Internal Revenue Code?
A. You relinquish U.S. citizenship. Please note that a “renunciation” is one form of “relinquishment”. In general, the date of relinquishment of U.S. citizenship is more important than the form of relinquishment of U.S. citizenship. A Certificate of Loss of Nationality (“CLN”) may or may not (depending on the date of relinquishment) be necessary to cease to be subject to U.S. taxation.
Q. In simple terms, where do I get information about the process of renouncing U.S. citizenship?
A. You can start here.
Q. What are the tax consequences of relinquishing or renouncing U.S. citizenship?
A. The Internal Revenue Code describes the tax consequences of relinquishing/renouncing U.S. citizenship. See Internal Revenue Code S. 877A (the “Exit Tax” rules).
Part G – How a “permanent resident” of the U.S. – AKA “Green Card Holder” – ceases to be a U.S. tax resident
Q. I understand that IF I am a U.S. “tax resident” then I may be able to use a “tax treaty tie breaker” to NOT be treated as a U.S. “tax resident”. But, how do I cease being a U.S. tax resident period?
A. The definition of “residence” for tax purposes is NOT the same as the definition of “residence” for immigration purposes. In fact it is possible to have lost the right to live permanently in the United States, but still be treated as a “resident for tax purposes.” “Residence for tax purposes” is defined in Sec. 7701(b) of the Internal Revenue Code and is discussed in the Topsnik case. Most “lawful permanent residents of the United States” cease to be “tax residents” of the United States by either (1) Filing Form I-407 or (2) Filing a “tax treaty election”. You are advised to seek professional advice on the best way to proceed.
ATTENTION!! A permanent resident of the United Sates AKA “Green Card Holder” does NOT cease to be a U.S. “tax resident” by simply moving from the United States to another country. One must take specific steps to sever “tax residency” with the United States.
Part H – Are you, or have you ever been a U.S. citizen or Green card holder? Sometimes it’s not what it seems.
Q. Are you a “U.S. Person” for FATCA purposes?
The articles linked in the following two tweets make it very clear that a “U.S. citizen” is a “U.S. Person” for tax purposes. They do NOT provide good analysis about:
1. What kinds of “past acts” result in a relinquishment of U.S. citizenship; and
2. The relationship between a relinquishment of U.S. citizenship for nationality purposes and ceasing to be a U.S. citizen for purposes of taxation.
A. See the articles referenced in the following two tweets.
Circa 2013 from Maple Sandbox: "Who is a U. S. person ( or has U.S. indicia) according to the IRS (for #FATCA purposes)? https://t.co/LEDtAghErm
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) July 30, 2018
Generally good article from @CDNBankers about @taxresidency for #FATCA and #CRS purposes. Attached examples in "Appendix – Additional information for US Persons" (I believe) are misleading. Ex: doesn't consider "back dated" citizenship relinquishment! https://t.co/wFn02e1WiQ pic.twitter.com/CTodvMtSDm
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) March 30, 2018
Part I – “Relinquishments of U.S. citizenship and loss of U.S. citizenship for tax purposes
This is an extremely complex area. See the post referenced in the following tweet which makes it clear that: “Renunciation is one form of relinquishment – It’s not the form of relinquishment, but the time of relinquishment”
Q. When does a "U.S. citizen" cease to be subject to U.S. taxation? A. "Renunciation is one form of relinquishment – It's not the form of relinquishment, but the time of relinquishment" https://t.co/Jmy78paeX9 via @ExpatriationLaw
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) March 9, 2018
Part J – Beware! You don’t sever “Tax Residency” From Canada or the United States without being subject to massive “Exit/Departure Taxes!” – You may have to buy your freedom!
It is extremely important to understand that “severing” tax residency with an increasing number of countries requires that you pay taxes on the value of your assets. Note that these are taxes triggered by and only by severing “tax residency”. THERE IS NO SPECIFIC REALIZATION EVENT THAT WOULD OTHERWISE TRIGGER THESE ASSETS. This appears to be a consequence of increasing disparities in wealth coupled with the increased mobility of capital. A comprehensive discussion of how these taxes work is beyond the scope of this post. At a bare minimum you must be aware that:
1. The United States imposes very punitive “Exit taxes” on the assets (including foreign pensions) of certain U.S. citizens who relinquish U.S. citizenship or “long term residents” (Green Card holders) who cease to be “residents” of the United States.
3. Canada imposes significant “Departure Taxes” on people who sever tax residency with Canada.
4. How the U.S. S. 877A Exit Taxes differ from Canada’s “Departure Taxes”.
Conclusion …
The receipt of a FATCA or “CRS” letter is a frightening thing. Take a deep breath. Deal with it rationally and logically. If you are NOT a U.S. citizen you are probably NOT a “tax resident” of more than one country. On the other hand, if you are a “U.S. citizen” …
Circa 2014: Some "timeless" advice for those learning that they may be "U.S. persons" for tax purposes: "OMG! IRS Wants Me!" https://t.co/VPGvSMR8Xj
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) July 30, 2018
How would you go about “Solving this problem of U.S. citizenship”?
Expatland is preparing to welcome its first royal American since FATCA! (And its first royal American since Queen Noor of Jordan, who pre-dated FATCA, but who came after US-born Princess Grace of Monaco, and the US-born Duchess of Windsor, Wallis Simpson…) pic.twitter.com/RmmJmhHD6o
— Helen Burggraf (@helenburggraf) May 18, 2018
or maybe this
Welcome to Expatland, the new Duchess of Sussex! pic.twitter.com/y30EWfikIE
— Helen Burggraf (@helenburggraf) May 19, 2018
(For an interesting article on the “Possible Meghan Markle U.S. Tax Chronicles” by Helen Burggraf read here).
I am available on a “consultation basis” to help you sort out your “Tax Residency” in a FATCA and CRS world.
John Richardson