Living Next to the IRS: Part 7

Feb 15, 2019 | Mark Ryan


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Our finale in this lengthy series on IRS issues impacting the Canada US border.

We were looking forward to schooling these chumps.  For several months we anticipated the international contest, matching up our Burnaby Minor rep talent against an American select team from that thriving (not) hockey hotbed of Bellview Washington.  It was 1976, the year of the (Soviet) Super Series 76, another international tournament of much renown, or infamy depending on your point of view.  Most of us felt a mixture of pride and embarrassment when the Philadelphia Fliers humbled the Russian Red Army team a few days before our game.

 

With the Russian team losing badly, star Russian competitor, Valeri Kharlamov was levelled (literally) by one of the Fliers, and in protest, the Russian coach pulled his team off the ice.  The Russians only finally returned after the US cash they had been promised for the game was pulled off the table.  Dollar trumps ruble, and the Red Army team returned to finish their humiliation.  This (according to Igor Larionov’s biography) was a game that lived on in Russian folklore for decades thereafter, and not in a happy way.

 

To Canadians it was iconic for different reasons. What we saw was a bunch of cry-baby commies who conceded their first defeat of the tournament because they didn’t have their incompetent, cheat-faced Russian ref to rig he game for them. Boo hoo.

 

It was in these sorts of chippy shoulder pads we dressed that Sunday morning in Bellview.  Our team showed up to the game looking for an international incident of our own. 

“Do they even have a real ice rink here? I heard it’s fake ice, made of plastic, and the players use roller skates.”

“Somebody told my mom that Trudeau and Ford were both secretly planning to come to the game!”  “Your mom smokes weed!”

 

For all of our bluster, and supposed superiority, what we found that day was a disciplined, hard-hitting, big tough hockey team, much like ours.  They skated with us stride-for-stride, and stood up to our body checks like… well, like Canadians.  And I really liked playing them.  We all did.  And we seriously respected them ever after.  The game ended in a 1-1 tie.

 

Our seventh and last instalment on IRS Taxation of US Persons in Canada concedes that this is a very light touch on an incredibly complex problem.  US Taxes are goofily complicated, and only made worse across borders.

 

One Doesn’t Just Walk out of Alcatraz:

Over the years, the U.S. has had a number of regimes that govern how one can exit (escape) the U.S. tax system. These regimes involve the renunciation of U.S. citizenship or green cards, as applicable.  Under the most recent regime enacted in 2008, it is possible that an exit tax will be payable if one of the following is true:

 

  • their average annual net income tax in the U.S. was more than $160,000 in the previous five years
  • their net worth is at least U.S. $2 million
  • U.S. tax returns have not been filed over the previous five years

 

In the event that they meet any of these tests, if they choose to expatriate, then they will be deemed to have sold their assets at that time, triggering potential capital gains.  Any gains in excess of U.S. $690,000 (the current exemption for covered expatriates) will be taxed at current capital gains tax rates.  If you do not meet any of these tests, (hint – you want to fail these tests) then you will not be a covered expatriate, and you can renounce your citizenship or relinquish your green card, and from that time, exit the U.S. tax system.

 

There is an exception for those who meet the above tests if they are a dual citizen at birth and live outside the U.S., or have not lived in the U.S. for more than 10 years and have not yet reached 18 ½ years old.

 

If you are a covered expatriate, there are rules that cover most of the other assets you own, retirement plans that you are part of, or interests in trusts or other legal structures, all of which should be addressed but are beyond the scope of this article.

 

One caveat to be aware of is that a covered expatriate who gifts assets either during life or upon death, to a U.S. citizen or green card holder, will subject the latter to U.S. gift tax upon receipt of the gift at a flat tax rate of 40%. This means that before deciding to exit the U.S. tax system, if you will be a covered expatriate, then you need to consider the tax status of your heirs and factor this into your overall estate and tax planning.

 

For those who meet the above tests, with proper planning, the use of many of the strategies discussed in this series to reduce your net worth may be used to ensure you can expatriate without falling into the classification of covered expatriate.

 

Now What?

Understatement: The U.S. tax system and the tax treaties involved across borders are cumbersome.  It is vital you seek professional expertise from qualified cross border tax and/or legal professionals. These specialists are few and far between in Western Canada, but they do exist.  See your advisor, or me for a list of you need it.