Nobledreamer’s comment to this article about renouncing U.S. citizenship is worth a post and that is exactly what this post is. One of best descriptions of the problem I have seen. It’s in language and a format that anybody can understand it. Thanks! Continue reading
Financial planning is difficult for US citizens abroad. I have been writing a series of posts that describe the tax treatment of US citizens abroad in very specific circumstances. Few would imagine many of these circumstances. I have recently written about when US citizens abroad sell a principal residence and why US citizens abroad should not invest in TFSAs. I have written about why PFICs must be avoided.
My topic today is how the fluctuating exchange rates can create “phantom gains”. AARO has noted and proposed the following as part of legislative tax reform for US citizens abroad:
Based on current tax law, for Americans living abroad, currency fluctuations create U.S. dollar capital gains or losses even on daily transactions as well as on movements of short and long term investments done in local currencies. The exchange rate on the purchase date and the exchange rate on the sale date determine the capital gain for the U.S. Treasury.
Allow Bona fide foreign residents the option to choose a foreign currency as their functional currency and calculate all capital gains/ loss transactions in that currency before converting to U.S. dollars. The current average annual exchange rate with the U.S. dollar is then used to convert any gains/ losses into dollar amounts from the foreign currency. Since the use of a functional currency is allowed for foreign subsidiaries of U.S. corporations, it is only reasonable that a similar logic be applied to U.S. citizens abroad.
Obviously fluctuating FX rates are a problem for US citizens abroad. My inspiration for this post comes from the following comment by Lisa on the Isaac Brock Society site. Anybody who has taken out a mortgage loan will have to deal with this problem.
Introduction – U.S. citizenship has opportunities, liabilities and disabilities
Living as a U.S. citizen outside the “Homeland” is at best difficult and at worst impossible.
Those who wish to remain U.S. citizens and live outside the United States must live by the motto:
“The difficult we do today. The impossible takes a bit longer”.
Many will see the difficulties as being too great, too time consuming and too expensive and will renounce their U.S. citizenship. At the very least, you should fully understands the opportunities, liabilities and disabilities of U.S. citizenship.
The difficulty of financial planning and investing – A Major Disability
As a U.S. citizen you are taxed in the same way and according to the same rules as U.S. citizens who live in the U.S. It is important to understand that the U.S. tax system is almost the exact opposite of Canada’s tax system. The reason is that:
Retirement planning in Canada is based on the principle of tax deferral. That is what an RRSP or TFSA is – a tax deferred investment plan. You will NOT (at least in the short term) pay tax on income earned inside one of these investment vehicles.
The U.S. tax system is designed to attack “tax deferral” (examples PFICS and Subpart F income) and will severely (and if you want to see how bad this is see this post about PFICs) punish you if you invest in these things.
By the way, if you are not already aware of this U.S. citizens should not invest in Canadian based mutual funds. (The are considered by the IRS to be PFICs.)
While I am on a roll, I will also remind you of the problems of:
Now, back to the main point of this post.
The Four Principles Of US Taxation Abroad
The U.S. tax system (at least in relation to U.S. citizens abroad) operates on the following four basic principles:
1. If something is “foreign” it should be punished.
2. The “principle of penalty” – There is no way that somebody can clean up innocent mistakes without paying penalties or the threat of penalties.
3. “No good deed goes unpunished” – Those who have filed (and are in the system) will have greater problems than those who have never filed. (Look at the new Streamlined compliance procedures for evidence of this – those who have filed cannot use the procedure to amend returns)
4. U.S. citizens abroad are tax cheats.
Those four principles sum it up.
This is a very interesting video of a FATCA discussion in Switzerland in June of 2012.
Dick Harvey – AKA – “Mr. FATCA” participated in the this discussion/debate. His comments on the experience are interesting and are referenced in an earlier post – where I noted that Obama has closed dialogue with U.S. citizens abroad. The relevant part of this post was: Continue reading
Introducing Queen’s Law Professor Arthur Cockfield:
Announcement from Queen’s University – August 30, 2012:
New IRS rules affect 1 million Canadians on Sept. 1: Queen's University expert – Arthur Cockfield talks #FATCA #FBAR queensu.ca/news/media/new…—
U.S. Citizen Abroad (@USCitizenAbroad) September 10, 2012
Then: September 2011:
Now: September 2012:
Canadian law prof discusses legality of #FATCA and IRS hunting #americansabroad ctvnews.ca/video?clipId=7… Canada not #offshore – So, why #FBAR ?—
U.S. Citizen Abroad (@USCitizenAbroad) September 07, 2012
Not twitter literate? Click here
Twitter literate? Spread this interview by retweeting.
Is the U.S. a leader in international justice? There was a time …
@hrw US undermines justice just by keeping #americansabroad locked in prison of #FATCA and citizenship-based taxation renounceuscitizenship.wordpress.com/2012/09/04/oba…—
U.S. Citizen Abroad (@USCitizenAbroad) September 04, 2012
“An American President always, always, always stands up for the freedom and justice of all people.” – Senator John McCain – August 29, 2012 – Republican National Convention - 13:00 minute mark of video
So, said John McCain in his speech at the GOP convention on August 29, 2012. Four years ago, John McCain was the Republican candidate for President of the United States. Would things have been different for Americans abroad if McCain had been elected? Would we have had FATCA? Would we have had an administration that would have deemed anybody with a non-U.S. bank account to be a tax cheat? Would US. citizens abroad, and US Green Card holders residing in the US, have been subjected to the FBAR Fundraiser? We don’t know for sure. Furthermore, we don’t know whether there would be a change in policy under a possible Romney administration. Continue reading
The Isaac Brock Society recently featured a discussion about how and when to advise young people about the potential problems of U.S. citizenship and whether they should consider renouncing U.S. citizenship. As parents, teachers, mentors and friends we should pass on to our young people the benefits of our (in varying degrees) knowledge, wisdom and experience. We do this because we want to equip them with the skills they need to make the best life decisions that they can.
The books: “Letters of A Businessman to His Son” and “Letters of A Businessman to His Daughter“, by G. Kingsley Ward, are wonderful examples of this principle. They are chock full of practical advice and thoughts on - the only business that really matters – “The Business of Life”.
I have been inspired by Mr. Ward. Here is the letter (with many factual modifications to protect the young person in question) that I wrote on the occasion of that young person’s High School graduation. Continue reading