This is my 20^th newsletter! It’s been fun to do this and I’ve appreciated your feedback and support!

 

One Comment About Taxation – Are You a U.S. Citizen Resident in Canada?

 

Were you born in the United States?  Was one – or both – of your parents born in the United States?  If you answered “yes” to one of those questions, then there’s a good chance you are a U.S. citizen. This may be an overly simplified statement that can’t be easily summarized in a short article since the determination of one’s citizenship can be a surprisingly difficult legal analysis of the relevant facts against the applicable law.  But it’s important to know.  Why? Well, the U.S. is one of only two countries (continue reading to find out the other!) that taxes its citizens based on citizenship.  U.S. permanent residents – commonly known as “green card” holders – are also taxed like citizens of the U.S.  And, if you spend a lot of time south of the border, you can also be taxed by the U.S.

So, what if you’re one of the many in Canada (there are varying estimates, but my guesstimate is approximately two million) who is both a U.S. citizen and a resident of Canada for tax purposes?  Well, welcome to onerous tax filing requirements for U.S. tax purposes and in Canada and, in some cases, extra taxes.  It’s not easy.

When I first started practicing tax nearly 30 years ago, I had zero U.S. taxation training or awareness.  When I obtained clients who were U.S. citizens, I was blissfully naïve about their filing and taxation requirements.  About five years into my career, I became aware of the need for U.S. citizens to file and report their worldwide income for U.S. taxation purposes. The U.S. taxation system is vastly different than Canada’s so it took a while for me to become aware of the significant issues. But most people I encountered – including many professionals – simply ignored the U.S. legal requirements.  “Let them come and find me” was the common rebuttal.  Ethically, I had to refuse to deal with such people.

Well, the entire ball game changed with the introduction of the Foreign Account Tax Compliance Act – FATCA, which was passed into U.S. law in 2010 with effect from 2014 forward.  Since that time, overly simplified, foreign financial institutions like Canadian banks are required to report their U.S. citizen account holders (after doing sufficient due diligence) to the Canada Revenue Agency, who in turn hands it over to the U.S. Internal Revenue Service (IRS).  In other words, the U.S. wants to know who their non-compliant U.S. expat taxpayers are.  The fines and penalties for not filing are astronomical and potentially devastating.

Accordingly, the amount of information passed to the IRS by the CRA since being required to do so has been voluminous.  There have been numerous voluntary disclosure programs initiated by the IRS since 2010 to encourage its non-compliant citizens to come forward.  Some of those programs continue today, but there are questions about how long they will continue.

While some academics, practitioners and advocacy groups have – and continue to – loudly proclaim that citizenship taxation is an outdated form of taxation (and it’s hard to disagree with some of the points made), the U.S. is unlikely to change its taxation system to accommodate expats anytime soon.  It would certainly be nice if that would happen since U.S. expats often face the daunting task of remaining tax-compliant in the U.S. and their home country.  One can easily make the case that such people are not treated fairly.  Unfortunately, life is not fair for many.

So, what are the solutions for U.S. citizens who are residents of Canada and not tax-compliant?  Well, the options are simple, notwithstanding such options are not ideal.  In all cases, it’s essential to get proper U.S. legal advice.  The first is to get compliant and remain compliant.  This can be expensive.  And if such a person is a high net worth individual, it can also come with daunting and expensive consequences upon death if exposed to the U.S. estate tax. The second option is to renounce their U.S. citizenship. Still, such a renunciation needs to be very carefully considered with proper legal advice to ensure the U.S. “exit tax” and other potential consequences won’t apply or can be managed.  (Moodys Tax does a ton of this type of work with more information here).  Another option is to continue to ignore such legal requirements to file, but in my opinion, that is not much of an option and certainly a dangerous one given FATCA.

In the meantime, if you’re a U.S. citizen living in Canada, please ensure you are tax-compliant.  The consequences for not complying can be costly.

And if you’ve made it this far in the article, do you have any guesses as to what the second country is that taxes on a citizenship basis?  If you’ve guessed Eritrea – a small African country in the Horn of Africa – then you guessed correctly.

I’m just guessing, but it’s not likely Eritrea has a FATCA equivalent to enforce taxation of its expats…just saying.

 

One Comment About Leadership – The Eight Characteristics of Effective Executives According to Peter Drucker

 

One of my favourite management authors that I became aware of during my undergraduate degree was Peter Drucker.  He was a prolific writer and researcher during his life.  Shortly before his death in 2004, he published a short but interesting article in the Harvard Business Review entitled What Makes an Effective Executive.

In the article, Peter states that the successful executives he worked with during his long career all had the following common characteristics:

• They asked, “What needs to be done?”

• They asked, “What is right for the enterprise?”

• They developed action plans.

• They took responsibility for their decisions.

• They took responsibility for communicating.

• They were focused on opportunities rather than problems.

• They ran productive meetings.
• They thought and said “we” rather than “I.”

Each of the above characteristics is worthy of separate discussion and consideration, and he does that in the article.  I’d encourage you to read the article and consider the above eight characteristics.  While there are many more characteristics and requirements to be a great leader, the above is a great list to ponder, consider and, better yet, do it!

 

One Comment About Economics and Politics: The Canadian Fall Economic Update – The Attack on Short-Term Rentals

 

Yesterday, the Canadian government released its Fall Economic Update.  Overall, it was a “bad news” economic update that showed how badly our country’s finances are being managed with excessive spending, increased budgetary deficits and historically high and increasing debt servicing costs.

As “leaked” over the weekend, there is a proposal to deny expenses for income tax purposes for short-term rental owners / operators who are non-compliant with their municipal regulatory regime.  This is absurd and a dangerous precedent that will simply not solve our housing issues.  Instead, it will likely encourage a lot of non-compliance and outright tax evasion.

Regarding the above, consider this: if a person wanted to sell drugs (a criminal offence) but reported such income on their tax returns, legitimate business expenses would likely be deductible (and for tax geeks, section 67.5 restrictions wouldn’t apply).  This is a complete public policy mismatch – encourage illegal and criminal activities but go after “evil” short-term rental operators.  Short-term rental operators are not all evil…they provide a legitimate alternative for many tourists to hotels. Ridiculous.

This proposal is very poorly thought out and, frankly, embarrassing.  But it’s good politics since the attack on the “boogeyman” continues as it relates to Canada’s housing shortage.  Instead of thinking about how Canada’s immigration policies might be contributing to a housing shortage, the tax system continues to be weaponized against “boogeymen”.  First, it was the two-year foreign residential property ban.  Next, the Underutilized Housing Tax since non-Canadians were the perpetrators causing housing shortages.  Then, it was “property flippers” who were the evildoers. Thus, the new “flipping tax” rules were introduced that were totally unnecessary (since the Income Tax Act already has provisions to deny capital gains treatment to property being treated as inventory).  I wrote about these ridiculous proposals in a previous newsletter here.  And now short-term rentals are supposedly the problem.

Keep grasping federal government.  The problem, as I’m sure you know, is not going to be solved by ridiculous taxation measures that are “good politics” but bad public policy.

 

Bonus Comment – Quote From Stephen Covey About Effective Leadership

 

“What you do has far greater impact than what you say.”

 

Yep, totally agree!

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