U.S. citizens are required to file a U.S. tax return every year, even if they don’t live or work in the U.S. That means Americans who live in Canada must file two tax returns each year — one for Canada, one for the U.S. — no matter how long they’ve been here.

In order to simplify their affairs or to get out from under the U.S. estate rules, some Americans consider renouncing their citizenship. But that’s not an easy process, particularly after the U.S. government introduced new expatriation rules last year.

Effective June 17, 2008, U.S. citizens who wish to renounce their citizenship can be subject to a departure tax. The tax applies to those U.S. citizens who meet one of three criteria: have a net worth greater than US$2 million at the time of expatriation; have an average income-tax liability in excess of US$139,000 in the five years before expatriation; or can’t prove that they’ve complied with all their U.S. federal tax obligations in the past five years.

U.S. expatriates who meet one of those conditions face a deemed disposition of all their property at fair market value, and owe taxes on any gain of more than US$600,000.

They can defer paying the taxes until the assets are actually sold, or until their final tax return in the year of death. But they will be charged interest on the taxes deferred.

If a U.S. expatriate, after renouncing his or her citizenship, gives a gift to a U.S. citizen or tax resident other than his or her spouse or to a charity, that recipient is liable for any gift or estate taxes on the gift, unless the expatriate him- or herself files the gift or estate tax return.

Certain deferred compensation arrangements, such as pensions, won’t be included in the assessment of expatriation taxes, but any distributions from such an arrangement are subject to a 30% withholding tax.

Along with the departure tax, a U.S. citizen renouncing his or her citizenship also has to undergo a lengthy administrative process that includes going to a U.S. consulate outside of the U.S. and formally renouncing citizenship. The decision to renounce citizenship will also have tax implications if the expatriate later decides to spend significant time in the U.S.

“The hoops you have to jump through are pretty significant,” says Terry Ritchie, a certified financial planner and an expert in cross-border issues with Transition Financial Advisors Group Inc. , based in Calgary and Phoenix.

The departure tax replaces the old expatriation guidelines, in which the expatriate was taxed on all U.S.-source income and gains in a 10-year period after expatriation. — RUDY MEZZETTA