Expatriation & Renouncing US Citizenship
With all the issues that arise for US citizens living in Canada, the idea of renouncing US citizenship is a common one. Perhaps these individuals came to Canada as young children, and are only now learning about their neglected US tax obligations. Others may have moved here as adults and are fed up with ever expanding compliance obligations.
All US citizens have the right to renounce their citizenship through a formal process at a US consulate. Generally, two appointments are required, during which the Consular official is required to confirm that renunciation is being done voluntarily and with a clear understanding of the implications of doing so.
In addition, the Immigration and Nationality Act specifies conduct that can result in a loss of citizenship. Such conduct is broadly worded in the law to include swearing an oath of allegiance to another country, serving in a foreign military and accepting high-level employment in a foreign government. However, the US Supreme Court has imposed a requirement that such acts be done with the present intention of relinquishing citizenship. Consequently, the US Department of State will presume that retention of citizenship was intended when, for example, a US citizen becomes naturalized as a Canadian citizen. The burden of proving intention to relinquish citizenship rests with the party alleging that citizenship was lost.
Since 2008, a special tax applies to US expatriates who meet certain criteria including a net worth of greater than $2 million, or an inability to certify tax compliance for the previous 5 years. So-called “covered expatriates” must pay a “mark-to-market” capital gains tax as though all assets were sold at fair market value immediately prior to losing their citizenship. Additional tax applies any time a covered expatriate makes a gift or bequest to a US person after renouncing.
As a consequence of the tax impacts of expatriation, careful planning is advisable to ensure that the benefits of doing so outweigh the costs. Attorneys at Altro LLP can assist in this analysis and develop pre-expatriation plans to minimize the consequences.
Renouncing US Citizenship From Canada: How the Process Works
Renunciation is a formal act before a US consular officer, and for residents of Canada it takes place at a US consulate in Canada. The process generally involves an interview and the signing of an oath of renunciation, after which the Department of State issues a Certificate of Loss of Nationality (CLN). Renunciation is irrevocable, and the consular fee is significant, so the decision should be made only after the tax and personal consequences have been modelled. Separately, the individual must file a final US tax return for the year of expatriation along with Form 8854, the expatriation statement, which certifies five years of tax compliance and determines whether the person is a “covered expatriate”.
The Exit Tax and Covered Expatriate Tests
A person is generally a covered expatriate if, on the date of expatriation, their net worth is US$2 million or more, their average annual US income tax liability for the previous five years exceeds an inflation-adjusted threshold, or they cannot certify five years of US tax compliance on Form 8854. Covered expatriates are subject to the mark-to-market exit tax on unrealized gains above an inflation-adjusted exclusion, and special rules apply to retirement plans, deferred compensation and interests in trusts. Certain dual citizens from birth and individuals who renounce before age 18½ may qualify for exceptions if they meet the residence and compliance conditions.
Because the compliance certification is so important, many clients first become compliant through the Streamlined Foreign Offshore Procedures. See our article on the streamlined filing compliance procedures.
Section 2801: Gifts and Bequests From Covered Expatriates
After renunciation, a covered expatriate who makes a gift or leaves an inheritance to a US citizen or resident exposes the recipient to a special US transfer tax under section 2801 of the Internal Revenue Code, at the highest estate or gift tax rate. For families with children or grandchildren living in the US, this can be the most important long-term cost of expatriation. Our article on section 2801 and the new Form 708 explains the reporting regime.
Pre-Expatriation Planning
Well-planned expatriation can often avoid covered-expatriate status altogether, or reduce the exit tax substantially. Planning may include gifting within exemption limits, realizing gains at favourable times, restructuring Canadian corporations and trusts, and addressing TFSAs, RESPs and PFIC holdings. It should also be coordinated with Canadian tax and estate planning, and with the individual’s long-term plans for the US. Our team works on expatriation files together with our tax planning for US citizens residing in Canada group, and the firm’s commentary on why Americans renounce their citizenship gives additional background.
Frequently Asked Questions
Can I renounce my US citizenship in Canada?
Yes. Residents of Canada renounce at a US consulate in Canada by appearing before a consular officer and signing an oath of renunciation. The Department of State then issues a Certificate of Loss of Nationality.
Do I have to pay an exit tax when I renounce?
Only if you are a covered expatriate, meaning you meet the net worth or average tax liability tests, or cannot certify five years of US tax compliance. Many Canadians with moderate assets who are fully compliant are not covered expatriates and pay no exit tax.
Does renouncing end my US tax filing obligations?
After a final return and Form 8854 for the year of expatriation, US filing generally ends, except for US-source income that any non-resident would report.
If you are considering renouncing your US citizenship, book a consultation so we can review your compliance history and model the exit tax before you book a consular appointment.