Almost two years ago to the day, I wrote a post explaining how:
How Fluctuating FX Foreign Exchange Rates Generate Capital Gains on the Sale of Property and the Discharge of Debt.
Those wishing to understand how exchange rates affect possible U.S. capital gains liability for Americans abroad should revisit that post. The “Readers Digest” version is as follows:
1. For the purpose of U.S. taxes, all transactions are converted to U.S. dollars (using the applicable rate at the time of the transaction);
2. The result is that fluctuating exchange rates can generate “phantom” capital gains and losses, which can generate U.S. tax liability for Americans abroad.
As the Canadian dollar rises in value, fewer Canadian dollars are needed to purchase a U.S. dollar. The capital gains measured in U.S. dollars would increase.
As the Canadian dollar falls in value, more Canadian dollars are need to purchase a U.S. dollar. The capital gains measured in U.S. dollars would decrease.
The Canadian dollar has fallen by about 10% in the last two years. The above tweet references a video suggesting that, the decline of the Canadian dollar or (as a Homelander would say), the strengthening of the U.S. dollar is EXCELLENT for Americans in Canada considering renouncing U.S. citizenship.
My recent post discussed the importance of renouncing U.S. citizenship before becoming a covered expat. For those who need a reminder (and this is not a substitute for careful legal advice) a “covered expatriate” is one who meets any of the following tests:
1. The Income Test – Has the composition of income hat has resulted in a U.S. tax bill of approximately 140,000 for each of the last three years (this is a paraphrase, look it up yourself);
2. The Asset Test – Has a net worth of two million dollars or more
3. The Compliance Test – Is unable to certify compliance with U.S. tax laws for each of the five years prior to expatriation. Note that this is intended to include having filed all relevant information returns. (I would argue that since FBAR is a Title 31 requirement it is irrelevant to Title 26 compliance). Interestingly, if you do not meet either the asset test or the income test, you have a huge incentive to ensure that you have five years of tax compliance.
When it comes to U.S. tax compliance:
The only thing worse than the fear of non-compliance is the certainty of compliance. Why?