Living in Canada? What to Expect After You Made a Decision to Renounce Your U.S. Citizenship
With the U.S. tax season underway, U.S. expats have to once again grapple with complexities surrounding U.S. tax filings and potential double taxation.
American citizens and green card holders living in Canada or anywhere else in the world are still required to file their U.S. tax returns in addition to any filings mandated by their country of residence. In some cases, they also owe additional U.S. tax, even if they reside in such high tax jurisdiction as Canada.
This is because the United States is one of the few countries in the world that levies tax based on citizenship and not residence, meaning its citizens and green card holders have to report their worldwide income to the IRS regardless of where they live or how long they’ve lived there.
Now you might have considered renouncing your U.S. citizenship and may be wondering what to expect after the renunciation process. You may also have questions on how to go about renouncing your U.S. citizenship and what key factors you need to consider to avoid any adverse consequences in the future. In this article, we outline at a high level the “new tax world” that is expecting you after you renounced your U.S. citizenship and how you can go about renouncing your U.S. citizenship in a hassle-free manner.
A Strong Case For Renouncing Your U.S. Citizenship – And It’s Not Taxes!
Giving up your citizenship is a very important decision. Once you renounced your U.S. citizenship, you won’t be able to get it back – as such, that action is also irrevocable and permanent.
Each dual Canadian/U.S. citizen should very carefully think about their reasons for renouncing their U.S. citizenship and consider all pros and cons of such a decision. For example, if you lived all your life in Canada and do not have any allegiance to the United States, you may want to simplify your life and have a freedom of choice when it comes to your life in Canada (for example, you can start making investments or own a business irrespective of U.S. anti-deferral tax regimes, such as Passive Foreign Investment Company (PFIC) or Subpart F). By the same token, all of this hassle may be worth for you if you wanted to work in the United States – moving freely between the Canada/U.S. border and working any time you want may be an appealing reason for you to keep your U.S. citizenship.
But, let’s face it – taxes are an important part of the decision-making process. After all, paying more tax, having excruciating reporting obligations and, on top of that, paying five times more for your tax return preparation than any Canadian may be daunting and is quite burdensome. Even then, we would strongly recommend that you set the taxes aside when you are deciding on whether to renounce your U.S. citizenship. Taxes may be high and frustrating, but they can be managed. You should not be making the decision to give up your U.S. citizenship solely due to the tax reasons.
If you did decide to renounce your U.S. citizenship, you should make sure that you do it right and are not prevented your entry into the United States in the future because you may have been found to have renounced your U.S. citizenship due to tax avoidance motives. Before you even start, make sure you have another country’s citizenship – you cannot renounce, unless you are a dual citizen. You should also carefully review your facts with a qualified U.S. tax advisor to ensure that you are not considered a “covered expatriate” and as such are not subject to the U.S. exit tax. Alternatively, if you may be considered a “covered expatriate”, you should review any potential planning opportunities to qualify for applicable exit tax exemption.
What to Expect Once You Renounced Your U.S. Citizenship?
First of all, now you are just a Canadian! That means that your travel to the United States is subject to U.S. immigration law restrictions for foreign nationals. As such, you generally should be able to stay in the United States up to 6 months under your existing and valid Canadian passport, without any additional steps to extend your stay. The Canadian passport has an embedded B1/B2 visa that generally allows a Canadian to travel to the United States for pleasure and as a business visitor. Please remember, those U.S. visas do not provide any work authorization. As such, you should not be doing any work in the United States, unless you obtain a proper U.S. work visa.
If you did everything right, you should not be prevented an entry to the United States, as a general proposition. But you will be subject to the discretion of the border officer who may prevent your entry as they could for any foreign national.
Reduced/Eliminated Tax Filing and Reporting Requirements to the IRS
After you renounced your U.S. citizenship, you will be subject to U.S. tax only on your U.S. source income or income effectively connected with a U.S. trade or business (in other words, on income that you received or that is attributable to the performance of services while physically present in the United States).
You no longer will have Form FinCEN 114 (Report of Foreign Bank and Financial Accounts) disclosure requirements. Whew!!!
In addition, you won’t need to talk to a U.S. tax advisor before you enter into any transaction in Canada, unless it has some connection with the United States (for example, if you were to sell your U.S. real property, you would need to understand applicable U.S. tax consequences).
Reduced Annual Tax Compliance Costs
You will now pay much less in tax return preparation fees and professional fees of U.S. tax advisors.
Protected From of the Complexity and Constantly Changing U.S. Tax Law
Staying compliant with complex U.S. tax law and Canadian tax law is challenging enough.
Repeated pleas from U.S. expat councils to Congress have fallen on deaf ears as it refused to create a residence-based taxation system for expats, including, more recently, as part of the comprehensive December 2017 tax reform.
The Tax Cuts and Jobs Act of 2017 (popular name of the bill) was one of the biggest overhauls of the Internal Revenue Code in three decades, however, it made matters even trickier for expats. Congress levied a one-time transition tax on U.S. Shareholders of certain non-U.S. corporations. IRC Section 965 imposed a one time tax on positive accumulated earnings and profits of certain non-U.S. corporations that in many cases resulted in double taxation for U.S. individual shareholders.
Congress also enacted the Global Intangible Low-Tax Income (GILTI) tax which effectively removed any possible tax deferral in Controlled Foreign Corporations (CFCs) – non-U.S. corporations where U.S. Shareholders own more than 50 percent by vote or value. Starting from the 2018 tax year, a U.S. Shareholder for these purposes is generally defined as any U.S. person who owns at least 10 percent of the non-U.S. corporation (by vote or value). Both these changes prove to be quite costly for U.S. citizens and green card holders who own non-U.S. businesses.
Changes like these in the tax code, combined with the unwillingness (based on past trends) of U.S. lawmakers to provide tax relief to U.S. citizens living abroad, make a strong case for U.S. citizenship renunciation for many dual Canadian/U.S. citizens.
Tax season is ongoing! Contact our team today to set your tax affairs in order and make a timely decision that bodes well for your financial future.
Reduced/Eliminated U.S. Estate and Gift Tax
U.S. citizens will find that their worldwide assets are also subject to the U.S. estate tax. If such individuals were to renounce their U.S. citizenship, assuming they do not fall under the specific resident category that is subject to U.S. estate and gift taxes, they will not have to pay U.S. estate tax on their worldwide assets upon their death, but limit that exposure, with limited exceptions, primarily on U.S. situs assets.
No More Double Taxation on Canadian Transactions
Most U.S. citizens and green card holders residing in Canada do not owe any U.S. tax as they can claim a foreign tax credit for taxes paid in Canada (and Canadian individual income tax rate is higher than the maximum U.S. tax rate imposed on individual taxpayers). But this isn’t the case for every expat.
There are several provisions in the Canadian and U.S. tax codes that may lead to double taxation for U.S. citizens and green card holders, even after they’ve taken advantage of the relief provided by the Canada U.S. income tax treaty. Additional U.S. tax is usually owed due to the difference in the timing of income inclusion, type of income rules, or additional complications.
For instance, the Canadian government does not levy a capital gains tax on the sale of a principal residence, while the U.S. allows only a $250,000 USD exclusion on these gains. Other scenarios where a dual Canadian/U.S. citizen might owe U.S. tax is if they paid a reduced or no Canadian tax on estate freezes, gambling or lottery winnings, capital dividends, specific charitable contributions, and so on. In addition, the U.S. imposes a Net Investment Income Tax (NIIT) of 3.8 percent that is not creditable in Canada and results in additional U.S. tax owed by U.S. citizens and green card holders.
How Should You Go About Renouncing Your U.S. Citizenship
If you decided to renounce your U.S. citizenship, you should first ensure that you have another country’s citizenship, as noted above.
Next, you should make sure that you are fully U.S. tax compliant for at least last five years. If you are delinquent with U.S. taxes, you should review IRS Amnesty Programs available to delinquent U.S. taxpayers and become compliant. You should consult with a qualified U.S. tax advisor prior to taking any steps, as the process is more challenging than what it appears to be. You should also fix any U.S. tax noncompliance as soon as possible, while the IRS still have the amnesty programs open and allows delinquent taxpayers to come forward voluntarily without penalties.
You can visit the website of U.S. Embassy in Canada to review all relevant information on U.S. citizenship renunciation: (here)
Once you followed the instructions, completed all the documents, and requested the appointment at the U.S. consulate of your choice, you would be advised when your appointment is scheduled. You can work with a qualified U.S. tax advisor who can assist you with the renunciation process or do it on your own.
The next step to renouncing your citizenship is to appear at the U.S. Embassy or Consulate General to take your oath of renunciation and have the exit interview. You will then be issued a Certificate of Loss of Nationality (COLN). Please note that your expatriation date is the date when you appeared before the consular officer and took the oath. Bear in mind, you still have to file a partial return to the IRS for that year; from Jan 1 to the date of renunciation.
Once you have the COLN, you should no longer have reporting or filing obligations to the IRS past the date of renunciation.
The final step in your U.S. citizenship renunciation process is to file your last U.S. tax return and Form 8854, Initial and Annual Expatriation Statement.
Need Help Making a Decision? Come to talk to a Trusted U.S. Tax Advisor!
U.S. Tax IQ provides individuals with smart and strategic tax advice to plan their taxes based on cross-border tax realities and the ever-fluctuating nature of the tax landscape.
We will examine the nuances of your case and advise you on whether or not renouncing your U.S. citizenship is the best course of action, and, if not, what other avenues you have at your disposal to legally reduce your tax burden while still staying compliant in both countries. Our team of U.S. tax attorney and CPAs is perfectly suited to address all aspects of relevant tax considerations and implications. If you do decide to renounce, our experienced advisors can walk you through the process and leave
nothing to chance.