Canada: Planning For U.S. Expatriation – The Ins And Outs Of IRC 877A

Last Updated: June 13 2016
Article by Todd King

The past several years have been a wild ride for many U.S. taxpayers (and tax practitioners), in particular for those residing outside of the country. While there are a surprising number of U.S. persons still grappling with becoming compliant, in general, the progression to considering expatriation has been somewhat predictable, as follows:

  • Get compliant – Countless American citizens and green card-holders residing in Canada have been scrambling to become compliant with what, even in seemingly straightforward situations, can be an extremely complicated U.S. foreign reporting regime. The U.S. tax treatment of Canadian mutual funds, Canadian-registered education savings plans and Canadian tax-free savings accounts (to name a few) can result in significant complexity and, sometimes, a U.S. tax cost.
  • Revisit tax and estate planning – Once compliant, the real fun begins. Even "plain vanilla" Canadian tax and estate planning structures (e.g. professional corporations, family trusts, alter-ego trusts, etc.) can have significant adverse U.S. tax implications and, at the very least, substantial tax compliance requirements. Every corporation or trust added to a corporate structure compounds the level of complexity and the associated reporting requirements.
  • Consider expatriation – For certain U.S. taxpayers residing in Canada, mostly those without significant historical, philosophical, personal or economic ties to the United States, the possibility of shedding all of the above-noted complexity by expatriating can sound very attractive.

It comes as no surprise that the number of Americans renouncing citizenship increased by 20 per cent in 2015 to about 4,300 persons. This number may be deceptively low since, in many cities, it can take months to get an appointment at the U.S. consulate. This is in spite of the fact that the U.S. has increased the fee for processing renunciations by 422% to $2,350.

Not so fast! The basics of the U.S. expatriation rules (IRC 877A)

While expatriation (i.e. giving up your U.S. citizenship or green card) seems like an easy "fix" to the compounding complexity of cross-border tax and estate planning and compliance, there can be real, immediate and significant tax implications to renouncing citizenship or relinquishing your green card. All U.S. taxpayers considering expatriation should carefully consider the U.S. expatriation rules (IRC 877A) since they are easy to be subject to and can have dire U.S. tax implications.

Who do the rules apply to?

The U.S. expatriation rules apply to a "covered expatriate;" someone who expatriates and meets any of three objective tests:

  1. Net Worth Test – The taxpayer has a net worth at the time of expatriation in excess of US$2 million.
  2. Tax Liability Test – The taxpayer has an average annual U.S. income tax liability in excess of US$161,000.
  3. Compliance Test – The taxpayer fails to certify on form 8854 that he or she has complied with all U.S. federal tax obligations for the five years preceding the year of expatriation.

Exemptions from the Net Worth Test and Tax Liability Test may apply for certain individuals, namely those born with dual citizenship and individuals who expatriate prior to turning 18.5 years of age. Both exceptions require the individual to have resided outside of the U.S. for a certain period of time prior to expatriation.

For the wealthy, US$2 million is a very low threshold. This combined with the severe implications (below) make these rules a significant deterrent. For the unwary, even with modest means, these rules can have significant and adverse consequences.

What are the implications?

In terms of implications, covered expatriates are subject to a set of rules similar, at least in part, to Canadian departure tax rules; however, they are much more severe and punitive. The basic implications are as follows:

  1. Exit tax – The taxpayer will be subject to immediate taxation of all unrealized gains and income (however, the first US$693,000 of gain is exempt). Special rules apply to deferred compensation, certain "specified" tax-deferred accounts and interests in foreign non-grantor trusts.
  2. Transfer tax – Any future transfers by the taxpayer to U.S. persons (while living or as a consequence of death) are subject to transfer tax at a rate equal to the maximum U.S. estate/gift tax rate of 40 per cent. Note that this tax is levied on the recipient of the gift or bequest.

What can I do?

There are some basic planning techniques we can use to avoid the application of the U.S. expatriation rules:

Confirm your U.S. status

It seems obvious; however, we have had many situations where clients thought they were U.S. taxpayers but, upon further consultation with immigration counsel, were determined not to be. U.S. immigration attorneys are well versed in the rules and should be able to confirm with relative certainty whether you are a U.S. citizen or green card-holder.

Timing your expatriation

Asset values and foreign currency rates can fluctuate wildly, and the net worth threshold is denominated in U.S. dollars. Since the greenback is relatively strong against the Canadian dollar, now may be a good time to consider expatriation.

If you are a green card-holder, it may also be possible to time your expatriation to avoid long-term resident status, which is an additional prerequisite to covered expatriate status for green card-holders. Long-term residents are green card-holders who are taxed as U.S. residents in at least eight of the 15 years preceding expatriation.

Give it away

While U.S. citizens and domiciliaries are subject to U.S. gift tax on worldwide assets, the lifetime estate/gift tax exemption is relatively generous at US$5.45 million. Also, one can gift up to US$148,000 to a non-citizen spouse without using up any unified credit. It may be possible to gift some or all of your assets to bring your net worth below the US$2 million threshold. Naturally, you would need to analyze both Canadian and U.S. tax (and non-tax) implications before considering such a strategy.

If you are a green card-holder residing in Canada, you may not be subject to U.S. estate and gift tax rules on your worldwide assets. This is because only U.S. citizens and domiciliaries are subject to U.S. estate and gift tax on their worldwide assets. To that end, one may be able to gift assets in excess of the exemption amount without incurring gift tax.

Finally, even if you cannot bring your net worth below the US$2 million threshold, you may be able to lessen the impact of the mark-to-market rules by gifting appreciated assets to another person, such as your spouse.

Align Canadian taxation

While not an ideal scenario, if covered expatriate status is inevitable and U.S. tax is going to be triggered by the expatriation rules, you should, at the very least, align Canadian tax to avoid the potential of double taxation in the future. This could be done by triggering actual realizations prior to expatriation or by utilizing preferential provisions in the tax treaty that would have a similar effect.

Above all else...Get help!

Cross-border tax planning can be very complex and rife with risk and uncertainty. To that end, any U.S. taxpayers considering expatriation should seek the help of advisors who are well versed in this specialized area of taxation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Todd King
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions