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US Citizens and Expatriation

U.S. citizens, including dual Canadian/U.S. citizens, may want to know more about how to expatriate from their U.S. citizenship. Approximately 5600 former Americans have renounced in the last four years, coinciding with an increased general awareness of tax compliance requirements for U.S. citizens worldwide.

In this blog, we discuss what expatriation is, the general process for formal renunciation of U.S. citizenship, and some of the consequences of a decision to expatriate. But beware: giving up U.S. citizenship also results in giving up certain rights to freedom of movement, residence and employment in the U.S., and that after expatriation, certain obligations of U.S. citizenship, including tax compliance and military service may still continue. Importantly, under the current law former U.S. citizens who are found to have renounced their citizenship primarily to avoid U.S. tax can be denied entry into the U.S.

There are several ways to expatriate from U.S. citizenship:

• Obtaining naturalization in another country;

• Serving in certain army or government positions of another country;

• Formal renunciation; or

• A conviction for treason.

These actions must be done freely, with intention to give up citizenship.

A U.S. citizen may formally renounce citizenship before a diplomatic officer abroad, and sign an oath of renunciation. Adults and certain mature minors may renounce. Renunciation of U.S. citizenship is generally irrevocable, and a person renouncing U.S. citizenship who is not also a citizen of another country can become stateless, without certain protections and rights.

A 2008 U.S. Act introduced new tax rules for certain persons expatriating from U.S. citizenship (“Covered Individuals”), and is a substantial change from the prior regime.

A “Covered Individual” includes a former U.S. citizen who on expatriation meets an income test, an asset test, or fails to certify that he or she has complied with all U.S. federal tax obligations, all for the five years immediately before expatriation. The income test requires an average annual U.S. income tax liability above approximately $155,000.00 (U.S.) for 2013, and the asset test requires a net worth of $2 Million (U.S.) or greater. An exception from being taxed as a Covered Individual may be available to a dual Canadian/U.S. citizen from birth, who remains a Canadian citizen and tax resident. Another exception may be available for a person renouncing U.S. citizenship before age eighteen-and-a-half.

The U.S. taxing authority levies an exit tax on unrealized gains in a Covered Individual’s property. The property included is similar to one’s worldwide estate, and is considered to have been sold the day before expatriation. Gains exceeding a threshold amount are taxed as income.

The consequences for settlors or beneficiaries of trusts who expatriate can be complex and must be carefully considered. After expatriation there is a transfer (gift or estate) tax payable by the beneficiary on gifts or bequests received by a U.S. citizen or resident from a Covered Individual, and the beneficiaries of an expatriate’s estate can remain liable for U.S. estate tax.

If you wish to consider renouncing your U.S. citizenship it is important to consider all of the consequences, financial and otherwise; for example, whether your work or family obligations will require travel to the U.S., or whether you hope to reside or retire there. It is important to consider that there may be ways other than renunciation to deal with your situation, and to seek U.S. professional advice based on your individual situation.

Don’t miss our next blog about your freedom to plan your estate as you wish and the limits on that freedom.

The comments offered in this article are meant to be general in nature, are limited to the law of Ontario, Canada, and are not intended to provide legal or tax advice on any individual situation. In particular, they are not intended to provide U.S. legal or tax advice. Before taking any action involving your individual situation, you should seek legal advice to ensure it is appropriate to your personal circumstances.