Section 2801 And The New Form 708 – How The IRS Will Now Be Scrutinizing US Expats And Their Families

Canada is home to well over one million US citizens, as well as many US Green Card holders. For varying reasons, many such dual citizens or Green Card holders who intend to remain in Canada consider renouncing their US citizenship or relinquishing their Green Cards. If you are a US citizen or Green Card holder residing in Canada and considering expatriation, it is important to understand the “covered expatriate” rules and the latest IRS enforcement tools. This article provides an overview of these rules, the risk of double taxation in the Canada-US cross border context, and the importance of preemptive planning prior to expatriation.

What is a Covered Expatriate?

As part of the HEART Act in 2008, Congress introduced Section 2801 of the Internal Revenue Code, which created a tax to a US recipient on the receipt of certain “covered gifts or bequests” from a “covered expatriate”. A “covered expatriate” is a former US citizen or long-term permanent resident (i.e. someone who held a Green Card for 8 out of the previous 15 years) who subsequently renounced their US citizenship or relinquished/abandoned their Green Card under certain circumstances after June 16, 2008. More particularly, such individual is a covered expatriate if at the time of renunciation/relinquishment he either: (a) had a net worth over $2,000,000 USD; (b) had an average income tax liability for the five years preceding expatriation exceeding $206,000 USD (adjusted annually for inflation); or (c) failed to certify under penalty of perjury that he has been tax compliant for the five years preceding the date of expatriation (such certification is made on Form 8854 Expatriation Statement in the year following expatriation).

What is a Covered Gift or Bequest?

Gifts or bequests received from a covered expatriate by a US person are deemed to be “covered gifts or bequests”. A covered gift or bequest includes property received directly or indirectly by gift from a covered expatriate, property received directly or indirectly by inheritance resulting from the death of a covered expatriate, and property received directly or indirectly through a trust settled or funded by a covered expatriate. The rate of tax owed on the receipt of a covered gift or bequest is equal to the value of the covered gift or bequest multiplied by the highest applicable estate tax rate under IRC Section 2001(c), which as of 2026 stands at 40%.

What are the new Regulations and Filing Requirements?

Notwithstanding the passing of Section 2801 in 2008, the IRS did not issue any proposed regulations providing guidance on the application of Section 2801 until 2015, and it was not until January 2025 that the IRS finalized the 2015 proposed regulations. With the finalizing of the Section 2801 Regulations (Treas. Reg. Section 28.2801-1) comes the introduction in January 2026 of IRS Form 708 – United States Return of Tax for Gifts and Bequests Received From Covered Expatriates. Prior to 2026, the IRS did not have a specific form for taxpayers to report the receipt of a covered gift or bequest and therefore lacked any enforcement mechanism relating to covered gifts or bequests. Instead, taxpayers would report the receipt of the covered gift or bequest on Form 3520, which does not include any question as to whether the gift or bequest was received directly or indirectly from a covered expatriate. By finalizing the Regulations and introducing Form 708, the IRS is now signaling its intention to more vigorously enforce the application of Section 2801.

Form 708 is due by the fifteenth day of the eighteenth month following the end of the calendar year in which the covered gift or bequest was received. For example, if the gift or bequest was received in 2026, Form 708 must be filed on or before June 15, 2028.

Is there a risk of double tax for Canadian residents who renounce/relinquish their US citizenship or Green Cards?

When a Canadian resident taxpayer passes away, there is a deemed disposition of his assets on the day prior to his passing, and a capital gains tax is owed on the decedent's final Canadian tax return. Additionally, the entire balance of certain registered accounts such as RRSPs and RRIFs are taxed as ordinary income.

If a Canadian resident covered expatriate passes away and leaves an inheritance to a US person beneficiary, the same income will be taxed twice; once in Canada on the deemed disposition, and again in the US under Section 2801 as a covered bequest. Most importantly, the Canada-US Tax Treaty, which is typically designed for the avoidance of double tax, has no provision for the avoidance of double tax in such a scenario. Article XXIX B(6) of the Treaty generally provides a Canadian resident decedent's estate with a credit for US estate tax paid against the Canadian tax on the deemed disposition. However, as the Section 2801 tax is not an estate tax, it is likely that no credit will be available under the Treaty. With the introduction of Form 708 and the IRS's increased scrutiny on covered expatriates, this becomes a real concern for Canadian expatriates.

Is there anything I can do proactively to avoid the application of Section 2801?

The most effective planning tool to avoid the application of Section 2801 is to avoid being a covered expatriate at the time of renunciation. Taxpayers who have not been fully tax compliant and cannot certify tax compliance can take advantage of the IRS' Streamlined Filing Procedures to come into compliance with their tax obligations in advance of expatriation. Note that the Streamline Filing Procedures generally require filing three years of previous tax returns as part of becoming compliant, while the expatriation regime requires the taxpayer to certify tax compliance for the five years preceding expatriation. This means that the taxpayer must continue to be compliant in the years following the Streamline leading up to expatriation.

Taxpayers who have a net worth over $2,000,000 USD can take advantage of the lifetime gift and estate tax exemption ($15,000,000 USD as of 2026) in order to gift away assets prior to renunciation without being subject to any gift tax in the US. For Canadian residents, this strategy is particularly effective in the context of a married couple with one non-US citizen spouse, as for Canadian tax purposes the gift to the non-US citizen spouse is not taxable. In the context of a gift to anyone other than a spouse (e.g. a child), this gift may be taxable in Canada and should therefore be structured carefully. Once the taxpayer has reduced his estate below the $2,000,000 threshold, he will no longer meet this net worth threshold on renunciation.

Green Card holders should pay special attention to the length of time which they have possessed the Green Card. If a Green Card holder intends to permanently reside in Canada, and he has not held the Green Card long enough to be considered a long-term permanent resident (i.e. eight out of the last fifteen years), he should be sure to formally relinquish the Green Card prior to becoming a long-term permanent resident.

This sounds quite complicated and the 40% tax is a heavy burden. Maybe I should just hold on to my US citizenship or Green Card?

While this is a reasonable reaction, there are many valid reasons for renouncing US citizenship or relinquishing a Green Card. Qualified cross-border counsel can simplify the expatriation process by providing advance guidance and planning tools to avoid or mitigate the application of Section 2801.

If you are a US citizen who is considering renouncing your US citizenship, or a Green Card holder who is considering relinquishing your Green Card, these rules may result in your family owing a significant amount of tax on receipt of any gifts during your lifetime or bequests on your passing. Reach out to Avi Guttman if you would like to discuss your potential expatriation and options for avoiding covered expatriate status.

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.