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Citizenship – to retain or to renounce

calander

Mar 21

Statistics show that the number of Americans renouncing their citizenship is at record levels – the total number may be relatively small but the growth in numbers is high.

One area of taxation in which DJH International Tax specialises is that relating to the expatriate US citizen, with a training course, conferences and a networking group, the US Professionals Association TM available to tax professionals in the UK, Canada and Hong Kong.

As most tax professionals know, US citizens, almost uniquely in the world, are obliged to report their income to the IRS based purely on their citizenship, nothing to do with residence.

At recent conferences in both London and Toronto, a panel of experts in immigration/visa law, taxation and investment planning discussed the challenges around retaining citizenship and the ensuing reporting obligations, or renouncing.

Most discussions of US citizenship revolve around the tax position but these sessions, both moderated by John Richardson, a dual US/Canadian citizen based in Toronto who often describes himself as a “citizenship counsellor”.

The discussions centred on the basic human requirement to live, work, marry and raise families and to invest and engage in retirement planning. As John put it, “How must a US citizen abroad live in order to be able to retain U.S. citizenship.

Our immigration/visa lawyers were Andrew Cumming, Cumming and Partners in Toronto and Nita Nicole Upadhye, NNU Law in London. Their areas of concern were the level of difficulty in entering the US if a person was no longer a US citizen. While neither thought the fact of renunciation itself should present a problem, both said that it should be pointed out to clients that any criminal conviction, however minor and however long in the past, could prevent someone from being admitted. Nita was concerned that the US is not presenting itself as a welcoming jurisdiction at present and there is a perception that it may become more, rather than less difficult in the immediate future.

All panellists agreed that tax advice should be sought before beginning the process of renunciation and should beware of the two things that the US tax system looks upon least favourably – deferral and anything foreign! The disposal of PFICs/mutual funds therefore present particular problems, with the sale triggering a realisation of gain and a deemed distribution, with excess distributions being taxed as income. John explained the case whereby if held for long enough the tax could approach 100%.

Neil Williams, LGT Vestra was more upbeat though on the opportunities for Americans to structure an investment portfolio, with some 8,000 equities and thousands of funds, he said, it should be possible to put something together with an appropriate risk profile. Bernardine Perreira, Perreira Hurly Wealth Management in Toronto had come across more urgent cases though, where clients had arrived with a cheque for the proceeds of their IRA, for which they were no longer eligible as non-US citizens, and needing to invest it quickly.

There was no dissent from the view that the provisions of FATCA had served to identify a number of people who had no idea they were classed as US citizens. While John put such people in the category of those who would find it least stressful to renounce it did prompt a discussion about who were the people that were taking that step. Here the advisers’ experiences differed markedly, with Nita having seen this mostly among high net worth individuals and Iain Younger, Frank Hirth in London noting that his affected clients were more likely to be found in the middle income brackets. This was also John’s experience.

Ray Kinoshita, Grant Thornton in Toronto was asked to comment on the tax treatment of assets in matrimonial cases and cited a number of problems that could occur if one partner is not – or no longer – a US citizen. For example the law that provides for no gain on assets transferred as part of a divorce applies only if the recipient is a US citizen. Counter that though, with the statistic that divorce is thought to be 3x more expensive in Canada if one spouse is a US citizen.

Many things to be considered then – without even touching on the emotional impact that John finds makes up so much of his role with clients.