As Expatriations Increase, Potential Relief for “Accidental” U.S. Citizens

As Expatriations Increase, Potential Relief for “Accidental” U.S. Citizens

Note from Coleman Wealth: We work with a network of cross border experts, and are fortunate to have connected with the law partners at Hodgson & Russ LLP. Alice Joseffer, a partner at Hodgson & Russ is also the contributor of the post below. Alice offers her clients a full range of tax services and has been practicing for more than 30 years. She focuses her practice on successfully resolving U.S. federal tax controversies and advising U.S. and foreign clients on international tax issues. We thank Alice for allowing us to republish one of her blog posts from February, 2015. The original post can be found at

According to Treasury reports, 3,417 U.S. citizens relinquished their U.S. citizenship in 2014, which is more than the number of expatriations reported in prior years. As required by law, the Treasury publishes a quarterly list of names of individuals who have relinquished their U.S. citizenship. Individuals’ reasons for relinquishing citizenship are not published. London Mayor Boris Johnson, a self-described dual citizen ‘as an accident at birth’ has reportedly announced his intent to renounce his U.S. citizenship to prove his commitment to Britain. Perhaps his recent dispute with the IRS over tax on the sale of his home in London factored into his decision. Some accidental U.S. citizens have never entered the United States and simply see no reason to retain U.S. citizenship.

The reason for expatriation may be very significant for U.S. immigration reasons. Under U.S. immigration laws, any former U.S. citizen who officially renounces his or her U.S. citizenship and who is determined to have renounced for the purpose of U.S. tax avoidance may be denied entry into the United States. This provision was included as an amendment (the Reed Amendment) to immigration legislation that was enacted in 1996. There are a variety of other immigration and tax issues that should be considered carefully by an individual before initiating the expatriation process.

How does one become an accidental U.S. citizen? An individual who is born outside of the United States may be a U.S. citizen at birth based on citizenship of a parent. The U.S. laws determining citizenship at birth have varied over the years, so specific facts and applicable law must to be considered for each citizenship determination. But an individual can be a U.S. citizen without taking any affirmative action to become one. In some situations, individuals born in the United States may also consider themselves to be citizens as an accident at birth. Non-U.S. citizen parents may be traveling through the United States when a child is born. Sometimes a baby is born at a U.S. hospital when the baby’s non-U.S. citizen parents live outside the United States but close to a border and, based on medical resources, a U.S. hospital is the place of birth.

Many accidental U.S. citizens are unaware of their U.S. citizenship until an event such as the death of a U.S. citizen parent or an inquiry requires investigation. FATCA, the U.S. regime that requires certain foreign financial institutions to report information about U.S. account holders, has resulted in discovery of U.S. citizenship by some nonresidents.

Why do dual citizens care about their status? Unlike virtually every other country, the United States taxes its citizens on worldwide income. Nonresidents who are not U.S. citizens are required to pay U.S. income tax only on U.S. source income. Although the United States provides certain exemptions and credits for U.S. citizens living outside of the United States, many nonresident dual citizens still pay tax to the United States, including tax on income generated in other countries. Often foreign tax credits do not offset the U.S. tax. London Mayor Johnson was subject to U.S. tax on the sale of his residence. The sale was not subject to tax in the United Kingdom, so there was no foreign tax to credit against the U.S. tax. Further, the 3.8 percent net investment income tax (also known as the unearned income Medicare contribution tax) cannot be offset by foreign tax credits. As a result, nonresident dual citizens who previously owed no U.S. tax because it was offset by foreign tax credits owed tax on their 2013 tax returns, the first year the tax was in effect. Even when no tax is owed, nonresident U.S. citizens have the cost of tax return preparation and record keeping that is different than what is required in their countries of residence.

Some nonresident U.S. citizens who are aware of their status have complied with U.S. tax reporting requirements and also requirements to file annual statements reporting their ‘foreign’ accounts (FBARs). For those individuals, it often seems odd to report, as foreign accounts, ordinary personal checking accounts and retirement savings accounts in the countries where they have always lived and worked. Others, who have not been in compliance, have faced the need to come into compliance and potentially onerous penalties. In some situations, IRS disclosure programs have been helpful, but even when disclosure programs are available, they can be burdensome and costly. But unless a U.S. citizen has been in compliance with U.S. tax reporting requirements for the past five years, the individual can not relinquish citizenship without being subject to an expatriate tax regime.

The expatriation tax regime is potentially onerous. If a U.S. citizen relinquishes his or her U.S. citizenship and meets certain tests, the individual is subject to an exit tax and, potentially, additional tax and reporting requirements. Specifically, if the individual a) has an average annual U.S. income tax liability for the previous five years of $160,000 (the 2015 amount, based on an amount adjusted for inflation) (annual tax liability test), b) has a net worth of at least $2,000,000 on the expatriation date (net worth test), or c) fails to certify compliance with all U.S. federal tax obligations for the previous five years, the person is subject to the expatriation regime.

An important exception to the application of the three-part test applies in certain circumstances. An individual is not treated as meeting the annual tax liability and net worth tests (even if the applicable thresholds have been exceeded) if the individual:

Became at birth a citizen of the United States and a citizen of another country and, as of the expatriation date, continues to be a citizen and is taxed as resident of such other country, and
Has been a resident of the United States for not more than 10 taxable years within the 15-taxable year period ending with the taxable year during which the expatriation occurs.
An exception also applies if the individual relinquishes U.S. citizenship before age 18 ‘ and has been a resident of the United States for not more than 10 years before the date of relinquishment.
Under these exceptions, the annual tax liability test and net worth do not apply to many ‘accidental’ citizens. However, they are required to certify compliance with all U.S. federal tax obligations for the previous five years or be subject to the expatriation tax regime.

The administration’s 2016 budget proposes that an individual will not be subject to tax as a U.S. citizen and will not be subject to the expatriate tax if the individual:

1. Was a dual citizen at birth;
2. Has been a citizen of the other country of citizenship at all times;
3. Has not been a resident of the United States since turning 18 ‘; and
4. Has never held a U.S. passport or only held one for the sole purpose of departing from the United States.

Under the proposal, citizens seeking relief must relinquish citizenship within two years of the later of January 1, 2016, or upon learning of their U.S. citizenship. They must also certify under penalties of perjury that they have complied with all U.S. tax obligations that would have applied during the five years preceding the year of expatriation if the individual had been a nonresident alien during that period (i.e., reporting and paying U.S. income tax on U.S. source income, if any). As such, it appears the proposal would modify existing law primarily by eliminating the requirement for five years of tax compliance reporting worldwide income. Of course, at this time the proposal is simply that and until the law changes there is limited relief for dual citizens.

U.S. Taxation of Snowbirds

Note from Coleman Wealth: We work with a network of Canada’s best cross border experts, and are fortunate to have connected with Kevyn Nightingale, a partner with MNP LLP leading the Expatriate Taxation practice. Kevyn has worked with a number of our clients who have cross border legal issues and is known as a thought leader in this complex area of law. We thank Kevyn for allowing us to republish one of his blog posts from December, 2014. To contact Kevyn, please email us at and we can facilitate an introduction

By now, it is well-known in Canada that U.S. citizens must file U.S. tax returns, no matter where they live. However, the U.S. also taxes people based on residency ‘ the same concept that is used by most of the world’s advanced nations.
The U.S. has some peculiar residency rules and it is surprisingly easy to run afoul of them. Mistakes can be very costly. For clarity, we’re talking about income-tax residency here; the gift and estate taxes use different rules.

Impact of U.S. residency ‘ tax and filing
Residents must file tax returns annually and a host of information returns. Even if there is no U.S. tax, the filing process is usually onerous, intrusive and expensive.

A resident files form 1040, reporting worldwide income (yes, this duplicates the Canadian reporting). The income tax rules are similar to Canada’s. The U.S. offers certain exclusions and foreign tax credits to people abroad, so usually there is no actual tax. However, since the rules aren’t the same, it’s possible to have U.S. tax, even after paying the higher Canadian tax.

Residency definition
There are two ways a person can be resident:
1) A green card holder (also known as a lawful permanent resident, under immigration law) is deemed to be a resident, no matter where he or she lives.
Many people think that once the card expires, the status also expires. In order for a green card to cease to be valid, it must be voluntarily relinquished or retracted by a court. As a result, there are quite a few Canadians who think their status has expired, but are mistaken.
2) A person who spends a lot of time in the U.S. is also a resident. This determination is called the Substantial Presence Test and is the test most Canadian snowbirds need to be concerned about.
Substantial Presence Test (SPT)
Under domestic law, an individual who spends at least 31 days physically present in the U.S. in a year and meets this formula, is considered a resident:
Days in the U.S. in the current year +
1/3 days in the U.S. in the prior year +
1/6 days in the U.S. in the 2nd prior year
? 183
Any portion of a day is a day.
A person who spends 122 days per year in the United States for three years running will meet this test for year three.

Governments are tracking days
In the past, the IRS largely relied on individuals’ representations of their time in the United States. While it has always been possible for the IRS to glean the necessary information from border-crossing records, it was not practicable to do so on a mass basis.

The U.S. government is now tracking the number of days Canadians (among others) spend south of our border. Any individual can find out the government’s record of their number of days on the Department of Homeland Security’s website.

Exempt individuals Some days in the U.S. don’t count: Those for someone on foreign government-related business, a teacher or trainee, a student or a professional athlete competing in a charitable sports event.

The important exclusion here for snowbirds is for someone whose medical condition prevents them from leaving the country.
Form 8843 must be filed on a timely basis. This phrase, in most cases, means by June 15 of the following year. The due date can be extended, but late filing almost always means the form will not be accepted and the days will not be excluded.

Closer Connection Exception (CCE)
A Canadian who meets the SPT may be able to avoid U.S. residency by filing form 8840. To do this, one must meet several criteria:
1) Have a ‘tax home’ (usually the place one works) and a closer connection to Canada, based on their facts and circumstances;
2) Be physically present in the U.S. for under 183 days in the current year; and,
3) File form 8840 to indicate this connection on a timely basis.

An individual who meets the SPT, but does not file this form is deemed to be a U.S. resident under U.S. domestic law.
Again, late filing means the form will not be accepted and the individual will not be eligible for the CCE.

Treaty residency ‘ a last resort
Just about every snowbird will have a tax home in and closer connection to Canada. But it’s not uncommon to see people exceed the 183-day threshold (even if that causes them to be offside for immigration purposes as well). And many people are unaware of form 8840, so they can’t use the CCE.

It is still possible, even for these people, to avoid residency by filing a U.S. return with a treaty disclosure. The treaty contains tiebreaker rules, allowing a snowbird to be taxed as a resident of only Canada.

The tiebreaker tests are applied in order. If one rule breaks the tie, then the subsequent tests are ignored. If a test results in a tie, the subsequent one is examined. An individual is a resident of the one country where they have:
1) A permanent home available to him / her;
2) A closer connection (similar to the Canadian domestic law residency test); 3) An habitual abode; or,
4) Citizenship.

The treaty overrides domestic law. Assuming Canadian residency, the individual files form 1040NR (not form 1040), along with form 8833. There is a $1,000 penalty for failing to file this form. If the individual has no U.S.-source income, there will be no U.S. tax.

Supplementary filing required anyway
A person who uses the treaty to be taxed as a U.S. non-resident is still considered a resident for most filing purposes. The IRS doesn’t have easy access to the same information about potential foreign (say, Canadian) payors of income, so it demands the individual taxpayers provide the data. For example:

Foreign Bank Accounts (FinCen 114)
Specified Foreign Financial Assets (8938) News flash: The IRS has withdrawn this requirement for 2014 and subsequent returns
Foreign Corporations (5471)
Foreign Partnerships (8865)
Foreign Trusts (3520/A)
These forms require disclosure of quite a bit of information many people would rather keep private. It goes without saying that preparation of these forms is time-consuming and therefore expensive.

Bottom line ‘ watch how many days you spend in the United States!

To learn more about taxation considerations for snowbirds, contact Kevyn Nightingale, CPA, CA, CPA (IL) at or 416.515.3881

4 Ways for Couples to Get on the Same (financial) Page

4 Ways for Couples to Get on the Same (financial) Page

Some relationships can be extremely strained due to different ways of dealing with money. One partner may be a natural saver, and the other an unbashed spender. (Don’t feel guilty if you’re the latter rather than the former)

A few years ago, I worked on a financial plan for a couple in their late 30’s who made very decent joint family income, but the husband was quite adamant that his wife was overspending and putting their retirement in jeopardy. The wife was unconcerned, and this made for a very tense and awkward meeting , and by the end of the meeting, no resolution had been made. Soon thereafter, the couple went to seek marital counselling. They realized that they needed to get on the same page, as they were clearly not able to talk about long term planning before settling their shorter term differences regarding their financial habits.

We have good reasons for developing partnerships – to have a stable partner we can love, raise a family together, depend on and be ourselves with. But when your future is inextricably linked with someone else’s, it is crucial to be able to trust that person, and money is no small part of that equation.

What are some of the key money mistakes couples make? How can you alleviate money stresses from your relationships?

1. Honesty is always the best policy. A friend of mine once confessed that she had a secret Visa bill that she kept hidden from her husband. She was embarrassed that she couldn’t repay it quickly enough. The #1 thing you can do to ease your money woes is to be completely honest with your spouse. Don’t hide your purchases, or your debts. Chances are that if you feel the need to hide them, then something may be amiss. The end result will always be worse if your spouse finds out that you have hidden it from him/her.

2. Have a Budget. This point speaks to the importance of both partners being on the same page with regards to everyday spending. Have you sat down to go through how much money is being spent on necessities, how much is put towards savings and how much is “discretionary” ( money)? Are you on the same page when it comes to the latter point? This can be hard when one of you is a saver and the other is a spender, but it is SO KEY to developing long-term trust with your partner. Try giving yourself a monthly allowance for extraneous spending so that you don’t end up nitpicking over every little purchase.

Something else I’m a fan of is having a joint bank account or credit card for household expenses (utilities, groceries, maintenance, cars, etc.), and individual accounts for your discretionary “fun” purchases. As long as you both contribute equivalently to the joint account, and adhere to the amounts committed to long term savings and debt, then whatever each of you chooses to spend from your own individual accounts is your business.

3. Don’t Put One Person in Charge. In every partnership, chances are that one person is “better” (or more well versed) with money than the other. One of the biggest mistakes that couples make is letting one person be in charge of everything financial. The unfortunate outcome of this is that it releases one person from any responsibility for money matters. This can lead to a certain amount of resentment on the part of the partner dealing with money (what, you don’t care?), but more importantly allows potential mistakes to go “unchecked”. If two sets of eyes see everything that’s going on, chances are that you will be on more solid financial footing.

If you were to outlive your spouse, would you want to feel in control of your finances? I had a client whose spouse unexpectedly passed away and left her in financial ruins. She had not known the true state of their finances and had been told by her late husband that they were in “good shape”.

Lastly, perhaps your spouse thinks that they are really financially savvy (but they really aren’t!). A few years back, I met a couple where the wife (who was the main income earner) had left her husband in charge of dealing with all their investments. He had boasted about how well he had done over the years. The reality was that he had lost a significant amount of money on trading penny stocks, and had only been talking about the “wins” that he had had. Overall, their savings had diminished which put their retirement plans in jeopardy.

Make sure to educate yourself and take part in discussions with your spouse and meetings with the Coleman Wealth team!

4. Communicate and Negotiate. Most importantly, make sure that you are always on the same page as your partner. If you’ve always taken a backseat to your partner and want to regain a bit of financial control, then bring it up! The longer you let things lie, then the more it becomes part of your modus operandi, and the harder it is to change the behaviour.

At Coleman Wealth, we strongly believe that it’s important for both spouses to take part in the planning process. This goes towards empowering you as a couple to make important strides forward towards financial freedom, comfort and success!

“Cleaning Up”

“Cleaning Up”

There has been a lot of concern about the rapidly falling oil prices and what that means both for energy stocks as well as the Canadian and global economies. We’ve been following this and hearing a lot of conference calls and reading analyst reports on the topic. As you can imagine, there is a lot of noise about this right now – and the short answer is that no one knows.

While that may be disconcerting, it is indeed most often the case anyway – so, from my perspective, this is nothing new. We continue to watch the situation closely to see what we can glean from it.

In any event, it has always been my bias to not own more than a token weighting in the energy sector. We like businesses that have high degrees of predictability. Anything connected with a commodity, almost by definition, has no predictability. For example, 6 months from now, a barrel of oil could be $40 or $140. No one knows! And that’s a lousy business.

Banks, by comparison, will undoubtedly continue to be the greatest fee generating machines the universe has ever created. The Canadian banks reported their results this month and they continue to set records, even in a historically low interest rate environment. Bank of Montreal, for example, made $12 million profit per day last year, including Sundays when they are closed! Yet, try and find a pen at the teller station. Actually, try and find a teller now… but I digress. The point is, banks generate remarkably stable and robust profits – and yet they all sold off as they didn’t make quite as must as “The Street” had hoped in the 3rd quarter of 2014.

It’s funny – my decision to not have any significant weighting in energy stocks is not something we’ve generally talked about. Managing for risk, as we do, is not a huge selling feature when people are normally hunting for returns. From my perspective, it’s like a car company bragging that they have better air bags than the next guy. It doesn’t really matter until you need them. We’re happy to report now that our portfolios are doing considerably better than most, precisely because we managed for risk.

Where we do see considerable opportunity is in all of the beneficiaries of lower oil and gas prices — the consumer. The sudden drop in the price of gas at the pump is an immediate and significant savings for all consumers! It’s like a massive tax cut. It comes at a very good time, as people are spending and travelling a lot over the holidays. This impact will primarily be felt in the US – which is great for most clients, as we have purposefully overweighted US and global companies in most portfolios. As I suspect this trend will continue, we’ll be tilting our sails more in this direction.

We will also continue on the path of reducing stock specific risk in most portfolios. Buying single securities is a bit 1970’s now, as we have so many effective tools (ETF’s and well selected mutual funds, for example) that allow us to manage risk and access new opportunities with great speed and efficiency. I’ve seen so many cases of an investor getting the idea right – and the stock wrong. Just consider how you could be right in identifying smartphones as a great investment, and then buying Blackberry instead of Apple. Better to have bought several of them and getting it mostly right than trying to pick the winner and getting it completely wrong.

In any case, we continue to do our due diligence and “vacuum” behind the scenes!