Canada’s new “citizenship by descent” law may benefit many U.S. citizens in unanticipated ways

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Introduction and purpose of this post

In response to a 2023 Canadian court decision the Government of Canada is enacting a new law – Bill C-71. (A good analysis of the court decision is here). Assuming it is enacted, Bill C-71 may create an opportunity for certain U.S. citizens to become Canadian citizens at birth. This will this give them the usual benefits of citizenship (right to live and work in Canada). But, it may also allow them to accumulate wealth in the United States, move to Canada, renounce U.S. citizenship and avoid paying the 877A Exit Tax. Once again, we see the U.S. Tax Code has created a hierarchy of U.S. citizens. Those born with dual citizenship (U.S. and another citizenship) are “preferred U.S. citizens”. Those born with dual citizenship are the Brahmins of the USA and those born with only U.S. citizenship are the “Sudras” of the USA. In the same way that a change in a country’s criminal laws can impact extradition TO the United States, a change in a country’s citizenship laws can facilitate escape FROM the United States.

The U.S. Internal Revenue Code is based on citizenship taxation. But, for certain “dual citizens from birth” it creates citizenship non-taxation. Incredibly, the Internal Revenue Code creates an opportunity to be exempted from the 877A expatriation tax for those who are born dual citizens. (It’s no wonder Senator Wyden believes that “dual citizenship” creates opportunities for tax “avoidance” (what he would thin is tax “evasion”)).

The unintended benefit to certain U.S. citizens

It is widely agreed that more Canadian citizens live in the United States than in any other country outside of Canada. It is not unusual for those Canadian citizens to have their children born in the United States. If those Canadian citizen parents became Canadian citizens because of birth or naturalization in Canada, their U.S. born children will be Canadian citizens from birth. Canada’s Bill C-71 (a response to the 2023 court decision) is designed to ensure that Canadian citizens who were born outside of Canada and became Canadian citizens at birth, will be able to transmit their citizenship to their children born abroad as well.

To put it another way:

Bill C-71 will create a new class of Canadian citizens AND a new class of U.S. citizens. To the extent that the legislation is retrospective, it will turn many U.S. born citizens into Canadian citizens from birth. Therefore, a new group of U.S. citizens will find that:

1. They are Canadian citizens; and

2. They are Canadian citizens from birth.

This means that (because they are born in the United States) they will be dual Canada/U.S. dual citizens from birth.

Q. So, what? Why is this such a big deal?

A. The dual citizen from birth exemption from the U.S. 877A expatriation tax

At present U.S. citizenship taxation makes it difficult for middle class Americans to move from the United States and survive as tax residents of another country. Renunciation carries with it the spectre of the 877A expatriation tax. That said, there is a “dual citizenship from birth exemption from the 877A exit tax.”

Bottom line:

The upcoming changes to Canada’s “citizenship by descent laws” could mean that:

A new group of U.S. citizens may become dual Canada/US citizens from birth and can arrange their affairs to leave the United States, move to Canada with a “stepped up basis” in their assets, renounce U.S. citizenship and avoid the 877A exit tax!

The U.S. has citizenship taxation. It also has citizenship non-taxation. Interesting that the benefit of dual citizenship is based ONLY on the citizenship of the parents. You can’t make this kind of injustice up!

John Richardson – Follow me on X.com @Expatriationlaw

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