U.S. citizens living in Canada face an enormous tax-filing burden. Not only do they have to file Canadian tax returns, but they also must contend with U.S. tax-filing requirements as the U.S. imposes taxes based on citizenship, not residency.
What's particularly challenging is the enormous cost of U.S. tax compliance, which goes well beyond simply filing a U.S. tax return. For example, all foreign financial accounts - including a bank account, brokerage account, mutual fund, trust, or other type of foreign financial account over $10,000 - must be disclosed annually to the U.S. Department of Treasury. If the value of those accounts is large, they must also be disclosed on an additional form to the IRS.
Furthermore, if the U.S. citizen holds a TFSA, RESP or RDSP, these accounts are not recognized as tax-preferred by the U.S. and the income from these must be reported annually on a U.S. return. Most U.S. tax professionals consider these Canadian plans to be foreign grantor trusts from a U.S. tax perspective and thus also subject to onerous and costly information return filings.
To make matters worse, U.S. citizens are generally cautioned to avoid purchasing Canadian mutual funds as they are considered to be passive foreign investment corporations under U.S. tax law and must be extensively disclosed.
While most dual citizens find that, at the end of the day, no U.S. tax is owing, the compliance burden and costs of filing are prohibitive and have caused many U.S. citizens living abroad to explore the process of renouncing their U.S. citizenship. Of course, the process isn't cheap. In September 2014, the U.S. quadrupled the processing fee for renunciation from US$440 to US$2,350.
But all hope is not lost: There is a growing movement both in the U.S. and by U.S. citizens living abroad to lobby the U.S. government to change the rules.
Last week, University of Virginia School of Law professor Ruth Mason presented a paper at the Second International Tax Research Symposium that critically evaluates the traditional arguments for taxing non-resident citizens but also raises new arguments against citizenship taxation, including that it puts the U.S. at a disadvantage when competing with other countries for skilled employees. She argues while citizenship-based taxation was originally designed to punish "economic Benedict Arnolds," in today's global economy and our interconnected world, there are both professional and personal opportunities that U.S. citizens can only obtain by moving outside the U.S. As Mason writes, "Concerns about a few high-profile, rich tax defectors who can be sanctioned with targeted anti-abuse regimes should not drive tax policy governing seven million Americans who reside abroad."