For so many people around the globe, U.S. citizenship is a highly vaunted status symbol, even a ticket to success.
While the validity of that perception is debatable, many businesspeople, including Canadian entrepreneurs, do glean some advantages when holding a U.S. passport. Unfettered access to the world’s largest marketplace would, of course, be the main benefit and a prime motivator to consider pledging allegiance to the flag. Indeed, there are undeniable advantages to being able to establish business operations south of the border without having to navigate the onerous process of obtaining a U.S. work visa.
And while Canadians do enjoy greater access to the U.S. market under the North America Free Trade Agreement—soon to be the United States-Mexico-Canada Agreement if the revised deal is ever ratified—and Canada and the U.S. are long-time signatories of a tax treaty that helps entrepreneurs mostly avoid double taxation when doing cross-border business, they still face a litany of immigration restrictions. Obtaining U.S. citizenship can help avoid many of those hurdles.
Taxation based on citizenship
The reality, however, is that having U.S. citizenship and living abroad exposes individuals to a complex set of tax filing requirements that may, in some cases, fully negate the benefits of holding a U.S. passport. That’s because the United States is one of the only countries in the world that taxes based on citizenship rather than an individual’s country of residence, as is the case in Canada and every other developed country.
In its latest issue, Maclean’s magazine has an intriguing piece that explains why holding a U.S. passport and living abroad—possibly for an entire lifetime without ever taking up residency in the U.S.—can be so challenging. In an article titled, ‘Little Archie’s big tax problem,’ (https://www.macleans.ca/royalty/little-archies-big-tax-problem/) they frame the issue by way of the royal-sized conundrum facing tiny Archie Harrison Mountbatten-Windsor, son of the Duke and Duchess of Sussex (Prince Harry and Meghan Markle) and seventh in line to the British throne.
The issue is that young Archie gains automatic U.S. citizenship through his mother, who was born and raised in California. Until he potentially chooses to renounce his U.S. citizenship—which usually can’t happen until, at the earliest, age 16, but in most cases 18—Archie will be bound by draconian U.S. tax laws imposed on citizens living abroad. For a potentially wealthy royal (even one not old enough to sit up on his own, let alone file a tax return), this is a major problem. Let’s hope Buckingham Palace has an army of accountants within its storied walls—the royal family will need them. Why?
Complex tax compliance requirements
First off, even as a minor, Archie will be required to file a U.S. tax return if he earns more than US $12,000 in income a year or US $1,050 in unearned income (such as interest and dividends from a trust account, for example). For a royal who will undoubtedly receive gifts and potentially investment income through inheritance or other means, hitting that meagre annual threshold is almost guaranteed. His mother, too, will need to declare baby shower gifts, gifts of art and other tchotchkes deemed taxable income by the Internal Revenue Service—not to mention every asset in her name. And the penalty for non-compliance is hefty, ranging up to 50 per cent of the value of each unreported bank account or investment per year.
As the article notes:
“The U.S. government doesn’t just want to know how much income its citizens are earning. If Archie has money in non-U.S. accounts worth an aggregate total of at least US$10,000, Uncle Sam also requires a thorough breakdown of where that money is. U.S. citizens are required to report the tax year’s maximum value in every chequing account, savings account, investment fund, retirement savings plan, pension plan and life insurance policy they hold, including joint accounts and any corporate accounts they have signing authority over. Archie likely has someone to tally this all up for him, but regular American citizens have to go through a mind-numbing annual exercise of highlighting the maximum value in every monthly statement for every single account they hold.”
While a daunting requirement, the real risk for the royals—or any family member of an American citizen living abroad—is that the IRS also “considers Americans to be the owners of any shares their spouses, parents and grandparents own, even if those family members are not U.S. citizens. As long as the shares aren’t in Meghan or Archie’s names, and the American royals don’t own any stock in corporations that hold the shares members of the royal family own, this will only be a reporting requirement and they won’t actually owe any U.S. tax when the shares are sold.” In other words, the IRS can require full asset and accounting disclosure from non-citizen family members. For high-profile, high net-worth individuals, that can be a highly uncomfortable requirement.
Think strategically (and work with your accountant) before making important decisions
While it’s unlikely that the IRS would ever drop its enforcement hammer on a British royal, your average businessperson or U.S. citizen living abroad is fair game. Canadian entrepreneurs who long to obtain U.S. citizenship should take a cautionary lesson from young Archie’s potential tax troubles. Be careful what you wish for, especially where international citizenship and subsequent taxation is concerned.
Always work with a chartered professional accountant with international tax experience before making any major citizenship (or even overseas business) decisions. And remember that avoiding the long arm of the IRS, whenever legally possible, is usually a strategy worth pursuing.
Marshall Egelnick, Managing Partner