Americans living in Canada who are thinking about renouncing their U.S. citizenship should make sure they understand fully the consequences of making that decision, cross-border tax experts say.
“It’s not an easy or painless undertaking,” says Terry Ritchie, a registered financial planner and partner with Transition Financial Advisors Inc. in Phoenix. “There may be a tax result imposed, and there may be lifestyle consequences as well.”
U.S. citizens must file a tax return based on their worldwide income, regardless of where they reside in the world. For Americans in Canada, that means filing a U.S. tax return every year, in addition to their Canadian return. Increasingly, dual citizens are making the decision to renounce their U.S. citizenship in order to rid themselves of their annual U.S. tax filing and reporting obligations.
U.S. citizens who wish to renounce their citizenship must make an appointment and present themselves in person at a U.S. consulate or embassy outside the U.S. and take a formal oath announcing their intention to renounce. At some diplomatic posts, there may be a waiting period of several months before a consular officer is available, and often more than one visit to the consulate will be needed. There also is a $450 fee.
If the U.S. citizen hasn’t been staying current with his or her U.S. tax-filing obligations, he or she must now file the past five years of U.S. returns and any U.S. foreign account forms — and pay any taxes and penalties resulting from those filings. The returns have to be prepared by a tax preparer certified by the U.S. Internal Revenue Service. The American taxpayer then has to file a Form 8854: Initial and Annual Expatriation Statement, listing the value of all his or her assets as of the day of expatriation.
U.S. citizens who have a net worth greater than US$2 million at the time of expatriation, or who have an average annual income-tax liability above US$145,000 in the five years prior to expatriation, or those who hadn’t filed tax returns for the previous five years, face a departure tax. This tax is based on a deemed disposition of all the taxpayer’s assets at fair market value. Any capital gains above an exemption amount of US$636,000 is taxed at a rate of 15%. There is also a 30% tax imposed on any deferred retirement plan, such as an RRSP.
There may be tax consequences even after a U.S. citizen has expatriated. If a so-called “covered expatriate” makes a gift to an American child, that child faces a 35% tax on the value of that gift above an annual exemption amount of US$13,000. Finally, U.S. citizens who expatriate may find it difficult to enter the U.S. when they would like. Immigration officials will have information regarding who has expatriated, and can deny someone entry for that reason alone.