Beware the risks of renouncing your U.S. citizenship in Canada

Paul Gallant
Daily Brew

American citizenship comes with responsibilities—some of them expensive and time-consuming. Even dual citizens who live and work outside the country must file their tax paperwork or face fines starting at $10,000 and going up to 50 per cent of their assets.

But for Americans who want to break free of the country of their birth, it’s not simply a matter of saying goodbye to imperial measurement, Obamacare, American football and November Thanksgiving. Renouncing U.S. citizenship is fraught with risks. Missteps could get expats permanently barred from entering the U.S., cost them dearly or hurt their children’s future opportunities.

“What people are trying to do is simplify their affairs and cast off their U.S. filing obligations,” said Roy Berg, director of the U.S. tax law group at Calgary-based Moodys Gartner Tax Law. “But it’s easy to accidentally get offside and end up with a big mess.”

More and more Americans are cutting the cord. It’s usually not so much that they’re losing their faith in their homeland. The U.S. had always been unusual in taxing its citizens wherever they are in the world, and recent measures to beef up IRS enforcement on foreign-held assets have been the last straw for many Americans who have lived outside the U.S. for years or decades. The Federal Register shows that 3,415 Americans renounced their citizenship last year, though at least one expert suggests that’s probably a low-ball figure. That’s 15 times the number of renunciations in 2008, the year before the U.S. government started talking about introducing the Foreign Account Tax Compliance Act (FATCA).

Passed in 2010 and in effect in Canada since July 2014, FATCA requires foreign banks to report on the overseas finances of U.S. citizens. For some, it’s not merely a nuisance. Boris Johnson, mayor of London, England, controversially paid a six-figure U.S. tax bill earlier this year. Even though Johnson hasn’t lived in the U.S. since he was five years old, he was born in New York and is a dual citizen, and so was required to claim U.S. capital gains on the CAD$1.5 million profit he made selling his London home.

Though Johnson has threatened to renounce his U.S. citizenship, at this point, it could hurt him more than it helps him. The process can be a minefield. Americans who abandon their citizenship in order to avoid paying taxes face an especially harsh penalty.

“You can’t go back to the U.S. ever,” Berg said. Though the law is rarely enforced, it can still provoke awkwardness at the border.

Fortunately, avoiding the hassle of tax paperwork is not considered the same as avoiding paying taxes. But since applicants must do an interview before taking an oath of renunciation at an American embassy or consulate, they must be careful in how they present their case.

“Those exit interviews go all kinds of different ways depending on who you are,” Berg said.

Still, most expat Americans don’t owe money because treaties allow them to pay taxes to their country of residence instead. But they must file all the forms annually. Messing up here can cost dearly as they must show they’ve been compliant with the tax laws for the previous five years and pay off any outstanding balance. Failing to do so can trigger an exit tax. Introduced in 2008, it can be close to 40 per cent of all assets for high income earners. Renouncers worth more than U.S.$2 million may have to pay the exit tax regardless, while there are exceptions for some dual citizens including dual Canadian citizens.

Confusing enough, but many expat Americans may not even understand their citizenship status. The laws have changes a lot since the 1960s, when desertion or voting in a foreign election would automatically revoke a person’s U.S. citizenship. And it’s still possible for American-born people who have lived abroad for a long time to argue that they relinquished their citizenship at the time they left the country. In those cases, they shouldn’t have to pay back taxes or the renunciation fee, which this year jumped to U.S.$2,350 from U.S.$450—about 20 times higher than the fee charged by other rich countries. But many activities disqualify them from this easier exit.

“I have to make sure people haven’t done anything inconsistent with their claim that they lost their nationality when they became Canadian,” says Blair Hodgman, an immigration lawyer with Allen and Hodgman in Mahone Bay, Nova Scotia. Many expat Americans call the picturesque town home.

“If they voted in a U.S. election, got a U.S. passport or registered a child that was born afterwards, they can’t make that claim because they were still acting as a U.S. citizen.”

In the exit interview, officials have to be confident that the applicant understands the gravity of the situation and isn’t doing it for tax reasons. If the oath of renunciation is approved, there’s no turning back.

“We can help people analyze the tax consequences, the border-crossing consequences and the legal consequences,” Berg said.

“What we can’t help people do is look into their head and their heart and make that decision for them.”

Even those who execute the process flawlessly must prepare themselves for other disadvantages. Visiting the U.S., especially if they have a criminal record, will be more complicated, as will working in the U.S.. Their children won’t be able to claim U.S. citizenship nor will they be able to vote in a U.S. election.

“You have a lot of rights as a U.S. citizen and you’re giving those up,” Hodgman said.

“People who are older and have a fixed career usually look at it differently from people who are younger and want to keep their options open.”

All Americans who have renounced their citizenship have their names published in the Federal Register, which some might find embarrassing. Claimants are finally free when they’ve received a Certificate of Loss of Nationality, which their banks will need to release them from FACTA obligations.

There’s one mistake exiting Americans don’t have to worry about making. The U.S. government won’t administer the oath of renunciation unless the person is already a citizen of another country. You can’t accidentally make yourself statelessness.

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