“US Citizens” and The RESP/TFSA Battle

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Is anyone else sick of dealing with bureaucratic machines that are absolutely terrible at what they are trying to accomplish? To catch a few of you up, I am one of the million or so Canadian citizens that have been residing in Canada and paying my fair share of taxes for my entire life, yet have been told I have to file a ridiculous amount of paperwork on a yearly basis because I was born in the USA. My significant other and extended family are in the same boat. To understand some of the details read this background piece on the trials and tribulations of trying to become aware of my supposed duties as an American citizen check this out.

A Screw-Up So Bad Only a Bureaucrat Could Love It

I actually am kind of fascinated by the incredible gong show that this whole ordeal has turned into for the IRS. Can you imagine the huge cost in manpower and resources that the IRS is going to need to go through these filings, as well as to enforce their new FATCA rules on Canadian banks? Now think about the fact that the vast majority of Canadian/American citizens are just like me and owe no taxes. Who in the world would take out Canadian citizenship as a tax haven move? It makes no sense at all. Does the IRS really think that anyone with enough wealth to try to hide it in Canada won’t simply find another place to hide it all together? Billionaires have the means to hire lawyers and accountants to switch their citizenship to something more advantageous while making up BS reasons why they did so, or else find untraceable tax havens and loopholes all around the world. Their own Presidential candidate has dozens of foreign bank accounts and paid an effective tax rate of 14.7% for crying out loud! So ultimately one has to conclude that the big fish the IRS is chasing they have almost no hope of ever catching, while at the same time they induce the costs of having to process hundreds of thousands of “0 rated” tax forms that are pretty complicated. The only people that are actually making money here are the super high in-demand tax specialists that have taken $3,000 from my uncle, $1,400 from my dad, and $300 from me (and I did the majority of my own paperwork – after several hours of frustration). What a waste.

Just to give people some idea of the ridiculousness that this has on your life besides the obvious stomach punch that is paying high fees to an accountant to prepare a tax return that says you don’t owe anything, I thought I would look at two great Canadian programs that my citizenship impacts. Both RESPs and TFSAs are very cool financial tools that Canada allows citizens to use as a means of encouraging savings. While the US and Canadian governments have worked out a sort of hands-off reciprocal treaty concerning RRSP and 401K accounts, the same cannot be said for RESPs and TFSAs. If you want to use these financial vehicles in Canada and you have to file a USA tax form, get ready for the incredibly complicated world of income trusts. Since those accounts are not really income trusts they don’t fit into the bureaucratic conundrum that is the USA tax code. Just writing this gets me incredibly frustrating since no American in their right mind would use a TFSA to hide money from the American government!

My “Crazy” Simple Compromise Proposal

I imagine that the IRS has some smart people working for it. Logic tells me that with that many people with degrees in the same organization someone must have some original ideas that don’t suck. While I disagree with the principle of what is going on, I am also a practical person. Hey, you tax collectors want a tool to go after tax evaders, I get it. I technically could enjoy the benefits of living in the USA if I chose, and I can also vote for President if I want to, so I have almost wrapped my head around filing taxes. But is there no freakin way you could make this a little simpler? From my experience, the majority of tax preparers that think they know how to do this stuff in Canada have no idea, and every person I talk to in my situation has been told something radically different by the IRS when they called. It is utter insanity. Is there no way the IRS couldn’t put 3 really smart people in the same room and create a 1-page document specifically aimed at the million Canadian citizens/Canadian residents that pay taxes in Canada every year, yet have to file a US tax report? Wouldn’t this save millions and millions of dollars in manpower, as well as not incur the wrath of a million people?!

How hard would it be to create a basic document that asked people in my situation the following questions (obviously all gussied up in lawyer-speak):

  • Name Social
  • Security Number
  • Identification of All Bank Accounts Used
  • Do You Owe Any USA Tax?
  • If Yes, How Much?

I presume this would give the IRS what it needed to go after the tax cheats. I mean if you don’t identify your account, that should be it, right? Even if some of us had investment income that didn’t fall under current regulations, I’m sure there are enough exemptions and tax credits available that would cancel out almost all of us. Instead, they force Canadian citizens who design their personal financial situation and financial vehicles to fit Canadian rules, into the complex web of the same US tax filing sheet that everyone else uses. It doesn’t take a genius to figure out there are going to be a ton of unnecessary headaches there.

Any Bets On What The End Result Be?

The end result of this will not be anything other than mass confusion, insane penalties for law-abiding citizens, absolute fear of approaching the USA border for many Canadians (and you silly American tourist businesses thought you would benefit from our strong dollar), and wasted time on so many levels. Incredibly frustrating in so many ways. Oh ya, I’m sure all those congressional representatives we get will be sure to bring our concerns up (we don’t get to vote for congress). I would love to renounce my citizenship, but unfortunately, that would cost me hundreds of dollars more, dozens of more hours of stupefying paperwork, and I would likely be harassed every time I went through the border crossing to visit my family in the USA (which is often).

Sorry for the pity party. Anyone else out there dealing with this stuff, and can anyone point me to specific resources (free ones) that explain how their dual-reporting responsibilities have impacted their investment decisions?

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