Beware This “Tax Haven”

Dave Gonigam – September 20, 2011

  • Canada, tax haven? The strange logic of the IRS…
  • More bizarre consequences of a previous Obama “jobs bill,” the threat they pose to your wealth and the best way to safeguard it
  • Risk on! Markets anticipate more happy juice from Bernanke & Co.
  • Chris Mayer with a chart that shows gold stocks as cheap as 1979 — just before an epic rally
  • Strange tale from a torpid housing market: Free drinks to the buyer!
  • Readers inquire about pipeline project, compact fluorescents and a real reason to go protest on Wall Street

   It’s come to this: The IRS considers Canada a tax haven.

Yes, Canada — with a combined federal and provincial tax rate higher than the United States. “People do not flock to Canada to avoid paying taxes,” says the nation’s finance minister Jim Flaherty, belaboring the obvious.

“Many Canadians, however,” Flaherty goes on, “have become concerned about the impact of a proposed piece of American tax legislation — the Foreign Account Tax Compliance Act, or FATCA.”

Allow us to correct the minister. This is not “proposed.” This is the law now… and while Canadians are concerned, it’s Americans who are the targets.

Indeed, FATCA is an essential brick in the “virtual Berlin Wall” that aims to keep Americans and their money trapped within the U.S. dollar and U.S. banks.

   FATCA is a provision buried within a “jobs bill” President Obama signed into law 18 months ago. It says if you hold $50,000 or more in “foreign financial assets,” you must do business at a foreign bank that turns over information about balances, deposits and withdrawals to the IRS.

If the bank does not agree to turn over that information, you’re then subject to a 30% withholding tax on the income and gross proceeds from any U.S. assets in your foreign account.

Last summer, one of Canada’s Big Five banks, Toronto-Dominion, stood up and said this was ludicrous: It would cost $100 million for the software and staff to implement. Other big international banks spoke up too — Germany’s Allianz, Holland’s Aegon, and the Commonwealth Bank of Australia.

Given this push-back, IRS bureaucrats did the only thing that would logically occur to IRS bureaucrats: They decided that instead of enforcing this provision of FATCA starting in January 2013 as scheduled, they’d delay it till January 2014.

   Many overseas banks, faced with becoming an enforcement arm of the IRS sooner or later, are making the only logical choice available to them: They’re refusing to do business with U.S. customers.

“I’m in the process,” says an American living in Switzerland, “of having my…accounts with [bank redacted] forced closed, except for the mortgage. I’ve been unable to open an account with any other Swiss bank.”

This story was related to the Cato Institute’s Daniel Mitchell, who collected a large pile of similar stories:

  • “All of these banks and institutions are cutting me off from participation in any but the most basic bank account,” says an American in Japan
  • “I was extremely surprised and outraged,” says an American sent overseas by his company, “by the fact that not one bank (including foreign branches of U.S. banks!) would allow me to open a simple savings account to pay my rent and bills”
  • “I was denied the policy,” says an American in Germany. “My agent very clearly said that he could sell the policy that I wanted to any other nationality, except me — because I was American!”

   There’s another onerous provision of FATCA, and this one’s in effect already: If you hold “bank, brokerage or ‘other’” accounts with a total balance of $10,000 or more, you must disclose that on your 1040 Schedule B and submit a Foreign Bank Account Report, or FBAR, to the U.S. Treasury.

This too, has peeved Mr. Flaherty, the Canadian finance minister, given the number of Canadians who hold dual citizenship.

“These are honest and law-abiding people,” he says, “including many senior citizens now caught in a nerve-racking situation. Moreover, because they work and pay taxes in Canada, they generally do not owe any taxes in the United States in any event. Their only transgression is failing to file the IRS paperwork they were never aware they were required to file.”

“To impose FACTA on our citizens and financial institutions,” he concludes, “would not accomplish anything but to waste resources on both sides.”

By the way, Flaherty wrote his remarks in a letter to the editor he sent to The New York Times, The Washington Post and The Wall Street Journal. As far as we can tell, none of the three has seen fit to publish it.

   So why all this trouble to hunt down Americans with foreign bank accounts who have as little as $10,000 stashed away?

Jamie Golombek, director of tax and estate planning at CIBC Private Wealth Management, suspects it’s this simple: The U.S. government “is in dire need of revenue.”

Still, all hope is not lost. As we spell out in a special report available to every new reader of Apogee Advisory, you still have three choices to scale the “virtual Berlin Wall” and diversify your nest egg outside the United States: a bank account with less than $10,000, foreign real estate or gold.

Our favorite solution is what we’ve dubbed “offshore gold storage programs.” Addison explains the ins and outs, and even does a little comparison shopping among three of the better-known services, in the aforementioned special report. Access here.

   Bipolar markets, after a deep depression yesterday, are in a manic stage today.

Standard & Poor’s downgrades Italy’s debt? No big whoop. U.S. housing starts fall 5% in August? Water off a duck’s back. The IMF issues a forecast for slower worldwide growth the rest of this year? Party on!

  • U.S. stocks have recovered yesterday’s losses, and then some. The Dow has crested 11,500
  • European stocks staged a comeback today: France’s CAC 40 closed up 1.5%, and Germany’s DAX nearly 3%
  • The euro is steadying at $1.367, and the dollar index is holding above 77
  • Hot money is fleeing Treasuries, the 10-year yield up to 1.96%
  • Gold has pushed back above $1,800, and silver above $40.

A warm glow has settled over traders: The newswires describe “growing optimism” about Greece. What’s different now compared with 24 hours ago? Nothing.

Too, there’s anticipation the Federal Reserve will deliver some easy-money heroin at the end of its two-day meeting tomorrow afternoon.

Yeah, those are the ingredients for a healthy, sustainable rally…

   Gold is up today, but gold stocks are up bigger. As of this writing, the HUI Gold Bugs Index is up nearly 4%.

If this is the start of a breakout, it’s well overdue. “For the first half of the year,” Chris Mayer reminds us, “the HUI was down 9%, despite the fact that the price of gold was up 30%.”

Result: “Gold stocks are fundamentally cheap based on cash flow,” says Chris. “One of the most remarkable charts I’ve come across is this one showing the collapse in the cash flow multiples of gold stocks. They’ve gone from over 20 times in 2008 to about 10 times this August!

“The last time gold stocks got this cheap, on this basis, was back in 1979, when the group touched 8.5 times cash flow. This preceded a parabolic move in gold stocks in which they ultimately ran up fourfold. The 1970s is an interesting period to look at because gold stocks also lagged the price of the metal all the way up.”

For an intriguing chart underscoring the point, and three reasons why the big move hasn’t happened yet, check out Chris’ write-up in today’s Daily Resource Hunter.

   We have an answer to a question that’s persisted in the smoking ruin of the housing collapse: In a neighborhood of cookie-cutter homes, many of them up for sale, what do you do to make yours stand out?

For Melanie Gravdal in the Chicago suburb of Glenview, the answer is: free drinks!

“I was getting frustrated in selling our home,” Gravdal tells the Chicago Sun-Times, “so I told (her Realtor) we needed something to set us apart from the crazy number of townhomes in the area.”

The idea she hit on was a $1,000 credit at Grandpa’s, a bar and restaurant across the street.

Melanie Gravdal: A step closer to unloading her ticky-tacky townhouse

“We had two to three showings when we first had the house on sale in June,” she says, “but now there’s about nine. That’s a 300% increase, but we don’t know if it’s related.”

$1,000 in booze and grub? On a home that’s listed for $450,000?

Probably not related. Wouldn’t the money be better spent building a well-stocked bar at home, anyway? Just askin’…

   “I got a phone call,” writes a reader, “from some outfit in Washington, D.C., asking if I was in favor of a pipeline from Canada to Houston to help ease the oil imports from the Middle East.”

“What’s the story on this? Who is canvassing for a bill to Congress to create this, etc.?”

The 5: Hard telling whom called you. But presumably you were being called about the proposed Keystone XL pipeline — which would haul oil from Alberta’s tar sands through the Plains states down to Texas.

It’s become an environmental cause celebre. In recent weeks, more than 1,200 protesters have been arrested in front of the White House. The brouhaha is starting to have some strange effects. A few days ago, the University of Nebraska cut off a sponsorship arrangement with TransCanada, the company seeking federal approval for the pipeline.

“Last week at the [football] game,” says Nebraska Congressman Lee Terry, “I was there when the TransCanada advertising sign came up. There was booing. And I am sure that probably concerned Tom [Osborne],” the university’s athletic director, who made the call.

   “The lack of participation at the Wall Street demonstration should not be a sign that others do not share their concerns,” a reader writes after yesterday’s issue.

“William Black played a critical role during the S&L crisis in exposing; a lot of people in the financial sector went to jail, including Charles Keating. He has found that the 2007-plus credit crisis was the result of the ‘greatest financial crime in world history,’ but there have been absolutely no convictions this time around.”

“According to Black, the FBI warned in open testimony in the House of Representatives, in September 2004 — we are now talking seven years ago — that there was an epidemic of mortgage fraud (their words) and they predicted that it would cause a financial crisis (crisis being their word) if it were not contained.”

“After a brilliant start with this September 2004 warning, with no help from the regulators, the Bush administration refused to assign any significant number of FBI agents to investigate. Professor Black believes that the level of corruption and fraud is so pervasive that very few of the guilty will ever be brought to justice.”

“Unless something dramatic or radical changes, this is going to be the greatest case of elite fraud with impunity in the history of the world. And it is only going to change if we express our outrage as the people and demand that it is changed. So pass the word on.”

The 5: Done. But we don’t know how much good it will do. From where this editor sits, the booboisie appear to be more upset with the new pricing scheme at Netflix than they are with systemic fraud.

   “I bought a bunch of compact fluorescent light bulbs a couple of years ago,” a reader writes after seeing our item about rising rare earth prices pushing up the price of bulbs.

“I was trying to be eco-conscious and all that. Guess what? The spots and floods that go in your high hats in the ceiling? They don’t last more than a year! And you are paying three-five times as much for them as for the old incandescents!”

“I have been replacing mine over and over. Looks like a great scam for the GEs of this world, what with their claims that they last five or more times as long as incandescents, to offset their higher cost!”

The 5: But think of all the energy you’re saving. Oh, but if you have to keep driving to the store to buy more… and if you have to haul the burned-out ones to the recycler because you can’t throw them in the trash without violating a half-dozen environmental laws… well, never mind.

Cheers,

Dave Gonigam
The 5 Min. Forecast

P.S. Bad news from our friend Chuck Butler at EverBank World Markets. “The ‘infection’ that I had in my gums and jaw turned out to be another bout of cancer,” he writes in today’s Daily Pfennig. “Cancer is eating away my jawbone.”

“I knew there was something wrong when the antibiotics I took didn’t clear the so-called ‘infection.’ The good news is that there are no other signs of new cancer. So this ‘spot’ in my jawbone will begin receiving radiation next week.”

“I’m OK, no worries. I’m just dealing with swollen gums and some pain for now. I know that a lot of you keep me in your thoughts and prayers, and I thank you from the bottom of my heart.”

Hang in there, Chuck. Get well soon.

rspertzel

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