Part 8 – “The U.S. “Exit Tax vs. Canada’s Departure Tax – citizenship taxation vs. residence taxation”

The above tweet references the following comment:

At least the departure tax has a sliver of logic to it, and an appropriate name. To have to pay a US “exit tax” when I left empty handed over thirty years ago, beggars belief. Perhaps if they called it an escape tax or freedom tax that would make more sense.

Composing this series of posts about the U.S. S. 877A “Exit Tax” made me realize that “Exit Taxes” are a prism through which to view a country’s tax system. Any kind of tax imposed on leaving the “tax jurisdiction” of a country will reveal much about the fairness of a tax system. Yet there has been little discussion of “Exit Taxes”. In theory an “Exit Tax” is imposed when one emigrates from one country and immigrates to another country. This is how “Canada’s Departure Tax” works. It is NOT how the U.S. “Exit Tax” works.
I recently came across an interesting book written by Nancy Green and Francois Weil titled:
Citizenship and Those Who Leave: The Politics of Emigration and Expatriation
The description includes:

Exit, like entry, has helped define citizenship over the past two centuries, yet little attention has been given to the politics of emigration. How have countries impeded or facilitated people leaving? How have they perceived and regulated those who leave? What relations do they seek to maintain with their citizens abroad and why? Citizenship and Those Who Leave reverses the immigration perspective to examine how nations define themselves not just through entry but through exit as well.

It is clear that civilizations are largely defined by the nature of their tax systems. Therefore, “Departure Taxes” and/or “Exit Taxes” are indicators of how “nations define themselves”. Canada uses a system of “residence taxation”. How is Canada’s “Departure Tax” an indicator of how Canada defines itself? How is the U.S. “Exit Tax” an indicator of how the “U.S. defines itself? How do “Departure/Exit Taxes” shed light on the meaning of a country’s citizenship? Interesting thoughts and interesting questions.
Let’s look at Canada’s “Departure Tax” and see how it works. The differences between Canada’s Departure Tax and the U.S. “Exit Tax” are extreme and striking. It is no surprise that ACA (American Citizens Abroad) has endorsed Canada’s “Departure Tax” as the appropriate model of “Exit Tax” (assuming that there is one at all).
Interestingly, Cynthia Blum and Paula Singer in their insightful article “A Coherent Policy Proposal for U.S. Residence-Based Taxation Of Individuals”  appear to endorse (page 731 and onwards) a “Canada like” system of departure taxes.
Now on to how Canada’s “Departure Tax Works” …

The above tweet references a comprehensive about Canada’s Departure Tax at “U.S. Taxation Abroad”. The article includes:

In a global world it is common for people to move from one country to another. For example one could move from Canada to the Bahamas. By ceasing to become a resident of Canada, one ceases to be subject to Canadian taxes (with the exception of certain kinds of Canadian based income). As a result, Canada (like many countries) imposes a tax when one ceases to reside in Canada and is therefore no longer subject to Canadian tax laws. The theory is that Canada should have the right to impose a tax on the gains in assets that accrued when the person was a tax resident of Canada. To put it simply:
If your gains accrued while you were a tax resident of Canada,and  if you then cease to be a tax resident of Canada, you are required to pay tax on the gains that accrued while you were a tax resident of Canada. Is this fair? Is this logical? In Canada capital gains are triggered by the earliest of: sale (actual disposition), death (deemed disposition) or departure (deemed disposition).
Like it or not, that’s the theory and reality. Note that the tax is triggered by “departure” – ceasing to be a resident of Canada. The tax applies to almost all residents with exactly the same rules: regardless of citizenship, regardless of income and  regardless of wealth.

You can read the complete article here.

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