This paper provides analysis of one of the foundational elements
of the Foreign Account Tax Compliance Act (FATCA) and various
intergovernmental agreements (IGAs): an unambiguous place of U.S.
birth and the ability to cure (Cure) this element, thereby
rendering the account nonreportable. The IGAs generally allow the
individual to Cure his unambiguous place of U.S. birth by producing
a Certificate of Loss of Nationality (CLN) or by providing a
"reasonable explanation" of why he does not have one
despite having relinquished U.S. citizenship.
Unfortunately, however, none of the IGAs, FATCA, or legislative
history provide guidance as to what might constitute a
"reasonable explanation." Analysis of this issue is
deceptively difficult because (beginning in 2004) U.S. law
differentiated the loss of U.S. citizenship for nationality
purposes from the loss of U.S. citizenship for tax purposes.
Further, FATCA and the IGAs use the tax definition of U.S.
citizenship (and loss thereof), which incorporates elements of the
nationality definition of U.S. citizenship.
This paper provides an analytical framework for determining the
reasonableness of the explanation and provides a template that, the
author hopes, will be useful in providing guidance on this issue.
The paper also addresses the importance of clear guidance and harm
that may result if an individual attempts to Cure his U.S. place of
birth by seeking to obtain a CLN from the U.S. Department of
The harm that may result is based on the fact that a literal
reading of current U.S. law deems the individual to lose his U.S.
citizenship for tax purposes after, inter alia, giving
notice to the Department of State which results in the issuance of
a CLN, even though the issuance of a CLN is not required (and has
never been required) to terminate U.S. citizenship for nationality
purposes. Thus the individual who currently applies for a CLN may
inadvertently find himself subject to income tax obligations and
also the expatriation tax regime, even though he may have lost his
U.S. citizenship for nationality purposes years (or decades)
Specifically the paper analyzes: (1) loss of U.S. citizenship
for tax purposes and nationality purposes; (2) unambiguous place of
U.S. birth; (3) cure for unambiguous place of U.S. birth; (4) what
might constitute a "reasonable explanation" under the
Treasury regulations and the IGA; (5) whether Canada has the
authority to issue guidance on "reasonable explanation"
under the IGA; (6) whether Canada should modify its Guidance Notes
to clarify "reasonable explanation;" and (7) U.S.
expatriation tax and the consequences of Curing a U.S. place of
birth by obtaining a CLN.
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This paper was originally presented at the Canadian Tax Foundation Annual Conference held in Vancouver on November 30 –
December 2, 2014. An edited version of this paper will be published in Report of Proceedings of the Sixty-Sixth Tax Conference, 2014
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On July 1, 2014, the US’s Foreign Account Tax Compliance Act (FATCA) went into effect, and as a result, it will become increasingly difficult to renounce your US citizenship for the “right reasons” and avoid any negative consequences.
All evidence suggests that now may be the time to consider renouncing, however, the process can be complex and daunting. It is essential to ensure that you renounce properly. If not done correctly, you may be subject to the US Exit Tax or barred from ever entering the US again.
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