As regular readers know, I have strongly hinted that I would love to live in Canada. And I realize that being a citizen of one country and living in another country can produce some amazing headaches.
But U.S. citizens have one extra headache that no other country requires. If you are a U.S. citizen, you have to file a tax return regardless of where you live and whether you made any money in the United States.
The tax amnesty, or as the IRS calls it — Offshore Voluntary Disclosure Initiative, expires on August 31. The penalties, as harsh as they are, will be less severe if taxpayers meet the deadline. The tax returns involved are from 2003-2010.
Since February, U.S. citizens living in Canada and elsewhere in the world have been shocked and surprised to realize that they needed to file U.S. tax returns, even without income in the U.S. And some of those people qualify in obscure fashions, like being born in the United States even if they never lived in the U.S.
Now I'm not a tax attorney by any means, but generally, U.S. citizens in Canada pay little to no tax since taxpayers would get a foreign tax credit on money made outside the U.S., similar to working in more than on state in the U.S. and getting a tax credit for money made in another state. The penalty comes in not filing the paperwork. (Perhaps the fine folks at the American Bar Association can explain this better than I can.)
The exceptions, according to this Montreal Gazette article, are a little alarming:
Filing these past tax returns can be quite burdensome especially if you own a Tax Free Savings Account or Registered Education Savings Plan. These vehicles are not recognized as tax deferred vehicles in the U.S. which views them as foreign grantor trusts requiring separate filings (IRS Form 3520/3520As). The IRS itself estimates that it would take six hours and 40 minutes to complete Form 3520.
In addition, if you have more than $10,000 in foreign (i.e. "non-U.S.") accounts, including Canadian bank, investment, RRSP and RRIF accounts, you must file a "Report of Foreign Bank and Financial Accounts" (FBAR) return listing details of each account. Note that this is under the U.S. Bank Secrecy Act and is not a tax filing.
In another case of U.S. dominant overreach, the U.S. Foreign Account Tax Compliance Act (FATCA) — as of 2014 — requires Canadian banks to give off financial information about U.S. citizens to the United States.
Every other country outside the United States adopts a tax philosophy along these lines: "What you make in [insert name of country where you live] is their business. What you make in our country is our business." Unless a significant reason to change that thought process exists, this should be the norm. Unfortunately for U.S. citizens, the norm doesn't apply to them.
If I ever get the chance to live in Canada, I will remember to file my tax return. I might even have to send some money to Uncle Sam. But I will be living in a country where my taxes will go toward universal health care, something that isn't true where I live now.
More: 2011 Offshore Voluntary Disclosure Initiative Frequently Asked Questions and Answers (irs.gov)
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