Part 1 – "Facts are stubborn things" – The possible effect of the US "Exit Tax" on Canadian residents

This is Part 1 of a 9 part series on the Exit Tax.
The 9 parts are:
Part 1 – April 1, 2015 – “Facts are stubborn things” – The results of the “Exit Tax
Part 2 – April 2, 2015 – “How could this possibly happen? “Exit Taxes” in a system of residence based taxation vs. Exit Taxes in a system of “citizenship (place of birth) taxation”
Part 3 – April 3, 2015 – “The “Exit Tax” affects “covered expatriates” – what is a “covered expatriate”?”
Part 4 – April 4, 2015 – “You are a “covered expatriate” How the “Exit Tax” is actually calculated”
Part 5 – April 5, 2015 – “The “Exit Tax” in action – Five actual scenarios with 5 actual completed U.S. tax returns.”
Part 6 – April 6, 2015 – “Surely, expatriation is NOT worse than death! The two million asset test should be raised to the Estate Tax limitation – approximately five million dollars – It’s Time”
Part 7 – April 7, 2015 – “The two kinds of U.S. citizenship: Citizenship for immigration and citizenship for tax”
Part 8 – April 8, 2015 – “I relinquished U.S. citizenship many years ago. Could I still have U.S. tax citizenship?”
Part 9 – April 9, 2015 – “Leaving the U.S. tax system – renounce or relinquish U.S. citizenship, What’s the difference?”
Part 1 – “Facts are stubborn things” – The results of the “Exit Tax”

This post will demonstrate how the U.S. “Exit Tax” affects “middle class Canadians who  have U.S. citizenship and wish to relinquish it. You will see how the “Exit Tax” imposes punitive taxes on Canadian assets and on income earned in Canada. You will also see how some U.S. assets are (in effect) exempted from the “Exit Tax”. We will learn from the example of a “Middle Class Canadian” with an average house in Toronto, a pension plan from the University of Toronto and a low value RRSP who decides that he no longer wishes to be a U.S. citizen.
This person has lived in Canada most (or perhaps all) of his adult life. You will see that he has NO U.S. assets and NO U.S. income. He was born in the United States, never officially relinquished U.S. citizenship and is therefore considered to be a U.S. citizen.
The U.S. imposes charges fees/taxes to NOT be a U.S. citizen. Everybody is required to pay an administrative fee of $2350 to no longer be a U.S. citizen. Others will have to pay an additional premium in the form of an “Exit Tax”.
In this particular case our “middle class Canadian”  would have be required to  pay the United States an additional fee in the form of an “Exit Tax”.
The amount of the “Exit Tax” is approximately $400,000 Canadian dollars.
Note that this “Exit Tax” is paid NOT on U.S. assets but completely on Canadian assets. It could very easily have been much more! Of course, if he had NOT been born ONLY a U.S. citizen he might not have to pay any Exit Tax (unless he was NOT living in Canada when he renounced) ….
This is all possible because of U.S. “citizenship (place of birth)” taxation.
The problem will be exacerbated by FATCA and by the agreement by the Government of Canada to assist the U.S. in the enforcement of FATCA in Canada

“Citizenship (place of birth) taxation” and FATCA are logically distinct but contextually related. The purpose of FATCA is to enforce “citizenship (place of birth) taxation.
This post will demonstrate  the graphic and horrific tax consequences of a middle class person in Canada who relinquishes  U.S. citizenship. If you understand this post, you will see that the claim that U.S. citizens abroad renounce citizenship to avoid taxes is absurd. In fact, it’s the exact opposite. Renouncing U.S. citizenship is more likely to subject a “long term, middle-class American abroad” to tax consequences that are horrific and unjust in the extreme.
How this works – the S. 877A “Exit Tax” rules in action  …
In order to see the graphic and brutal confiscatory effects of the U.S. Exit Tax in action I asked a licensed U.S. CPA who specializes in International Tax to consider the following factual scenario:

Relinquishment date: A person who renounced U.S. citizenship on November 1, 2014.
Profile: He was a “middle class” person who was completely tax compliant in Canada – his country of residence. He was a saver and investor. He had worked hard for this money.
The CPA was asked to calculate the Exit Tax based on the following “Financial Facts”. Note that the persons assets do exceed the $2,000,000 dollar U.S. threshold. Notice also that this example is representative of a typical “middle class” person.
Financial Facts – All amounts were in Canadian dollars.

– pension income from Canadian sources of $50,000
– principal residence bought in 1985 for $100,000 with a fair market value on November 1, 2014 of $1,200,000. The CPA calculated the taxes under the assumption that the relinquisher WOULD be entitled to the $250,000 capital gains deduction that would  normally be available under S. 121 of the Internal Revenue Code. It is NOT clear that he would be entitled to this deduction under the S. 877A rules. Note that if the S. 121 deduction does NOT apply the taxes owing will be significantly higher.
– pension from the University of Toronto with a present value of $900,000
– RRSP with a value of $500,000
– 500 shares of Telus common shares with a deemed sale on November 1, 2014 and a cost basis of half that. In other words the shares doubled.

Note that this person clearly exceeds the $2,000,000 U.S. threshold and is therefore subject to the Exit Tax. Yet he is a person with a “middle class” life style. The CPA graciously calculated the amounts to go on the Form 8854 (mandatory asset disclosure form) and calculated the Exit Tax (amount payable to the IRS to no longer be a U.S. citizen).
Our CPA calculated the “Exit Tax” based on the following five different fact patterns.
1. U.S. citizen only at birth – living in Canada – Canadian source INELIGIBLE (meaning Canadian source) pension
Exit Tax payable: $363,954 USD
2. Dual U.S./Canada citizen from birth – living in Canada
Exit Tax payable: $00.00 USD
3. Dual U.S./Canada citizen from birth living in U.K. – Canadian source INELIGIBLE (Canadian source) pension
Exit Tax payable: $363,954 USD
4. U.S.  citizen only at birth – living in Canada – U.S. source ELIGIBLE (U.S. source) pension
Exit Tax payable: $69,926 USD
5. U.S. citizen only at birth – billionaire – living in Cayman Islands – relinquishes before the age of 18 1/2
Exit Tax payable: $00.00 USD
A picture is worth a thousand words:
Exit tax chart_final
And more …
It’s because of the exacerbating factor of “citizenship (place of birth) taxation”
Notice that the most brutal and confiscatory effects of the U.S. Exit Tax are born by Americans abroad who have built their careers abroad and acquired their assets abroad. It is because of “citizenship taxation” that the U.S. is able to lay claim to income and assets earned in other countries. This results in (governments take note) U.S. confiscation taxation of capital earned in other countries.
As Ronald Reagan, remembering the wisdom of John Adams, used to say:

“Facts are stubborn things.”

The perverse application of the U.S. S. 877A “Exit Tax” is a graphic example of the immorality of a tax system that taxes people based on “place of birth”.

On April 2, 2015, in Part 2 of this series I will explore:

““How could this possibly happen? “Exit Taxes” in a system of residence based taxation vs. Exit Taxes in a system of “citizenship (place of birth) taxation”

5 thoughts on “Part 1 – "Facts are stubborn things" – The possible effect of the US "Exit Tax" on Canadian residents

  1. Colin Post author

    Thanks for starting this series. This is the first I’ve heard of 0 exit tax for someone who was a Canadian at birth. I was born in Canada so was a Canadian at birth and didn’t take out US citizenship until I was 16 (my mom is American and took it out for me..) Would I ever have to pay an exit tax even if my assets were more than 2M USD? Would I still be counted as a “covered” expat if I didn’t owe an exit tax but my net worth was more than 2M USD? I plan to renounce if CBT isn’t changed in the next 5 years.

  2. Petunia Post author

    Excellent post. The pictures are really worth a thouand words here. I was wondering if it is possible for the house valued at CAD 1.2 million to only be valued at 50% of that amount (i.e. CAD 600k) if the house is jointly owned with a non-US citizen spouse? Hence, the U.S. citizen owns half the house as does the non-U.S. citizen spouse. I know this is getting into the details, but the value of a house is certainly what can make the difference in whether someone is subjected to the Exit Tax.
    Looking forward to the next posts in this series.

  3. Jeffrey Post author

    What would happen if you did nothing when your ussa passport expired rather than raised a red flag?

  4. John Post author

    A citizen relinquishes their citizenship at no cost, but renouncing does cost the $2350. Relinquishing is not easy, but it can be done. Obtaining a Canadian citizenship is an avenue, if performed for the explicit reason of giving up American citizenship.
    Likewise to the exit tax, the annual piracy of our earnings also steals money from Canada’s capital base. We do not have any idea of the sum of the impact, but an estimate of $1,000 a head yields $1 billion for the one million estimated American population living in Canada.
    It is disappointing that Harper cannot understand, let alone acknowledge, the scourge America is imparting on Canada. He should open his eyes and do something about it, as Premier Gallant has done.


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