It appears that many Canadians may be U.S. citizens. Recent legislation exacerbates the tax consequences of surrendering such dual nationality.
The United States imposes its income tax on three bases: on income having a U.S. source, on the U.S. residence of the taxpayer, or on the U.S. citizenship of the taxpayer. The Internal Revenue Code1 is quite detailed in its definitions of U.S. residence and U.S. source income, but it barely addresses the concept of citizenship. IRC reg. section 1.1-1(c) states that every person born or naturalized in the United States is a citizen, and refers to title 8 of the United States Code, "Aliens and Nationality," sections 1401-1409.
Recent tax legislation dealing with citizenship, particularly with the consequences of renouncing one's citizenship, has prompted numerous inquiries from clients concerning their U.S. citizenship status.2 The following article provides an outline of the rules regarding the acquisition and retention of U.S. citizenship and some issues that might arise.3
Curiously, the U.S. constitution originally did not define the term "citizen," the category of persons to whom its terms applied. Citizenship is granted under the 14th amendment to "[a]ll persons born or naturalized in the United States, and subject to the jurisdiction thereof."4 Additional means of acquiring citizenship are defined by statute, 8 USC section 1401, under which three general methods of obtaining citizenship are described: citizenship based on one's place of birth (jus soli), citizenship based on the citizenship of one's parents (jus sanguinus), and citizenship based on naturalization.5 The only source of jus sanguinus citizenship is the statute, which currently requires some U.S. presence of the citizen parent or parent. Therefore, citizenship based purely on parentage may not run for multiple generations outside the United States.
Also pursuant to statute, U.S. citizenship may be lost by certain prescribed specific acts of expatriation. As described in 8 USC section 1481(a) and listed inside U.S. passports, one may lose one's U.S. citizenship by performing any of the following acts:
1) being naturalized in a foreign state;
2) taking an oath, or making a declaration, to a foreign state;
3) performing certain service in the armed forces of a foreign state;
4) accepting employment with a foreign government; or
5) formally renouncing U.S. citizenship before a U.S. consular officer overseas.
However, judicial decisions have made it clear that because citizenship is a constitutionally protected right, the acts listed above must be undertaken with an intent to terminate one's U.S. citizenship.6 This requirement is now incorporated in the statute; in addition, 8 USC section 1481(b) places the burden of proof, by a preponderance of the evidence, on the party who asserts that a loss of citizenship occurred.
A particularly instructive case on what not to do if U.S. citizenship is not desired is United States v. Matheson.7 The court noted the unusual nature of the case, in which the government was asserting nationality rather than opposing it. The defendant was the executor of the estate of Dorothy Gould Burns, granddaughter of the legendary financier Jay Gould. Ms Burns was born in the United States, left for Europe at the age of 15, and never again resided in the United States. She married a Mexican national and applied for a certificate of Mexican nationality, which application contained the following statement:
I herewith formally declare my allegiance, obedience, and submission to the laws and authorities of the Republic of Mexico; I expressly renounce all protection foreign to said laws and authorities and any right which treaties or international law grant to foreigners, expressly furthermore agreeing not to invoke with respect to the Government of the Republic any right inherent in my nationality of origin.
After making this declaration, however, Ms Burns renewed her U.S. passport, filed U.S. tax returns,8 and as a U.S. citizen registered her yacht with the U.S. Coast Guard. The court held that Ms Burns never intended to relinquish U.S. nationality--the oath was merely an effort to obtain benefits of Mexican nationality and a promise not to call upon the protection of the U.S. nationality that she retained.
Mathesonis an easy case, in which a taxpayer extensively availed herself of the benefits of U.S. citizenship after the event which, her estate later claimed, had terminated her U.S. citizenship. However, the case does point out that the intent requirement can be interpreted quite broadly to find that citizenship exists. It is possible that a person, born abroad to one U.S. parent, could grow up unaware of his U.S. citizenship. After voting in, swearing allegiance to, and fighting for the country of his birth, he could theoretically be charged with failure to file U.S. income tax returns and to pay tax on all his income as a U.S. citizen. None of his actions could have terminated his citizenship, because one cannot intend to terminate something that one never knew existed.9
The situations in Matheson and the hypothetical are extremes, but they are instructive. The lesson to be learned is that it is not unusual for one to acquire citizenship of more than one country and that, if one does have multinational status, one should carefully consider both the burdens and benefits of citizenship in each country, and use caution in undertaking any acts to modify one's nationality.
1Internal Revenue Code of 1986, as amended (herein referred to as "IRC").
2See IRC section 877 ("Expatriation To Avoid Tax").
3We assume that most readers will be concerned primarily with the burdens of citizenship, particularly that of being taxed by the United States on all one's income. It should be kept in mind, however, that much of the interpretation of the statutes arises in the context of litigation in which the individual desires citizenship.
4United States constitution, amendment XIV, section 1. This rule was added in the aftermath of the Civil War, and clarified the status of freed slaves born in the United States.
5Section 1401 reads as follows:
The following shall be nationals and citizens of the United States at birth:
(a) a person born in the United States, and subject to the jurisdiction thereof;
(b) [Native Americans born in the United States;]
(c) a person born outside of the United States and its outlying possessions of parents both of whom are citizens of the United States and one of whom has had a residence in the United States or one of its outlying possessions, prior to the birth of such person;
(d) a person born outside of the United States and its outlying possessions of parents one of whom is a citizen of the Unites States who has been physically present in the United States or one of its outlying possessions for a continuous period of one year prior to the birth of such person, and the other of whom is a national, but not a citizen of the United States;
(e) a person born in an outlying possession of the United States of parents one of whom is a citizen of the United States who has been physically present in the United States or one of its outlying possessions for a continuous period of one year at any time prior to the birth of such person;
(f) [abandoned children found in the United States;]
(g) a person born outside the geographical limits of the United States and its outlying possessions of parents one of whom is an alien, and the other a citizen of the United States who, prior to the birth of such person, was physically present in the United States or its outlying possessions for a period or periods totaling not less than five years, at least two of which were after attaining the age of fourteen years...
(h) a person born before noon (Eastern Standard Time) May 24, 1934, outside the limits and jurisdiction of the United States of an alien father and a mother who is a citizen of the United States who, prior to the birth of such person, had resided in the United States.
6The rule that the specified acts must be done with the intent to revoke citizenship was originally developed in the case law, but is now included in the statute. 8 USC section 1481(a).
7532 F.2d 809 (2d Cir. 1976).
8Her income consisted primarily of interest on bonds that were exempt from tax in the United States, and she used her US citizenship to escape taxation in France under treaty.
9Of course, the United States would likely have difficulty enforcing its judgment, unless the individual owned property located in the United States.
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.