A situation that becomes ever more torturous confronts U.S. citizens resident in Canada and elsewhere outside the United States. While complexities proliferate, the essentials are easy to outline.
The cornerstone of the problem is the singular view that the United States takes of citizenship. Unlike any other nation in the world except Eritrea, the United States presumes to tax its non-resident citizens.
Out of an estimated five to seven million expatriate U.S. citizens worldwide, no more than 0.5 percent seem to be fully compliant with US filing requirements. In Canada, the basic compliance of filing a tax return appears to run at less than 5 percent.
To compound the difficulties, especially in Canada, many individuals have acquired an unwanted U.S. citizenship by accident. In parts of New Brunswick, for example, birth in a hospital across the border has been common. As many as a million Canadian residents may also be citizens of the United States.
Starting in 2009, the Internal Revenue Service (IRS), the tax collection agency for the United States, initiated a series of “voluntary disclosure” programs. As of early 2012 these efforts had enabled the IRS to collect $4.4 billion from more than 33,000 individuals.
Through the Foreign Account Tax Compliance Act (FATCA), the United States is setting out to use the world financial system as its tax enforcement agency. Starting in 2014 offshore banks that deal with the United States are expected to report all accounts of US citizens.
At that point both the Treasury and the IRS can begin to compare their already required individual reporting with aggregated data for offshore accounts. FBAR reporting of personal financial accounts to the U.S. Treasury has become increasingly stringent over the past decade. Parallel Form 8938 reporting to the IRS began in 2011 as a part of annual income tax filing by extraterritorial U.S. citizens.
There is also evidence that U.S. authorities are beginning to link passport data and border control to tax filing compliance. A U.S. passport provides direct means of identifying U.S. citizens. A Canadian passport listing U.S. place of birth may lead to questions being asked. A March 2011 study by the U.S. Government Accountability Office focused specifically on “Potential for using passport issuance to increase collection of unpaid taxes.”
The horrendous climax to this story is a neverending Catch-22 scenario: U.S. citizens have no useful option to give up their citizenship unless they are tax and reporting compliant — but over 90 percent are not compliant. The small minority who are in a position to relinquish or renounce U.S. citizenship face significant paperwork hurdles, often a fee of $450, and an uncertain wait — at least months, perhaps more than a year — for issuance of a “certificate of loss of nationality.”
The glimmer of good news for residents of Canada is that the Government of Canada has stated that it will not enforce FBAR reporting penalties against anyone, nor will it enforce U.S. tax liability against persons who are concurrently citizens of Canada. This seems less a matter of Canadian government benevolence toward those persons than one of simple exegesis of the existing tax treaty between Canada and the United States.
The practical consequence is that many U.S. citizens in Canada may become exiles, fearful of prosecution for tax offense should they cross the border. The legal and accounting costs incurred to become tax compliant can run to tens of thousands of dollars. Beyond that overhead cost lie severe possibilities of tax owing, if only because of taxation system mismatches. Meanwhile, penalties to be exacted for presumed willful noncompliance grow ever greater and more certain.
Select List for Initial Reading
Jamie Rich — 19 Nov 2012
Land of the flee: why, despite Obama’s re-election, Americans are renouncing citizenship in droves
Bernard Schneider — 1 Oct 2012
The end of taxation without end: a new tax regime for U.S. expatriates
Roy A. Berg — 28 June 2012
IRS offers partial tax amnesty for Canadians with “low compliance risk,” though questions remain
Phil Hodgen — 5 June 2012
Why people expatriate
Don Whiteley — 28 May 2012
The accidental Kenyan: What would happen if the African nation copied U.S. tax policy?
Laura Saunders — 18 May 2012
Should you renounce your U.S. citizenship?
Brian Knowlton — 10 May 2012
Many Americans abroad surprised by tax code’s nasty bite
William McGurn — 23 Apr 2012
What’s U.S. citizenship worth?
Atossa Araxia Abrahamian — 16 Apr 2012
Tax time pushes some Americans to take a hike
Faizal Valli / Brian Dennehy — 13 Dec 2011
US citizens resident in Canada — common circumstances where US tax may be payable
Don Davies — 17 Nov 2011
Getting results: Response from Minister Flaherty re United States taxation of Canadian citizens
Amy Feldman — 9 Nov 2011
Undisclosed foreign accounts? The IRS is coming
Brian McKenna — 9 Nov 2011
Americans in Canada driven to divorce from their country
Jamie Golombek — 3 Sept 2011
The ultimate pledge of disallegiance
David Christianson — 2 Sept 2011
Long arm of American tax law
Robert E. Ward — Sept 2011
Advising US citizens and long-term residents on expatriating
Don Cayo — 19 Aug 2011
U.S. citizens living in Canada face risk of massive tax penalties
[ Last update 22 Nov 2013 ]