H. Alger's great-grandfather moved
from England to the United States in search of the American
dream of "anyone who works hard can become rich".
He was more than happy to give up his U.K. passport when
the time came to become a citizen of the "land of
the brave and the home of the free". From generation
to generation in the Alger family, the legend of poor
boy making good was passed on. H. Alger started his business
career at the age of 12 delivering telegrams. By the
time he was 50, he had built from scratch a specialty
steel manufacturing business that was worth $30,000,000
USD and employed over 200 employees.
H. Alger later discovered the dark
side of the American dream, "work hard and get taxed
harder". It seemed that the more successful he became,
the greater the percentage of his profit went to the
government coffers. Through the years, H. Alger didn't
mind paying taxes that covered the services his family
received from the local, state, and federal governments.
Since he was a public minded soul, he didn't mind when
he paid enough tax to help out ten fellow Americans who
had to rely on the public purse. Although he choked when
he wrote out a check to the IRS that would have also
paid for fifty more unfortunate fellow Americans, he
still thought, "You can't escape death or taxes".
His breaking point occurred one fourth of July.
That day the factory workers went on
strike for higher wages, less hours and job security.
H. Alger was outraged. He was paying them the high wages
their union had negotiated for them in the last strike,
and yet productivity was down and absenteeism was way
up. How could job security be guaranteed when these conditions
were rapidly making his plant uncompetitive in the face
of international competition? The chief union negotiator
said "We are going to stay out forever if that's
what is needed to break the back of that fat-cat Alger".
Union members cheered because even if the plant closed,
they would be able to collect unemployment insurance.
As the owner of the factory, H. Alger couldn't collect
unemployment insurance even if he was bankrupted.
To add insult to injury, that same
day the IRS completed its audit. H. Alger's accountant
submitted an enormous bill. This was an annual event
after the accountant and his five associates had to baby-sit
the IRS for a month. Finally, the accountant handed H.
Alger an assessment of how much money would be left for
his children and grandchildren after all the estate taxes
had been paid. H. Alger was appalled. The half they didn't
take when he was alive would be taken when he was dead.
His children and grandchildren would have to start from
ground zero again.
H. Alger was angry with the workers
who had repaid him for the jobs created and the taxes
paid by putting him in this position. He was determined
to find a way to have more money, work fewer hours, and
have greater security. Initially, H. Alger was discouraged
after discovering that even if he just left the United
States to live in the Caribbean, he would still be subject
to income, gift capital gain, and estate taxes. After
a little investigation, he discovered that the United
States was the only major country that taxed its citizens,
even though they no longer lived in the U.S. or received
any service from the government.
H. Alger telephoned a former American
businessman whom he had met on his last vacation in the
Bahamas, who told him that he pays no income or estate
taxes anywhere. This helpful former taxpayer put H. Alger
in touch with his legal advisors who outlined a strategy
to eliminate his tax problem and give him the peace of
mind he sought.
First H. Alger secured a Grenadian
citizenship and passport for himself and his wife. Next
he purchased a home in Lyford Cay in the Bahamas and
secured a Bahamian residence permit. After moving his
residence and domicile to the Bahamas, H. Alger and his
wife relinquished their U.S. citizenship.
As you can imagine, H. Alger was uncertain
about living out the rest of his life on a travel document
from a small little known country. In addition, he wanted
to make sure that he could easily visit in the U.S. Therefore,
H. Alger and his wife also secured permanent residence
visas to Canada. Prior to assuming the Canadian status,
he set up his assets in a trust. This trust gave H. Alger
and his wife the benefit of a complete five-year holiday
from Canadian taxation on its assets. The combination
of a Grenadian passport with a Canadian permanent residence
visa meant that they could travel to the U.S. without
a visa. H. Alger wanted to avoid having to go to the
State Department for anything since giving up his U.S.
citizenship. In addition, a full-time move from the U.S.
directly to the Bahamas was too jolting for his wife.
Since most of the population lives within an hour or
two drive of the U.S. border, establishing a residence
in Canada was like living in a crime free northern state.
Finally, as part of the sales agreement
for the steel company, H. Alger agreed to provide some
consulting advice to the new owners for a three-year
period. Since he was no longer a U.S. citizen and did
not want to be arrested as an illegal worker, H. Alger
secured U.S. non-immigrant H1-B status. Again since he
was a Grenadian citizen/Canadian permanent resident he
was able to secure this status within two weeks from
the INS. The State Department was never involved. Although
he had to pay U.S. tax on his consulting work, H. Alger
was very careful to avoid spending too much time in the
U.S. and thereby re-acquiring worldwide income and estate
tax liability. Even though the border crossing between
Canada and the U.S. is not closely monitored, H. Alger
wanted to take no chances. Therefore he took advantage
of a little known "Cinderella clause" that allowed him
to enter the U.S. from Canada to go to the factory, and
not count the day he entered the U.S. or the day he returned
to Canada.
At the end of three years, H. Alger
acquired a Canadian passport for himself and his wife.
Next they gave up the Canadian residence and moved to
the Bahamas with their Canadian passports in hand. As
non-residents of Canada before the end of the five-year
Canadian tax holiday, they had managed to completely
avoid Canada taxing the trust assets. Although his wife
still wants to spend only a few of the winter months
in the Caribbean, H. Alger is able to arrange his life
quite nicely so that everyone is happy and there is no
tax liability anywhere. He and his wife spend up to six
months in Canada, 122 days in the U.S. and the rest of
the time in Lyford Cay. His children and grandchildren
enjoy coming up to the summer place in Nova Scotia and
the winter place in the Bahamas and it's not much of
a financial burden to pay for their plane fare when he
doesn't pay any taxes.
IMPORTANT NOTE: As a result of a November
1994 Forbes magazine cover story on the "New Refugees" like
H. Alger and Sir John Templeton, the Clinton administration
passed new laws dealing with Taxpatriates. Although these
laws were supposed to stop the flow of so-called "Economic
Benedict Arnolds", it has only highlighted the unique
tax liability imposed on U.S. citizens. Business people
and professionals like H. Alger are now realizing for
the first time that their government has a unique opinion
on its right to tax the productive members of their society.
After taking risks, working hard and paying fortunes
in taxes these "fat cats" are resigning in droves from
the U.S. social contract. The provisions are not terribly
onerous at this time but many Americans are heading out
now while it is still favorable. Taking steps now avoids
the inevitability that exemptions disappear and rates
increase.
The new laws deal with a) on-going
taxation of U.S. source income for ten years after expatriation;
and b) a poor attempt to stop expatriates from visiting
the U.S. The impact of the U.S. source tax provisions
can be eliminated or limited with proper planning. The
immigration /visitor problem can be completely avoided
by proper planning in the method of losing U.S. citizenship.
©COPYRIGHT 1999-2007
DAVID S. LESPERANCE
