For Americans long subject to the complexities and confusions of the Internal Revenue Code, it may come as a shock to find that some believe the U.S. to be a tax haven.
Yet that’s exactly what Phoenix, Arizona-based financial planner Robert Keats tells his high net worth Canadian clients: “Take your money and drive!”
“The Canadian’s best tax haven is the United States,” he said.
Keats, president of KeatsConnelly, a cross-border wealth management firm, specializes in helping Canadians and Americans lead a cross-border lifestyle.
Traditional tax havens have a number of disadvantages, he observed. “The assumption that there are no taxes in offshore jurisdictions is a myth. And any personal relationships are bound to suffer due to the geography of living on an island in the middle of nowhere. Simple things such as setting up bank and credit card accounts become surprisingly complex when trying to do it in an offshore tax haven.”
But the number one reason for the U.S. as a tax haven for Canadians, and vice versa, is the U.S.-Canada tax treaty.
Canadian taxpayers who leave Canada to live in a traditional tax haven—which isn’t covered by a treaty—must clearly sever all residential ties and leave nothing they own in Canada, he noted.
“Something as minor as leaving furniture in storage, holding a Canadian driver’s license, or leaving a vehicle in Canada can send the CRA on a rampage to tax the expatriate as a full Canadian resident.”
On the other hand, to prevent double taxation the treaty provides tiebreaker rules to determine whether an individual is taxed as a resident of the U.S. or Canada. To a certain extent, these are under the control of the taxpayer, and allow tax planning that would otherwise not be available.
Moreover, Keats said, a tax treaty hardly ever changes, and its terms take precedence over the Income Tax Act rules in Canada and the Internal Revenue Code in the U.S.
An overwhelming amount of high net worth Canadians seeking relief from high Canadian taxes are commonly and erroneously counseled by large accounting and law firms to relocate offshore to the tax haven islands, according to Keats. “These individuals and families suffer a decline in their desired lifestyles, and the majority of them do not realize the disadvantages until the move has already been made,” he said.
One of the areas which made the U.S. such an attractive option—its health care system—will be decidedly less attractive.
“Thousands of Canadians come to the U.S. to get medical assistance,” Keats said. “They were on the waiting line in Canada but they didn’t want to wait any longer, so they ended up paying for it twice. Part of protecting the cross-border lifestyle is getting access to both the Canadian and U.S. medical systems—even the Canadian system has some things they do reasonably well. The big thing is you want access to both systems so you can get access to both worlds.”
One individual who turned to Keats for advice was on a waiting list for open heart surgery years ago. “Because the Canadian system places you very low on the priority list for open heart surgery when you’re in your 70s, he basically figured he was going to die while he was on that waiting list. He got his green card and had his surgery within a few months. Now he’s in his 90s and plays golf every day.”
4 Comments
While your comments about FBAR and FATCA are correct, there are two easy solutions, report your foreign accounts if you have them or move those accounts to the US so that you do not have to report them as foreign accounts.
In most cases, RRSPs included, it is best to bring those assets to the US for a number of other reasons such as lower costs and lower taxes.
Posted by: dalewalters | August 14, 2012 1:07 PM
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Regarding comments about the FBAR and related reporting, you are both correct HOWEVER, this can be avoided if the client moves all assets to the US, which is typically recommended to avoid currency speculation. Most importantly, you are missing the big picture; if a person can save 10's of thousands of dollars in unnecessary tax, the additional expense of tax preparation pales in comparison.
Let's not forget lifestyle. Wealthy people do not typically want to be a prisoner on an island. Yes, a few weeks or even months is great, but spending your life away from arts, entertainment, resturants, etc. is not worth the price. The additional cost of travel would easily exceed the additional tax prep costs.
Posted by: dalewalters | July 13, 2012 4:36 PM
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Boy, if I were a Canadian I would look hard and long at the complexity of the US tax system and the requirements it places on you for FBAR disclosures and now FATCA reporting too. You will definitely find yourself double taxed in ways you have never considered. Once the IRS is able to designate you a U.S. person, it is hard to get them to let go of you if and when you decide to return to Canada. So, Canadians BEWARE of Tax Practitioners giving you advice which lines their pockets in fees!!!
Of course, if you have tons of money to throw at expert Tax practitioners and don't care if you waste a lot of LCUs (life credit units) in preparing extra US tax forms or collecting information for your Tax attorney, then welcome to Form Nation!!
Just know, that penalties for failure to file an FBAR or FATCA form will be VERY VERY expensive even for non willful failures caused by your tax practitioner who isn't so well informed either!
On the other side of the equation, are tons of US Canadian dual citizens living north of the offshore border, that are doing everything they can to severe their ties with America. They want to free themselves of the current IRS offshore jihad and those cross border Tax excursions of the International Revenue Service. The U.S. asserts the right to tax Americans who have long ago given up US residence. America doesn't let go of those tax serfs easily. If you thought you won the birth lottery by being an American think again when FATCA kicks in!!
BTW, the IRS will soon be requiring all Canadian Banks to turn over account data back to the IRS on all U.S. Persons with accounts in Canada, something the CRA never requires out of U.S. Banks. F or Canadians thinking America is a Tax Haven, well, the jokes on you! Good luck. You have now just entered the most complicated tax regime in the world, and you may soon want to join Denise Rich on the "shame and name" list should you change your mind later about all the tax benefits in America.
You are now warned!
Posted by: Just Me | July 13, 2012 12:11 PM
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@Mr. Russell, you state "But the number one reason for the U.S. as a tax haven for Canadians, and vice versa, is the U.S.-Canada tax treaty."
You make a good case for the US being a tax haven for Canadians, but your "vice versa" conclusion for Canada being a good tax haven for US citizens, lacks any evidence or support.
The US-Canada tax treaty guarantees that the IRS can collect US taxes from US citizens who leave the United States and establish residence in Canada. It contains few provisions that would reduce this double tax liability. And US citizens who live in Canada must submit FBAR reports on their bank accounts in Canada or anywhere else in the world.
These reports must disclose, not only accounts in which they have any financial interest but also accouts they do not own, if they have any signature authority of those accounts. If they sign checks to pay their Canadian employers business expenses they must disclose full details of these non-owned accounts to the IRS.
There are not many Canadian companies that are willing to provide full details of all their confidential financial accounts to employees who happen to hold US passports so they can divulge that information to a foreign tax authourity, but that is exactly what they must do. Also, numerous types of income which is tax free under Canadian tax laws is fully taxable by the IRS to US citizens who are permanent residents of Canada - including those who are dual US-Canadian citizens.
Falure to submit totally-accurate FBAR reports subject the US citizen in Canada, as well as anywhere else in the world, to massive financial penalties which start at $10,000 and may reach 50% of the total maxiximum value during the year. They are truly confiscatory.
Posted by: RogerC | July 13, 2012 9:03 AM
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