The Ultimate Pledge of Disallegiance
American citizens living in Canada who have been delinquent in their U.S. tax filing obligations have another a week to come clean.
The Offshore Voluntary Disclosure Initiative (OVDI) deadline, originally scheduled for Aug. 31, 2011 was extended by the Internal Revenue Service to September 9, 2011 as a result of the impact of Hurricane Irene.
The U.S. is the only country that requires its citizens to file a tax return and report their worldwide income, no matter where in the world they might live and regardless of whether they hold another country's citizenship. With an estimated one million U.S. citizens living in Canada, many have been rushing to file their seven years of back taxes required by OVDI, which is designed to get people back into the U.S. tax system and to help U.S. citizens with undisclosed income from hidden offshore accounts get current with their U.S. taxes.
But according to Christine Perry, a cross-border tax lawyer with Keel Cottrelle LLP in Toronto who has been bombarded with OVDI inquiries in the weeks leading up to this Friday's deadline, the extension has become "more a curse than a blessing, as it means taxpayers must continue to deliberate over whether they should come forward voluntarily or take a wait and see approach."
In fact some dual citizens are contemplating whether they should take the ultimate pledge of disallegiance by renouncing their U.S. citizenship altogether, especially before 2014. That's when the U.S. Foreign Account Tax Compliance Act (FATCA) will require Canadian financial institutions to disclose information about U.S. citizens who hold Canadian financial accounts or the institutions risk punitive withholding taxes of 30% on all payments out of the U.S.
While almost unheard of in prior years, the number of citizens renouncing U.S. citizenship has risen dramatically in the past few years. Each quarter, the U.S. Department of the Treasury publishes in the Federal Register the names of those citizens who renounce their citizenship. For example, in all of 2008 there were less than 250 names on the lists. In 2010, that total sextupled to approximately 1,500.
According to the U.S. Immigration and Nationality Act, a U.S. citizen can lose his or her citizenship "by voluntarily performing any of the following acts with the intention of relinquishing United States nationality." These acts include: naturalizing or taking an oath to a foreign state, serving in the armed forces of a foreign state, accepting employment with a foreign government under certain circumstances and formally renouncing citizenship before a U.S. diplomatic or consular officer.
While the U.S. takes the position that its citizens intend to retain their citizenship when undertaking these acts, that presumption can be rebutted if the citizen affirms, by swearing an affidavit, that they intended to lose their citizenship and completes a questionnaire reviewing their intent toward U.S. citizenship.
Of course the fail-safe method of giving up your U.S. citizenship is to make an appointment at the U.S. consulate, formally renounce and obtain a "Certificate of Loss of Nationality." While the renunciation itself will set you back US$450 (only $440 at today's exchange rates!), it may also have both tax and immigration implications.
Once you renounce, you must still notify the IRS by filing Form 8854. On this form, you must certify, under penalty of perjury, that you have been tax compliant for the last five years, so there's no escaping filing prior years' tax returns and information forms. The penalty for non-filing Form 8854 is $10,000.
In some cases, renunciation can also result in a heavy tax hit under the U.S. departure tax regime for certain high net worth Americans who satisfy certain criteria.
According to Ms. Perry, clients faced with the renunciation option are sometimes reluctant to take this drastic step for fear that an increasingly hostile U.S. Border Patrol may hassle you at the border once it is known that you have relinquished your U.S. citizenship.
In fact, under U.S. immigration law, if it is determined that the principal reason for renouncing was to avoid U.S. taxes, then you can be barred from entry to the U.S. for ten years. Indeed, Ms. Perry has heard stories from travelers who have been detained at the border and questioned.
Her advice? "Have the name of a good immigration attorney handy for emergencies," quips Ms. Perry.