Ted Cruz is lucky it wasn’t the other way around. The Texas Senator recently learned that he is an accidental Canadian citizen because he was born in Calgary. His American mom moved back to the U.S. when he was four and the Senator apparently never considered himself a Great White Northian.
Now he plans to “renounce” his Canadianhood, presumably to make his political life easier. That’s fine for him, but I hope he ponders just how lucky he is that his life didn’t go the other way. If Ted Cruz’s mom were a Canadian who brought him into the world in Fargo, and then moved him as a toddler back to Canada, he would be up to his toque in problems with the IRS.
Assume our alternate-world Ted Cruz – we’ll call him Canada Cruz — had become a successful Canadian lawyer and politician. Given his $3.5 million net worth, he certainly would have opened substantial bank and brokerage accounts in Canada. He would have significant retirement plan assets. And, like many accidental Americans, it would probably never have occurred to him that his American citizenship obligated him to file FBAR reports and U.S. tax returns reporting his Canadian income.
The Treasury might claim half the balance of his financial accounts for each year he failed to file Form TD F 90-22.1 — or a mere $10,000 per year if they decided his violation wasn’t “willful.” If he attempted to participate in the OVDI “amnesty” program to clean things up, he would probably be told to cough up “only” 25% of the balances in all of his Canadian accounts, and to file US returns paying tax on “all tax years” covered by the disclosure. Assuming $3 million of his $3.5 million net worth represents financial assets, Canada Cruz would have to fork over at least $750,000 as a result of being an accidental American. Just in case you wonder why people might renounce U.S. citizenship.
US citizens abroad now understand that discovering ties to the US means discovering a world of obligations and consequences flowing from citizenship that you were expected to know and obey. Ignorance of the law being no excuse, the punishments range from the merely ridiculous–many times any tax that would have ever been due–to the infuriating: life savings wiped out and many future tax savings sponsored by your home government, such as in education or health savings plans, treated as offshore trusts and therefore confiscated by the US. Moreover there is no ready escape hatch for the newly discovered and unwanted US citizenship: five years of full tax reporting compliance must be documented, appointments must be made with officials, fees must be remitted, interviews must be conducted, and in some cases exit taxes must be paid. If some in Congress get their way, renunciation could even mean life-time banishment from the US someday soon.
If U.S. politicians had any sense of shame or capacity for introspection, they would take heed of Canada Cruz’s problems and stop U.S. tax law at the border. A humane and sensible IRS would create an easy way for accidental citizens to come into compliance short of financial ruin. As it is, Canada Cruz is just screwed.