Dual citizens increasingly renouncing U.S. status
Onerous tax laws, Trump driving more people to rethink U.S. status
As the U.S. election draws near and the prospect of a Donald Trump presidency rises, more dual U.S.-Canadians are considering renouncing their U.S. citizenship.
Tax accountants and tax lawyers in Canada say they are getting more calls from people considering giving up their U.S. citizenship, not only over onerous tax filing requirements but also over political objections to a Trump presidency.
“We have people inquiring more frequently about renouncing not just for tax reasons but for political reasons,” said Max Reed, a tax lawyer with SKL Tax, a Vancouverbased U.S. advisory service. “I have one person who is so mad at Donald Trump she wants out, now.”
The rise in inquiries adds to a steadily growing number of Americans who have renounced since Uncle Sam began forcing banks worldwide in 2014 to disclose accounts held by people born in the U.S. or to American parents. In 2008, just 231 Americans who held two passports quit the U.S. Last year, the State Department published the names of more than 4,200 who had renounced in 2015.
Unlike every other country in the world but one, the United States uses a citizenship-based tax system that requires a person to disclose worldwide income regardless of where they live. Only Eritrea has a tax practice similar to the U.S.
According to Alex Marino, a U.S. tax lawyer with Calgary-based Moodys Gartner Tax Law, there are 800,000 to 1.1 million Americans living in Canada as dual citizens or as landed immigrants.
Marino says as many as 94 per cent of Canadian-resident U.S. citizens likely owe no U.S. income taxes because of a long-standing tax treaty between the two countries and Canada’s higher income taxes.
Taxes can still be levied against high net worth filers, gifts, estates and capital gains on things like property.
But the U.S. government’s decision in 2010 to bring in the Foreign Account Tax Compliance Act, known as FATCA, coupled with reporting requirements and threats of jaw-dropping fines and penalties for non-compliance even for those who owe no taxes, has driven more dual citizens to consider abandoning their U.S. citizenship.
The tax law, which came into effect in 2014, and new U.S. Internal Revenue Service filing requirements have helped spawn a lucrative worldwide tax compliance industry of lawyers and accountants who help navigate the Byzantine U.S. tax code.
In many cases, clients are people who never knew they had to file U.S. tax returns and who have not applied for U.S. Social Security Numbers or passports, according to Stephen Katz, the principal owner of SKL Tax, a Vancouver-based tax adviser company.
In September, 2015, the Canada Revenue Agency gave the IRS the names of 155,000 account holders.
“FATCA makes it a lot easier to find you,” said Katz. “We have people come in here with unbelievably high anxiety who ask if it is true that they could be fined or owe taxes.”
Marino’s firm is offering a free seminar Saturday in Richmond on the advantages, disadvantages and implications of renouncing U.S. citizenship.
“In my opinion, it is the cost of compliance every year (that is driving interest). Paying lawyers and accountants thousands of dollars every year to file returns because you are a U.S. citizen is not a fun exercise for most Canadian-resident U.S. citizens,” Marino said.
Susan Wood is an example. Born in Virginia, she moved to Canada with her parents when she was a child. Under rules at the time, she was deemed by the U.S. to have relinquished her citizenship when her family became Canadian citizens. But several years later, the U.S. changed the rules and said that becoming a Canadian didn’t automatically result in the loss of U.S. citizenship.
It was the beginning of a long nightmare, Wood said, in which she faced annual tax preparation and filing fees of more than $1,000, even though she’d never worked or voted in the U.S. and didn’t hold a U.S social security card.
Concerned that the U.S. could also grab capital gains from her home or affect her retirement income, Wood opted to pay Marino’s firm $12,000 to help her renounce her citizenship, which she did in November.
“OK, I was born in the U.S. But why would I want to belong to a country that will change its laws retroactively and will be really harassing its citizens,” said Wood, who lives on Texada Island. “I decided it was better to pay the $12,000 and get out.”
Getting out of U.S. citizenship doesn’t have to be that expensive. Reed says SKL charges about $3,500 for people who don’t have complex holdings. That’s in addition to the US$2,350 the American government charges as a processing fee.
The U.S. government charges an “exit tax” at a certain level of net worth. Applicants can find themselves having to pay up to 50 per cent of the value, Marino and Reed said.
But with the growing interest in renouncing U.S. citizenship have come long lineups. Where it once took a few weeks to get an appoint- ment before a consular officer it can take six to 18 months, according to both Reed and Marino. Anyone wanting out before the election is out of luck, Marino said. But most people, he said, are trying to get out of their citizenship for practical, rather than political reasons.
There is no breakdown of how many dual citizens in Canada have given up their U.S. rights. The State Department publishes names quarterly of those renouncing or “expatriating” in the Federal Register, but does not identify their locations. Marino says his company, which doesn’t limit its work to Canada, likely accounts for between eight and 11 per cent of all cases worldwide.
Trish Moon, of Toronto, who renounced her citizenship in 2012, says the U.S.’s heavy-handed attitude is driving a “tax compliance industry” that preys on the fears of Canadian-resident U.S. citizens who believe the only way out is to pay exorbitant fees.
Moon, a member of the Isaac Brock Society, which advocates for Canadian-U.S. citizens, renounced her citizenship after the IRS began to threaten people with hefty fines if they didn’t file mandatory forms that disclose the amount of every bank account they hold, even if they have no U.S. income.
“There is nobody madder at the U.S. in this world than me,” said Moon. “The viciousness with which they went after people, scaring and threatening them, made me sick.”
She also believes the best option for those who have not yet come on to the U.S. radar is to wait things out.
She argues that the laws are everchanging and that people should avoid the stress of trying to comply with something that in her view may be irrelevant in future years.
“I don’t believe the IRS will want to spend money and time going after average dual Canadians who would not owe any money to Uncle Sam anyway,” she said.
Moon is a member of two groups, including the Alliance for the Defence of Canadian Sovereignty, that are suing the U.S. over FATCA and the Canadian government for going along with it.
There is nobody madder at the U.S. in this world than me. The viciousness with which they went after people, scaring and threatening them.