I’ll have to admit I had not thought of this. Although it is clear that FATCA and FBAR have combined to make non-U.S. citizens reluctant to have any kind of financial relationship with a U.S. citizen, a new problem has surfaced. In hindsight this is perfectly obvious. A British Columbia adoption agency is disseminating information which explains what happens if a U.S. citizen is adopted. The agency states that:
“Whether your child lives in Canada as an American citizen, or unless and until they eventually renounce their American citizenship, they must file tax returns every year (if they have income), and if they have any qualifying financial accounts must file FBARs every year.” Continue reading →
As it stands, there are a number of normal investments prohibited to U.S. citizens living abroad. U.S. citizens living abroad will likely find it much more difficult to find an accountant or tax prep person to help them with their taxes. There are at least three reasons:
(Whether this can be applied to preparers outside the U.S. or not, it will certainly reduce the number of people willing to take this on.)
2. Professional liability – Who would want the risk of making a mistake? I know at least one Canadian CA who will not take American clients. Who would want the problems? In addition to the 1040, there is the problem of the FBAR, the new 8938 form, the appropriate RRSP election form, and a host of possible other forms (see below).
3. Too much work for too little money – The work is so substantial that, that I expect the minimum fee will be in the range of $1000 (for somebody who has no assets or issues). Although this I small change for some taxpayers, it is clearly too expensive for most taxpayers.
“There has been a lingering question about the US tax treatment of Canadian Mutual Funds in taxable accounts. This discussion does not apply to investments in RRSP accounts. In early 2010, the Internal Revenue Service issued a determination that most Canadian Mutual Funds are corporations for US tax purposes, even though they are organized as trusts under Canadian law. Because they are corporations, most Canadian Mutual Funds are Passive Foreign Investment Companies (PFIC).
A PFIC investor has burdensome US tax reporting as well as potentially confiscatory taxation. If a PFIC provides certain required information, the tax burden can be lessened, but this is not practical for must Canadian Mutual Funds.
There are two solutions—one short-term and one permanent. On a short-term basis you can report income on a “marked to market” basis in your US income tax return. This means that the change in value during the year will be reported as ordinary income. This, of course will, require additional valuation information each year, but it will avoid potential tax and interest charges that have the potential to exceed 100% of the income from the investment.
The second solution, and the one I recommend is divest your portfolio of all foreign mutual funds and invest in individual security issues. While this may not sound like a sensible solution for the Canadian investor, but it is the price of being a U.S. taxpayer.”