An email from Tim S. alerted me to an interesting article by Patrick Cain about getting the difficulty of getting an appointment for expatriation in Canada.
Patrick reports that wait times at the Toronto consulate have ballooned. Here we are in August, 2014. The earliest date that can be booked in Toronto is January 22, 2015.
Reason #1: FATCA
While the article does not explicitly say so, it appears that expatriation has become more popular since the FATCA agreement between Canada and the United States was implemented on July 1.
The FATCA rules are designed to use foreign banks to rat out U.S. taxpayers to the IRS. Foreign banks face severe penalties if they do not play along with the U.S. government and set in place reporting mechanisms designed to identify their U.S. customers.
This means that sooner or later every U.S. person will get a letter from his or her bank asking the simple question: “are you a U.S. taxpayer?” If the answer is “Yes,” there will be one of two responses from the bank:
- “Thank you for your answer, and we’re closing your account because we don’t want to spend $10 million upgrading our IT systems just to make a foreign government happy. You’re not a profitable customer; go away.”
- “Thank you for your answer, and while we’re happy to keep you as a customer, we’re telling the U.S. government about you. (Oh by the way, there may be some increased bank fees in your future.)”
I predict that for Americans abroad their banking choices will become more and more limited. Eventually only the juggernaut multi-national banks will be willing to work with them–the Citibanks, the HSBCs, etc. Smaller banks will simply close their doors to Americans because the compliance costs are too high.
This is something I have seen here in the United States. I recall calling the President of a bank that specializes in banking for mid-sized privately-held businesses only. I have known him for 25 years. I had a foreign client establishing business operations in the United States. He rejected the business because it would require hiring more and new compliance officers. Interesting tidbit: he figured one compliance officer adds $250,000 per year of cost. Thank you Uncle Sam for making everyday life difficult.
Reason #2: Tax Returns Are Expensive
But FATCA is just pushing everyone to wake up to the primary disincentive for holding a U.S. passport: citizenship-based tax rules. If you are a U.S. citizen, you are required to file U.S. income tax returns every year and comply with a (potty-mouth word)-load of bizarre paperwork. This adds enormous complexity and cost to a regular person’s life. Preparing U.S. tax returns is not cheap. From TFA:
Until recently, appointments to renounce U.S. citizenship in Toronto could be made within three to six weeks, said Toronto-based cross-border tax accountant Kevyn Nightingale, who specializes in tax advice for people giving up U.S. citizenship.
His clients are driven to divorce Uncle Sam less because of actual U.S. taxes and more because of the costly demands of the tax bureaucracy, he says:
“Almost none of them have to pay any tax – it’s just the hassle and expense of dealing with the paperwork.”
Nightingale says he charges $1,000-$1,500 for “very simple” U.S. returns.
[Note: hyperlink to Kevyn’s profile at MNP added by me; it was not in the original article. MNP is a very good cross-border accounting firm.]
What the article doesn’t say: for the Canadians that Kevyn is helping, there is probably a “zero payment due” tax bill from Uncle Sam on that U.S. income tax return.
Think of it. You pay $1,000 – $1,500 for accounting fees and Uncle Sam collects no revenue. Wouldn’t that annoy you just a tiny bit?
Reason #3: The Price of Salvation
The annual upkeep cost of filing U.S. tax paperwork is one thing.
What about those U.S. taxpayers living abroad and faithfully paying tax in their home country who suddenly find out that in some way or another they have run afoul of Uncle Sam’s weird paperwork rules? They face a Pain Factory: massive penalty risks or high professional fees to fix the problem. Or something both.
Yesterday I talked to a guy who had rental income from property outside the United States. He faithfully reported all of the income on his U.S. tax returns, but missed a couple of key pieces of paper that should have been filed. His penalty risks, at my guess, exceed $100,000.
Yes, there are IRS procedures to fix these situations. And yes, he probably–if he files all of the paperwork–will have zero penalties. But the cost of doing so (in professional fees) is likely to be in the $25,000 – $30,000 range.
This is insane.
The article mentions this point as well. Another quote from Kevyn Nightingale in the article:
“If somebody comes to us and says, ‘I’m a U.S. citizen, I’ve never filed tax returns, I’ve got a pretty ordinary life, but I’ve got an RRSP, an RESP, a TFSA and some mutual funds, and can you prepare all my returns and get me ready for expatriation?’, by the time we do all that, it’s not hard to spend $15,000 or $20,000 for a fairly ordinary person.”
This is a fair estimate. The particularly galling part of the expense is driven by mutual funds. It bugs everyone in our office more than anything else.
Buying mutual funds is a normal and recommended way to invest. But foreign mutual funds must be reported on Form 8621 and are taxed as Passive Foreign Investment Companies. The work needed to satisfy these requirements is staggering, driving professional fees through the roof. It’s simply unacceptable for ordinary people living ordinary lives.
The beatings will continue until morale improves.
When we tell people about the tax risks they face because of inadvertent paperwork failures in the past–and the cost to reduce or eliminate the risk–the response is often “How can I get away quickly, quietly, and permanently from this burden?”
The Backlog Solution
Many of you will want to renounce your U.S. citizenship before year-end. You can go anywhere in the world to do it. Start calling Consulates and Embassies to see what the wait time is.
Our experience is that the Caribbean and Central American countries are often good. Southeast Asia seems to be good as well.
Very Interesting: Back to One Appointment?
One of the interesting items in the article–by far the most interesting for me, in fact–is the transition back to a one-appointment expatriation process in Toronto.
When I started doing this work, renunciation required one appointment. Show up, do the paperwork, swear a mighty oath, and you were done.
Then the State Department started requiring two appointments. You had to show up, get lectured about the perils of renunciation, then go away and think for a while. Then you’d go back for a second appointment where they would take care of business. And maybe lecture you a bit more.
Forgive me for the analogy, but it’s almost like the State Department looked at the anti-abortion people who wanted to have a system where if you want an abortion you have to go in for a doctor’s appointment then go away to consider your choice before you can have the procedure. It is psychological warfare to tip the results in your favor.
But Toronto? The article says they are back to a one-appointment process, apparently in self-defense because they have so many expatriation appointments to process.
I hope this rolls out through the rest of the system. The two appointment requirement is silly and counterproductive for the government and the would-be expatriate.