Canada: FATCA In Canada: The "Cure" For A U.S. Place Of Birth

ABSTRACT

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 State.

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) earlier.

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 Conference Report.

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