Mark's Blog

I posted a short while ago about what worked for me and what I wish I knew in advance when it came to taxes/finances and moving to the U.S. I mentioned noticing from my own searches that the penalties for not knowing that you have to file an FBAR are nothing short of draconian.  I’d heard that penalties were as high as 50% of the account value. While I can understand these incredibly punitive measures for active tax evaders that moved money out of the U.S. to cheat on their taxes, taking half of an account because someone didn’t know they had to file a form seems downright ridiculous. The only reason I discovered this requirement is because co-workers were complaining about it on the internal list for Canadians.  If I worked at a different company, or hadn’t subscribed to the Canadians mailing list, I might not have discovered this at all until the tax man came knocking.

I still believed that the stories I read online must have been worst case scenarios that represented the exception, rather than the rule.  Then I read about the 2011 OVDI – Offshore Voluntary Disclosure Initiative, a program to allow people to voluntarily disclose foreign assets that they hadn’t previously declared.  I’ll scale the numbers for effect, but let’s say you left Canada in 2003, and left $10,000 in a bank account there that earned $500 in interest each year through the end of 2010.  In 2011, you learn about your mistake and voluntarily disclose the account to the IRS. How much do you think you’d pay? How much do you think you’d pay if the IRS discovered this and you didn’t voluntarily disclose the information?

If you voluntarily disclosed the error, you’d pay $5,180 – over half the original balance in the account.  If you did *not* voluntarily disclose the error, you’d pay $45,430 in penalties.  On a $10,000 account! That’s because the FBAR penalty of 50% of the account value applies for every year that you failed to file an FBAR!  So if you lapse by two years, they take everything; if you lapse by four years, they take twice what you had overseas.  The IRS uses large numbers in it’s examples – $1,000,000 in a foreign account, resulting in a $4,543,000 penalty – which makes it pretty clear that they’re thinking about rich people evading taxes – but the law itself applies to every immigrant that left $10,000 or more in their country of origin.

Next year, when mailing my FBAR forms (I do still have an RRSP in Canada), I think I’ll send duplicates and ask for signature confirmations :).

Leo usually sports a look that’s at least a little on the dopey side, but this weekend, he was carrying a water bottle around and just looking like a boss.  Don’t even think about taking his water:

Planning his next move:

Taking a cool sip from a bottle that’s taller than his head, and as long as his forearm:

Questions, anyone?

It’s been almost a month since the last time I posted anything, and while the reasons are varied, one definite contributing factor is that it was tax time.  Twice, actually, since I had to file a return in both the U.S. and Canada.  This isn’t the first time I’ve moved across the border (though I was considerably more ignorant the last time), and now seems as good a time as any to note what I learned – some parts via reading and planning in advance, and the rest via sometimes unfortunate after-the-fact discoveries.

Disclaimer – I’m not an accountant, lawyer, tax professional, or even astute in these matters. I might be arrested and thrown in jail by both Revenue Canada and the IRS once they process my returns this year, for all I know. Treat everything here as a pointer to go do your own reading!

1.  Make sure you’re a [deemed] non-resident!  If Canada deems you to be a resident, it will tax you on your world income as opposed to just the income you earn in Canada. Since Canadian tax rates are substantially higher than the U.S., it’s strongly in your interest to ensure that Canada doesn’t deem you a resident. You can read more here and also on this page, but what’s important is ensuring you don’t have residential ties.  Having a home, spouse/dependents, or car in Canada can all trigger deemed residency. So be careful!

2. Sell Everything (and bring the proceeds to the U.S.). While you don’t want a home or car due to #1, what I’m talking about here is any non-RRSP accounts & investments you might have. What I didn’t know the first time I moved back in 1999 is that Revenue Canada treats leaving the country as a deemed disposition of all your assets (like stocks, mutual funds, etc) even if you don’t actually sell them.  The IRS will similarly treat the purchase price for any investments you bring as the fair market value on the day you become a resident.  So tax-wise, it’s as if you sold everything – and it’s a lot easier if you actually do.  It was probably time to re-balance anyways, and you’ll probably also need more cash than you anticipate.

3. File an FBAR for your foreign accounts.  The IRS requires that you disclose foreign accounts if you have $10,000 or more in total abroad, using form TD F 90-22.1 (also called the FBAR).  You need to do this every year – and must report the peak value of the account for the year.  You have to file this separately from your tax return, and the penalties for not doing so are very severe – $10,000 minimum, possible jail time, and some sites indicate the penalty is actually 35-50% of the value of the foreign account.  Even if you’re just late!  This story indicates that penalties hit 50% even for a voluntary late filing; in this case, an 80-year old woman who inherited accounts she wasn’t fully aware of was hit with a $120,000 penalty.  So if you leave an RRSP or anything else in Canada, make sure you file or you risk losing a ton!

4. Make a Article XVIII(7) election on your RRSP.  Assuming you have enough in your RRSP that you’d like to maintain it, you need to file form 8891, or else the IRS will treat your RRSP account as taxable.  If you’re going to withdraw from your RRSP soon and will be in the U.S. when you do so, then it may be more complicated, so if you’re nearing retirement, consult an accountant.  If you’re still 20+ years out, make the election (it’s permanent), and you’ll only pay taxes on an actual distribution.  It’s hard to correctly file your US taxes if you don’t do this, because Canadian financial institutions don’t issue T3/T5 equivalents for RRSP accounts!

5. Disclose your foreign accounts again thanks to FATCA. Wait, what?  First an FBAR, then an 8891 for RRSP accounts, and now yet another form to the same organization about your accounts? The thresholds are different for FATCA, the time period it covers is different (in your year of arrival only), and what accounts are covered is also different. Seeing why #2 said “sell everything” so you could avoid this mess? Form 8938 is the one you need for this, though the threshold is much higher ($50,000 aggregate value). Note that RRSP accounts don’t need to be included, but due to IRS form bugs, you need to report form 8891 as if you had filed form 3520, at least in this years forms.

6. Get an ITIN for your dependents. We messed up on this one, and it had a $1,500 impact (which I’m hoping it’s possible to correct with an amended return later). As a newcomer to the U.S., you might naturally assume you should try and get your dependents a social security number. But if you’re on a visa, which is usually the case, you’ll discover that you can’t. What you might not realize to later is that there’s an Individual Taxpayer Identification Number (ITIN) that you can get (form here). From the name, you’d think this unnecessary – unless your 2 year old is fabulously more talented than our Leo, and is out there earning an income somehow. But you can’t claim tax credits for your dependents without an ITIN for them! So file for one as soon as you arrive and are getting your own SSN.

7. Beware Paperless Statements. Save the planet!  Think of the children! Switch to paperless statements! Really, how can you not go paperless with arguments like that? Paperless is probably still better than cutting down trees – but when you close your account, with many institutions, you can also lose access to the entire history of paperless statements you had for that account. So as you sell & close everything, make sure you’re capturing your transactions, cost basis, etc. – or you’ll be expending a lot more effort once you realize you need it at tax time. Like me.

8. Leave enough to pay Revenue Canada. While moving all your funds to the U.S. is a good idea for tax reasons, if you’ve held investments for a long time, make sure you have enough Canadian funds to pay Revenue Canada for capital gains taxes that you might have incurred as a result of selling all your investments (including deemed dispositions; see #2). You don’t want to be scrambling at the end of April to find a way to write a Canadian dollar check that Revenue Canada will be able to cash!

Again, use your own judgment and certainly don’t treat this list of things as comprehensive, but I thought it might help others avoid items they didn’t already know about! At least the upshot of this is that taxes in Washington are much lower than in Ontario!

While I might not like the Groupon model all that much, there’s one common practice that I despise without reservation, and that’s no-value-add secondary markets on new consumer products where supply can’t meet demand. The particular manifestation of this that bugs me is as follows:

This happens with many product launches; the most pronounced recent example I can think of was the Nintendo Wii, which had significantly higher-than-new prices on eBay for an extended duration. The practice harms consumers in a number of ways:

• It reduces the availability of the item through legitimate channels, and increases the difficulty of buying the item through those channels. One random sampling of a lineup during the Wii craziness indicated that half of them were just there to resell the item. The survey probably wasn’t accurate and I don’t think the problem was quite that acute, but it did mean that if the resellers were willing to line up starting at 4am to get at a new shipment of the item, you had to be too – or your odds of getting the item were 0%.
• It’s incredibly inefficient. Instead of being able to check stock online and even purchase for in-store pickup, you get to deal with a bunch of sellers through a variety of channels (eBay, craigslist, kijiji, etc), each of whom has exactly one item, and who’d back out of a deal with you 10 minutes before meeting if they got a higher offer.
• It’s unsafe. Not only is the buyers desperation a great way to lure an otherwise cautious consumer into a scam, you’ve got to meet a stranger somewhere carrying (in this case) $4,000 of cash – or pay and trust that they’ll ship something. Perhaps that’s an acceptable risk to save money, but in this case, you’re paying more.
• It may void or at least complicate getting warranty service on an item, especially if it was bought on one end of the country at a local store and then shipped to you.
• It’s worse for the retailer, especially online because pre-ordering is effortless. Speculators can buy an item, and if the price on eBay goes above retail, they sell it there and make a profit. If it doesn’t, they return it at no cost.
• It’s even worse for the product manufacturer. Sure, they sold out their shipment, but this would have happened anyways. But now, instead of delighted customers who bought into the product at launch, they have frustrated customers who don’t understand why so few were available. And sometimes, especially in the case of gifts for a birthday or Christmas, the consumer will buy a competing product instead.

There’s nothing here to like – it’s bad for the consumer, the retailer, and the product manufacturer alike. The secondary reseller is the only beneficiary of the practice, and they only benefit by creating scarcity and inconvenience for others.

Sports & concert fans have had to deal with scalpers for quite some time, though there, measures have generally been taken to prevent the practice (including making the practice illegal in some places, or requiring ID in others). With products, it’s harder; you can’t forbid people from selling property that they legally own.  Is there anything product companies can do? Sure:

• Price the product via auction until supply catches up with demand. The product is still more expensive to the consumer this way, but the benefits at least accrue to the product maker – and the issues of risk and inconvenience are address.  By definition, no intentional reseller will participate, because they could only pay a price at or above what the remaining long-term buyers are willing to pay.
• Same as the above, but with a dutch auction on each batch. This reduces the price to consumers, and is probably the way to go, except you’ve got to do this in batches which might be tricky (with a straight up auction, each time an item rolls off the factory line, you could send it to the current highest bidder).
• Yet another auction variation, in which the gap between the normal selling price of an item and the price paid by a consumer is donated to charity. This ensures the manufacturer has no incentive to create scarcity, and early adopters can feel good knowing that the premium they were willing to pay is doing some good in the world.
• Fans first. Let past fans of the brand have access a day before (or have higher priority pre-orders) than the general public. This is easiest when it’s easy to prove your allegiance to the brand (e.g. bring in your D700 to pick up your D800, provide your Xbox gamertag when ordering the next Xbox, etc).
• Price higher, with published, gradual, frequent price reductions. Consumers can decide whether to pay $3,300 now, or $3,200 next month.

Many products seem to get priced and sold as if we still live in an old retail world, where you need to post one price for everyone and stick with it for 6 months. The reality in the Internet age is that things can be much more fluid – and secondary market resellers are essentially taking advantage of this. Instead, the product makers themselves should recognize what’s going on, and build a product launch model that’s designed for the time we live in.

Consumers can help too, of course. If nobody ever paid more than retail on principle, this practice would vanish. Sadly, I don’t think this is likely to happen.

And yes – I’m still waiting for my D800 pre-order to ship, as you can imagine from this post :).

I talked a little about Groupon, and why I think the model in general is ultimately challenged, in an earlier post after using up my Photobook Canada Groupons. I haven’t gotten to see the photobooks yet, so I’m still looking forward to seeing how that turned out.  I’m also hopeful that Lightroom 4 support for creating PDF photobooks will help to push adoption of a standard that isn’t tied to a particular tool, since right now I have no option of reprinting the books I made with a company here in the U.S.  We’ll see how that goes!

My reservations about Groupon has absolutely no effect on Valerie, though.  Last weekend, when we were heading out, we had three of these group buying coupons to use on a single excursion!  One from Groupon for entrance to the Seattle Aquarium, another from Livingsocial for lunch at Henry’s Taiwan, and a third from Google Offers for a Chinese bakery.  And no, none of the barcodes in the above image are still valid, in case you had any bright ideas :).

There’s a cost to the consumer to going deal-crazy, though. We had to go to particular locales in Seattle for each of the above; understandable for the aquarium, but the other two places were not ones that we’d normally trek to and when you factor in time and the cost of gas, the deal is a little less sweet.  And while Valerie is at least a little cautious on ensuring that the rating of places she buys deals at warrant an actual visit, perhaps due in part to past complaining on my part, it remains true especially for food that most good restaurants are busy at mealtimes anyways, and don’t need to give away 50% of their revenue to be even more full. For instance, we like Din Tai Fung in Bellevue Square – but every time we’ve been there, it’s been packed with a wait of a decent length to sit down; I don’t think they’ll be doing a group deal anytime soon!

I have no complaints about the aquarium Groupon; it was already on our list of places to take the kids at least once, and the Groupon made it half price for one of us – though the aquarium might have gotten as little as $5 (vs. $20 usually) on entrance fees. Looking for value is great too; indeed, last weekend, shopping for clothes, I managed to stack a 30% off coupon, a $5 credit, and a donate-$5-get-$10 offer with an outlet store’s usual “50% off and then an extra 20 off!” prices to pick up some ridiculously cheap stuff, from a brand I bought before I ever knew they had an outlet place. But generally, I’m still not a big fan of the group deal model!