Tag Archives: S. 877A Exit Tax

The S. 877A “Dual Citizen” exemption: MUST certify tax compliance for the five years prior to relinquishment

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Introduction:
This is the 7th of seven posts analyzing the “dual citizen exemption” to the S. 877A Exit Tax which is found in S. 877A(g)(1)(B) of the Internal Revenue Code. Please remember that the “dual citizen exemption” is available ONLY to those who meet the “five year tax compliance test”.
1. What is the S. 877A(g)(1)(B) “dual citizen exemption” and why does it encourage those “born dual citizens” to not renounce U.S. citizenship?
2. The history of Canada’s citizenship laws: Did the 1947 Canada Citizenship Act affirm citizenship or “strip” citizenship and create @LostCanadians?
3. The S. 877A “dual citizen” exemption – I was born before the first ever Canada Citizenship Act? Could I have been “born a Canadian citizen”?
4. The S. 877A “Dual Citizen” exemption: The 1947 Canada Citizenship Act – Am I still a Canadian or did I lose Canadian citizenship? (The “Sins Of The Father”)
5. The S. 877A “Dual Citizen” exemption: The 1947 Canada Citizenship Act and the requirements to be “born Canadian”
6. “The S. 877A “Dual Citizen” exemption: I was born a dual citizen! Am I still “taxed as a resident” of Canada?”
7. The S. 877A “Dual Citizen” exemption: “MUST certify tax compliance for the five years prior to relinquishment”
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To begin: Any person who cannot meet the “tax compliance test” found in section 877(a)(2)(C) of the Internal Revenue Code will be a “covered expatriate”!
As a reminder, of what makes somebody a “covered expatriate”:
S. 877A(g) of the Internal Revenue Code includes:

(g) Definitions and special rules relating to expatriation For purposes of this section—
(1) Covered expatriate
(A) In general
The term “covered expatriate” means an expatriate who meets the requirements of subparagraph (A), (B), or (C) of section 877(a)(2).
(B) Exceptions An individual shall not be treated as meeting the requirements of subparagraph (A) or (B) of section 877(a)(2) if—
(i) the individual—
(I) became at birth a citizen of the United States and a citizen of another country and, as of the expatriation date, continues to be a citizen of, and is taxed as a resident of, such other country, and
(II) has been a resident of the United States (as defined in section 7701(b)(1)(A)(ii)) for not more than 10 taxable years during the 15-taxable year period ending with the taxable year during which the expatriation date occurs,

Notice that the “dual citizen exemption” operates so that the individual does NOT become a “covered expatriate” if he meets the tests of “subparagraph (A) or (B) of section 877(a)(2)” (the income test or the asset test). The “dual citizen exemption” does NOT absolve the individual from meeting the “tax compliance test” found in section 877(a)(2)(C) of the Internal Revenue Code, which reads as follows:
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The S. 877A "Dual Citizen" exemption: Am I still "taxed as a resident" of Canada?

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Introduction:
This is the 6th of seven posts analyzing the “dual citizen exemption” to the S. 877A Exit Tax which is found in S. 877A(g)(1)(B) of the Internal Revenue Code. Please remember that the “dual citizen exemption” is available ONLY to those who meet the “five year tax compliance test”.
1. What is the S. 877A(g)(1)(B) “dual citizen exemption” and why does it encourage those “born dual citizens” to not renounce U.S. citizenship?
2. The history of Canada’s citizenship laws: Did the 1947 Canada Citizenship Act affirm citizenship or “strip” citizenship and create @LostCanadians?
3. The S. 877A “dual citizen” exemption – I was born before the first ever Canada Citizenship Act? Could I have been “born a Canadian citizen”?
4. The S. 877A “Dual Citizen” exemption: The 1947 Canada Citizenship Act – Am I still a Canadian or did I lose Canadian citizenship? (The “Sins Of The Father”)
5. The S. 877A “Dual Citizen” exemption: The 1947 Canada Citizenship Act and the requirements to be “born Canadian”
6. “The S. 877A “Dual Citizen” exemption: I was born a dual citizen! Am I still “taxed as a resident” of Canada?”
7. The S. 877A “Dual Citizen” exemption: “MUST certify tax compliance for the five years prior to relinquishment”
 


In order to use your “dual citizen from birth” as a defense to being a “covered expatriate” and therefore subject to the S. 877A “Exit Tax”, you must (as both a Canadian and U.S. citizen from birth”) be subject to taxation as a Canadian resident. What does this mean? Are you actually required to live in Canada?
What are the rules for determining whether one is “taxed as a resident of Canada”?
This could be considered from each of a “U.S.” and a “Canadian” perspective.
“Resident in Canada” for tax purposes – from a Canadian Perspective


 
Living in Canada would be a “sufficient condition” for being subject to taxation as a Canadian resident (all Canadian residents pay tax).
Living in Canada may not be a “necessary condition” for being subject to taxation as a Canadian resident.
In other words, one could be treated as a “tax resident of Canada” without actually living in Canada. It seems clear that this is an issue that is decided on a “case by case” basis. That said, incredibly:
There are situations where one would want to be subject to taxation as a Canadian resident.
Here is information from the Canadian Revenue Agency (current as of the date of this post WHICH IS SUBJECT TO  CHANGE).
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Why the S. 877A(g)(1)(B) "dual citizen exemption" encourages dual citizens from birth to remain US citizens and others (except @SenTedCruz) to renounce

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Introduction – The S. 877A(g)(b)(B) “born a dual citizen” defense to being a “covered expatriate”

2023 Update: Introduction and summary

“Covered expatriates” are (1) subject to the 877A Exit tax and (2) subject to the 2501 “Covered Gift” problem. U.S. citizenship taxation makes the 877A Exit tax particularly brutal for Americans abroad – possibly resulting in the confiscation of their non-US pensions. But, “citizenship” is also used to create an exemption to “covered expatriate” status for those who meet the dual citizenship requirements found in Internal Revenue Code 877A.

Former U.K. Prime Minister Boris Johnson was a dual American/British citizen from birth. His renunciation of U.S. citizenship is a public record. I suspect that he was able to avoid “covered expatriate” status by using the dual citizenship from birth exemption.

Let’s start with the text of Internal Revenue Code 877A

(g) Definitions and special rules relating to expatriation For purposes of this section—

(1) Covered expatriate
(A) In general

The term “covered expatriate” means an expatriate who meets the requirements of subparagraph (A), (B), or (C) of section 877(a)(2).

(B) Exceptions An individual shall not be treated as meeting the requirements of subparagraph (A) or (B) of section 877(a)(2) if—
(i) the individual—
(I) became at birth a citizen of the United States and a citizen of another country and, as of the expatriation date, continues to be a citizen of, and is taxed as a resident of, such other country, and
(II) has been a resident of the United States (as defined in section 7701(b)(1)(A)(ii)) for not more than 10 taxable years during the 15-taxable year period ending with the taxable year during which the expatriation date occurs,

Think about it:

U.S. citizenship taxation means that the circumstances of one’s birth determine the outcome of one’s life (as long as one remains a U.S. citizen).

Citizenship-based non-taxation and the new “caste” system of American citizenship

The dual citizen exemption to the Exit Tax is a form of citizenship-based “non-taxation”. The dual citizenship exemption to the Exit Tax has created a “preferred class” of U.S. citizens which is in effect a modern day “caste” system of citizenship.

The “Gift” of dual citizenship from birth

Multiple citizenships are generally a benefit. Because of U.S. citizenship taxation, those U.S. citizens who are “dual citizens” from birth have a “preferred” kind of U.S. citizenship. They are always able to avoid “covered expatriate status” and the associated difficulties.

Four possible ways of acquiring “dual citizenship” at birth (and there may be more):

1. Citizenship of parent: A child may be born a dual citizen by being born in the United States to a parent who is a citizen of another country. For example, a child born in the US to a Canadian citizen parent would be a dual citizen from birth.

2. Ancestry: This is based on the family lineage. Commonly associated with Ireland and Italy. The issue here is whether the citizenship is automatic at birth or is dependent on a later registration. There is a difference between automatic citizenship at birth and the right to a citizenship.

3. Child born abroad to U.S. parent(s): For example, some U.S. citizens see the value of having their children born in Mexico (a country that confers citizenship at birth).

4. Surrogacy: This is a new and interesting topic.

Note that these four ways can overlap.

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The $2350 "relinquishment fee" does NOT mean that people should simply renounce citizenship

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On September 6, 2015 it was reported on the Isaac Brock Society that the State Department intended to begin charging $2350 for both “relinquishments” and “renunciations”. The proposed rule is to be published on  September 8, 2015. With respect to “relinquishments” the Federal Register states:

The Department is expanding the application of and renaming item 8 in the Schedule of Fees to “Administrative Processing of Request for Certificate of Loss of Nationality.” The fee will be applied to cover not only services to U.S. nationals (i.e., U.S. citizens and non-citizen nationals) who relinquish nationality by taking the oath of renunciation under 8 U.S.C. 1481(a)(5), but also to cover services to U.S. nationals who relinquish nationality under 8 U.S.C. 1481(a)(1) to 1481(a)(4) or any earlier-in-time relinquishment statutes administered by the Department of State and request a Certificate of Loss of Nationality. Currently, the fee is paid by those taking the oath of renunciation under 8 U.S.C. 1481(a)(5) at the time the oath is sworn. The fee would be collected from an individual claiming to have relinquished nationality at the time that person requests the Certificate of Loss of Nationality (that is, after completing Form DS-4079 and signing before a consular officer Part II of Form DS-4079 entitled “Statement of Voluntary Relinquishment of U.S. Citizenship”). The Fiscal Year 2012 Cost of Service Model update demonstrated that documenting a U.S. national’s relinquishment of nationality is extremely costly whether the service is for a relinquishment under 8 U.S.C. 1481(a)(1) to 1481(a)(4) or a relinquishment by renunciation under 8 U.S.C. 1481(a)(5). Both require American consular officers overseas to spend substantial amounts of time to accept, process, and adjudicate cases. The cost of the service is not limited to the time consular officers spend with individuals prior to and at appointments. The application is reviewed both overseas and domestically to ensure full compliance with the law. The consular officer must determine that the individual is indeed a U.S. national, advise the individual on the consequences of loss of nationality, and ensure that the individual fully understands the consequences of loss, including the inability to reside in the United States unless properly documented as an alien. Through documentary review, consideration of the individual’s circumstances, and careful interviewing, the consular officer also must determine whether the individual is seeking loss of nationality voluntarily and with the requisite intent, as required by U.S. Supreme Court case law and by statute (8 U.S.C. 1481). This determination can be especially demanding in the case of minors or individuals with a developmental disability or mental illness.

The consular officer must also ensure that the commission of an expatriating act was as prescribed by statute, which is often an issue in non-renunciation relinquishment cases. The loss of nationality service must be documented on several forms and in consular systems as well as in a memorandum from the consular officer to the Department’s Directorate of Overseas Citizens Services in Washington, DC (“OCS”), in the Bureau of Consular Affairs. All forms and memoranda are closely reviewed in OCS by a country officer and a senior approving officer, and may include consultation with legal advisers. This review entails close examination of whether the requirements of voluntariness and intent are satisfied in the individual case. Some applications require multiple rounds of correspondence between post and the Department. The final approval of the loss of nationality must be done by law within the Department (8 U.S.C. 1501), by OCS, after which the case is returned to the consular officer overseas for final delivery of the Certificate of Loss of Nationality to the individual. In addition, every individual issued a Certificate of Loss of Nationality is advised of the possibility of seeking a future Administrative Review of the loss of nationality, a time-consuming process that is conducted by OCS’s Office of Legal Affairs.

Currently, nationals who renounce nationality pay a fee of $2,350, while nationals who apply for documentation of relinquishment of nationality by the voluntary commission of an expatriating act with the intention to lose nationality, do not pay a fee. However the services performed in both situations are similar, requiring close and detailed case-by-case review of the factors involved in a request for a Certificate of Loss of Nationality, and both result in similar costs to the Department.

In the past, individuals seldom requested Certificates of Loss of Nationality from the Department to document relinquishment. Although the Department was aware that an individual relinquishment service was among the most time consuming of consular services, it was rarely performed so the overall cost to the Department was low and the Department did not establish a fee. Requests for a Certificate of Loss of Nationality on the basis of a non-renunciatory relinquishment have increased significantly in recent years, and the Department expects the number to grow in the future, causing the total cost of this service to increase. At the same time, the Department funds consular services completely from user fees. The Cost of Service Model continues to demonstrate that such costs are incurred by the Department when accepting, processing, and adjudicating relinquishment of nationality cases; therefore, the Department will collect a fee from all individuals seeking a Certificate of Loss of Nationality. Taking into account the costs of both renunciation and non-renunciation relinquishment processes, the fee will be $2,350.

The fee will take effect on November 9, 2015. I have been aware of this impending fee increase for some time. Hence, it comes as no surprise. Furthermore, if you accept the validity of the $2350 fee for renunciations then a similar fee for “relinquishments” is justifiable.

There has been and continues to be extensive discussion of this increase. What does it mean? Why now? Is this to discourage “relinquishments”? What does this say about the character of the U.S. Government?  At a bare minimum, the fee increase is a continuation of a pattern of abuse of Americans abroad. That said …
The purpose of this post is to comment on a question asked by, USXCanada, who is a long time (I believe) blogger at the Isaac Brock Canada. He or she includes an interesting question in this comment:

The best thing about the utterly predictable extension of the $2350 fee to relinquishers?
Not having to endure any more speculations about the convoluted retroactive possibilities for exhuming prehistoric personal intentions to lose U.S. citizenship – especially by extraterritorials who did any such thing as (1) hold a U.S. passport (2) vote in a U.S. election (3) file any U.S. taxes (4) work a week as a temp janitor for a non-U.S. municipality.
How about a Brock contest to see who can do closest guess on (1) when the current fee next increases? (2) how much it goes up by? Here’s mine: September 2016 to a round $3000. Further out? At least $6000 by September 2020.
Off-the-top-of-the-head question:  Is there now any circumstance at all where an exiter will prefer to seek relinquishment because the morass of rules confers some benefit that would be lost through renunciation? (PS – Staying off the name-and-shame list is NOT one.)

The answer is yes! The “relinquishment fee” is an irritation but it is NOT a reason to simply default into a “renunciation”. Now, I am writing this post quickly and I invite others to add their thoughts. But, here are categories  of reasons why those who believe that they have validly relinquished U.S. citizenship, under U.S. law, should insist on a CLN based on a relinquishment.
Category 1 – For at least “citizenship purposes” the relinquishment date is always prior to the renunciation date.
Category 2 – The difference in treatment under other U.S. laws between “renunciations” and other forms of relinquishment.
Let’s examine each category.
 
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Relinquish or renounce U.S. citizenship – The course

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[youtube https://www.youtube.com/watch?v=uOjdP7sAN6Y&w=560&h=315]

U.S. Citizenship – Where taxation and citizenship intersect

“Relinquish or renounce U.S. citizenship – The Course”
What: Relinquish or Renounce U.S. Citizenship – The Course
Who: John Richardson – Toronto Lawyer – Specializing in “solving the problems of U.S. citizenship” and the relinquishment of U.S. citizenship
When:
Toronto, Canada – Saturday October 1/16 – 10:00 a.m. – 3:00 p.m.
Where: Toronto Downtown – Exact address TBA
Cost: $500 per attendee plus taxes
Enrollment limited to 10 participants!
Why would you participate in this seminar?
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Interview with GordonTLong.com – Citizenship based taxation, PFIC, the S. 877A Exit Tax and #Americansabroad

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On May 22, 2015 I was interviewed by Gordon T. Long. There is NO way to discuss U.S. “citizenship taxation” (which is primarily “place of birth taxation”) without discussing the S. 877A Exit Tax rules. During the month of April 2015, I wrote a 14 part series on “How the S.877A rules affect Americans abroad“. The interview with Mr. Long serves as a good reminder (or if you don’t want to read the posts) on:
– what it means to be a “covered expatriate”
– how the U.S. S. 877A “Exit Tax” rules operate to impose punitive “taxation” on non U.S. pensions (See the actual scenarios of how the Exit Tax applies to various individuals including those with a non-U.S. pension.

– more
This topic is of extreme important to anybody with a U.S. place of birth. Those with a “U.S. place of birth” begin life as a U.S. citizen. Therefore, those born in the U.S. are in effect:

“U.S. Taxpayers by birth”.

The U.S. is using FATCA to search the U.S. for people who were “born in the USA” to bring them into the U.S. tax system. More and more people are receiving “The FATCA Letter“.

This interview with Mr. Long really should be included as part of the “Exit Tax” series.
Therefore, I have designated my interview with Mr. Long to be:
Part 15 of the Exit Tax Series.
As a reminder this series of “S. 877A Exit Tax Posts” includes:
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 is the “Exit Tax”  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 – “Why 2015 is a good year for many Americans abroad to relinquish U.S. citizenship – It’s the exchange rate”
Part 8 – April 8, 2015 – “The U.S. “Exit Tax vs. Canada’s Departure Tax – Understanding the difference between citizenship taxation and residence taxation”
Part 9 – April 9, 2015 – “For #Americansabroad: US “citizenship taxation” is “death by a thousand cuts, but the S. 877A Exit Tax is “death by the guillotine””
Part 10 – April 10, 2015 – “The S. 877A Exit Tax and possible relief under the Canada U.S. Tax Treaty”
Part 11 – April 11, 2015 – “S. 2801 of the Internal Revenue Code is NOT a S. 877A “Exit Tax”, but a punishment for the “sins of the father (relinquishment)”
Part 12 – April 12, 2015 – “The two kinds of U.S. citizenship: Citizenship for “immigration and nationality” and citizenship for  “taxation” – Are we taxed because we are citizens or are we citizens because we are taxed?”
Part 13 – April 13, 2015 – “I relinquished U.S. citizenship many years ago. Could I still have U.S. tax citizenship?”
Part 14 – April 14, 2015 – “Leaving the U.S. tax system – renounce or relinquish U.S. citizenship, What’s the difference?”
Part 15 – May 22, 2015 – “Interview with GordonTLong.com – “Citizenship taxation”, the S. 877A Exit Tax, PFICs and Americans abroad”
 
 

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Part 10 – The S. 877A "Exit Tax" and possible treaty relief under the Canada US Tax Treaty

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Introduction – The Canada U.S. Tax Treaty Does Not Always Prevent Double Taxation


When countries independently make major changes in tax law, double taxation can occur
The following comment from 5thSwiss on the Isaac Brock Society site explains why and how double taxation can be a reality. It also underscores the dangers of a U.S. citizen leaving the United States.

It’s not obvious that renunciation of citizenship will cure failure to report in the past, or forgive unpaid tax. (“a ‘disposition’ of PFIC shares can occur by redeeming them, selling them, gifting them away, or even by giving up one’s US resident status or citizenship”)
The increasingly complex, expensive and draconian US tax law as applied to “accidental” US Persons might be considered by some a “good thing”. The more draconian – disproportionate – tax laws and penalties become, the more costly it is for ordinary families living abroad to report and pay tax on concessionary funds (such as for minors and disabled dependents, and retirement and tax-sparing funds not envisaged in the relevant bilateral tax treaty) the more impossible of enforcement and outrageous in principle such unilateral and exorbitant laws are seen to be.
And the less likely it is that the country of residence of a noncompliant person deemed to be a US person will assist the USG in collecting tax, prosecuting an individual and pursuing others on the basis of “transferee liability”.
Canadians who faced double taxation of their inheritance in that decade after Canada moved to capital gains taxation of estates based on deemed sale at death vs US imposition of estate duty (there is now a credit of one against the other under a tax Protocol) will understand that individuals are cannon fodder for Governments, who when they negotiate tax treaties are mainly concerned with the interests of multinational firms as represented by lobbyists. It is no wonder that of the 6 million Americans said to be resident abroad (the State Department knows of only half of those), an increasing number, unable to pay for tax advice or preparation, for renunciation of citizenship or the incremental US tax itself, are simply remaining underground. A series of GAO reports has looked at this and found no solution. And, by and large, legislators and bureaucrats (including diplomats) don’t care.
For the time being, the Lord Mansfield Dictum protects. But the hostility towards tax evasion abroad translates into hostility to expatriates generally. That is not a good sign.

5thSwiss describes the creation of  “double taxation” after one country (in this Canada) moved from an Estate Tax to a deemed disposition of assets on death. We now have a problem of the U.S. creating a deemed disposition of assets on expatriation when Canada has no such tax. This is what happens when one country makes a major change to its tax system and the other does not. (In this case there is at a minimum a “timing mismatch” in the taxable event.)

The S. 877A “Exit Tax” and the Canada U.S. Tax Treaty
The primary purpose of this post is to explore whether the Canada U.S. Tax Treaty can be used to mitigate some or all of the effects of the “Exit Tax”. I don’t know the answer. Therefore, this post will “raise an important question”, but not “answer the important question raised”.
U.S. Tax Treaties 101 – The outline
I am also going to use this post to outline some VERY basic aspects of U.S. tax treaties.   There will  four parts to this post:
Part 1 – Tax Treaties and the U.S. Constitution
Part 2 – Tax Treaties and the “Savings Clause”
Part 3 – The S. 877A “Exit Tax” and possible treaty relief
Part 4 – The “Savings Clause” as an argument against “citizenship taxation”
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Part 7 – Why 2015 is a good year for many #Americansabroad to relinquish US citizenship – It's the "Exchange Rate"

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The purpose of my series of posts on the S. 877A “Exit Tax” has been to explain how the tax actually works. I have provided actual examples. The results have been enlightening and have demonstrated how arbitrary the results have been. In “Part 5” of this series you will find the actual examples and draft tax returns. I provided examples of how much the S. 877A “Exit Tax” could be. The examples were based on one consistent set of financial circumstances and demonstrated how that one set of financial circumstances would apply to five different people. We learned that there were wide variations in the amount of the “Exit Tax” payable. A person who was a “dual citizen” from birth may have paid on “Exit Tax” of $0.00. A person who was born ONLY a U.S. citizen might have paid as much as $365,000. (All amounts are in U.S. dollars.) But, wait the person was born a dual Canadian citizen, but was living in the UK when he renounced would pay an “Exit Tax” of $365,000.
Refreshing your memory
exittaxexamples
and
exit-tax
 
These visual reminders strongly suggest that …


As one commenter observed:

I find this to be a very important study. The inclusion of sample completed Forms 8854 and 1040s is really helpful to understanding how the exit tax can affect people differently. The unfairness of the exit tax under 877A and its dependence on accidents of birth, over which a person has no control, is breathtaking. The article makes a convincing case for calling the exit tax “evil”.

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

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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”

factsarestubbornthings
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 …
exit-tax
 
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”