By Brent Soucie, CPA, CA, T.E. Wealth
Special to the Financial Independence Hub
In the past three days, many unhappy American voters — including many celebrities — have been crashing web sites containing information on how to emigrate to Canada. As a cross-border tax specialist, I’ve had my share of calls about this, so am republishing the following blog that originally appeared on T.E. Wealth’s website a year ago. The posting caters to U.S. citizens already living in Canada, to U.S. citizens considering moving here, and to U.S. citizens considering renunciation of their U.S. citizenship.
With all of the recent attention on the Foreign Account Tax Compliance Act (FATCA), I thought it would be a good time to address some of the issues surrounding our friends who reside here in Canada and hold U.S. citizenship – there are an estimated one million of you! You come from all walks of life. Some of you emigrated here shortly after birth, some moved here to start or grow your career(s), and some of you have lived here your entire lives, having derived your U.S. citizenship through your parents. In any case, FATCA impacts you and you need to know how. I’m often asked about the merits and drawbacks of keeping versus renouncing U.S. citizenship. Such is a deeply personal decision with potentially serious ramifications, so you need to make it with your eyes wide open. Here are some important things to consider.
Are you a U.S. citizen?
- If you were born in the United States, you are a U.S. citizen – no exceptions
- If you were born in Canada to two U.S. citizen parents, you are a U.S. citizen
- If you were born in Canada with one U.S. citizen parent, your date of birth, as well as the amount of time your U.S. parent resided in the U.S., will determine whether or not you are a U.S. citizen
Facts about U.S. citizenship
- It is illegal for U.S. citizens to enter or leave the U.S. without a valid U.S. passport (section 53.1)
- Carrying U.S. citizenship offers several benefits, including protection while travelling abroad, consular services, access to the U.S. domestic job market, ease of travel to and from the U.S., and the right to vote in U.S. elections
Facts about U.S. income taxation
- U.S. citizens are required to file a U.S. tax return every year, regardless of where they live
- U.S. citizens must declare their worldwide income on their U.S. tax return, every year
- U.S. citizens can claim a credit on their U.S. tax return for taxes paid to a foreign country (e.g., Canada)
- Approximately 19 out of 20 U.S. tax returns filed by Canadian residents result in little or no balance due to the IRS because Canadian tax rates (combined federal and provincial) tend to be higher than U.S. tax rates (including state tax) on most types of income
- U.S. citizens must also disclose information about their non-U.S. financial accounts to the IRS on an annual basis and on the Report of Foreign Bank and Financial Accounts (commonly known as the FBAR form)
- U.S. citizens are subject to the U.S. estate tax, which is levied on estates greater than $5.45 million USD. This is different than the methodology for U.S. estate tax payable by a non-U.S. citizen who owns U.S. property. Learn more about Canadians’ exposure to U.S. estate tax here
- The sale of one’s principal residence can create a U.S. tax liability, as the IRS’s principal residence exemption is limited to $250,000 USD of gain ($500,000 USD for married individuals filing jointly)
- Now that FATCA is in effect, Canadian financial institutions are required to find out which of their clients are U.S. citizens, and disclose their names to the IRS
- Many Canadian financial tools are less efficient for U.S. citizen taxpayers. This includes, but is not limited to, RESPs, TFSAs, Family Trusts, private and/or professional corporations earning certain types of income, foreign (non-U.S.) partnerships, non-U.S. mutual funds, non-U.S. pooled funds, and/or non-U.S. exchange traded funds (ETFs). Several of these noted funds qualify as Passive Foreign Investment Companies, which is a topic in and of itself
- If you are a U.S. citizen and have not filed tax returns for several years, there are amnesty programs in place that allow you to catch up: the streamlined program for non-resident U.S. filers, and/or the Offshore Voluntary Disclosure Programs. These programs are very different and suit individuals based on their own personal circumstances
- The IRS is looking to bring their non-compliant or delinquent filers back into compliance. In other words, the IRS wants you to file your tax returns and your FBAR forms (non-U.S. financial account disclosure forms)
Facts about renouncing U.S. citizenship
- If you choose to renounce your U.S. citizenship, you will typically cease to have the above-noted income tax filing obligations
- Renouncing your U.S. citizenship does carry a potential exit tax (i.e., a deemed sale of all your assets)
- The U.S. exit tax is applicable to individuals with a worldwide net worth greater than $2,000,000 USD, as well as other individuals who meet certain income tax liability thresholds. The determination of your net worth is in accordance with U.S. tax law, and includes some assets that some individuals may not otherwise consider (e.g., present value of pension plans)
- Each quarter, the names of (former) U.S. citizens who have renounced are published in a publicly available Federal Registrar
- The number of U.S. citizens renouncing their citizenship has increased drastically since 2008 (up to approximately 1,300 per quarter)
- There are seven U.S. Consulate offices in Canada that offer regular renunciation appointments (Vancouver, Calgary, Toronto, Ottawa, Montreal, Quebec City, Halifax), each having different wait times
- There are ways to reduce the size of one’s taxable estate (subject to the exit tax); however, one needs to be cognizant of the U.S. gift tax regime and other nuances in the U.S. tax system. Simply gifting your estate away could create more tax than it might save
- Before you can renounce your U.S. citizenship, you must be compliant and up to date with your income tax filings (typically, the last five years)
- It is highly advisable to retain the services of a U.S. immigration lawyer, who can coach you through the process of renouncing. At present, some of the top tier firms offering this service are quoting $12,000 per case
- There is a $2,350 USD fee payable to the U.S. government for applying to renounce your U.S. citizenship
- If you are determined to renounce your U.S. citizenship for the sole purpose of avoiding taxation, this can cause you to be inadmissible to the United States (hence the importance of proper assistance from a U.S. immigration attorney throughout the renunciation process)
Travellers and Green Card holders
- The U.S. exit tax also applies to U.S. Green Card holders who are “long-term residents” of the United States (those who have resided in the U.S. for eight of the past 15 years) looking to give up or surrender their Green Card.
- If you renounce your U.S. citizenship, you can still travel to the U.S., collect U.S. social security, purchase U.S. real estate, and receive payments from U.S. based retirement plans. The same rules that apply to a Canadian traveller typically apply to a former U.S. citizen who resides in Canada
- Travellers who cross the U.S. / Canada border are now required to swipe passports when both entering and departing each respective country. As such, the border authorities now keep track of a traveller’s day count If you are considering whether or not to renounce your U.S. citizenship, it’s highly advisable that you reach out to a professional service provider to explore your personal circumstances. Knowing the facts and dispelling myths about the U.S. tax system can go a long way in reassuring you that you’ve made the right decision.
Brent Soucie is a vice president and consultant for Toronto-based T.E. Wealth. He specializes in cross-border tax and financial planning for U.S. citizens and/or Green Card holders residing in Canada, as well as Canadian residents with U.S. employment and/or property. His clients include professional athletes, entrepreneurs, and corporate executives.