In trying to do my 2010 taxes I realize that it was absolutely the right choice for me to relinquish my United States citizenship. A significant percentage of my income is “unearned” income. I’ve tried to come up with a zero return based on my Canadian taxes paid (Foreign Tax Credit) but the Form 116 is hopelessly complicated and I cannot do it myself. The year 2010 was perhaps my first really good year as an investor, and so I’ve never had to have a Form 116 done for me, since my US income tax was always zero based on the FEIE and the personal exemptions. I have decided that it is actually impossible to be an investor of any kind as a United States person living in a foreign jurisdiction, even a high tax region like Canada. Here are some of my reflexions in trying to do my 2010 taxes:
- Double taxation is a serious threat to investors. TaxAct said that my income tax before applying the FEIE (Foreign Earned Income Exemption) or the Foreign Tax Credit (you can’t use both on earned income, only one or the other) was y dollars. My 2010 Notice of Assessment (Canada) says I paid y dollars of taxes in Canada. Therefore in principle, I should owe nothing. But figuring out the Foreign Tax Credit (Form 116) is like doing an entirely new tax return. I see now why cross-border tax specialists can charge 1-2K to do a tax filing. Who can understand this gobbledygook?
- Capital gains are treated completely different in the United States than they are in Canada: In Canada, there are series of tests to determine if a stock trader should treat his profits from trades as capital gains or regular income (Is he a frequent trader? Are the stocks held over the long term? Is he trading full time? Does he have professional knowledge in the investing field? Does he use a margin account or other leverage?). If you generally have long holding period, and your main interest is long term capital gains and dividends, then profits from trading can be treated as capital gains. In the US there are short term capital gains (stocks held less than a year) or long term gains. Short term gains apparently are taxed like earned income–but don’t have the designation of earned income (so forget about using the FEIE to offset it). Since stock trading is subject to two completely different set of rules, it is impossible for a trader to be a US person and live in Canada. I had no choice but to relinquish my citizenship so that this nightmare that I am experiencing over my 2010 taxes will go away for future years.
- Dividends are treated differently in Canada and the United States. Canada eligible dividends receive favorable treatment in Canada because the company issuing the dividend has already paid taxes at the corporate level. If I am not mistaken however, the United States treats these dividends as “foreign” dividends and therefore not subject to this more favorable treatment.
- RRSP : Registered Retirement Savings Plan accounts are covered under the Tax treaty between the United States and Canada. So where is my reduction of income for an RRSP contribution on the US tax return? As far as I can tell, the RRSP does not defer income tax for a US person. I thought that the Tax Treaty covered this, but apparently, there is no tax reduction for putting money into a RRSP, only the US lets you to defer your income inside the RRSP. So here is the thing: I would be better deferring my RRSP contribution to my 2011 taxes; but that’s bad for my Canadian taxes because I made more in 2011 than in 2010. So once again, I cannot figure out what to do.
- TFSA : Tax Free Savings Accounts are wonderful savings vehicles for Canadians. But it is not covered under the treaty. So it is a complicated nightmare for US persons living in Canada. Leave it alone. The same applies to RESP and RDSP (registered education and disability plans).
- The Alternate Minimum Tax in the United States assassinates investors.
In the end, the dilemma for United States person living in Canada is this: Whatever tax dodges that are legally available to me in Canada, such as capital gains, Canada eligible dividends, RRSP contributions or gains in a TFSA, will suffer adversely from US taxes. So I cannot order my life to please Revenue Canada and the Internal Revenue Service both. No one can serve two tax masters.
I think this is probably worth going to Canadian tax court over. If the IRS wants to collect even one red cent from me, they are going to have to make the CRA collect it for them. Then I will explain that I paid y dollars in Canada; i.e., I’ve paid the Tax Master once, why should I have to pay again in a foreign country.
If Chua’s case was thrown out of court Canadian court–it concerned a six figure capital gains tax bill incurred from the sale of US investment (according to Tim–some research needs to be done on this)–then why would the IRS bother coming after me using the CRA? My total taxes are much less than that by a factor of ten.
Anyway, Jean-Luc Picard expresses how I feel right now (for me the Borg is the United States Federal Government):