In order to cease to be taxable in Canada, an individual must give up Canadian residence, and in the case of non-U.S. citizens, U.S. residence. A U.S. citizen may cease to be taxable in the U.S. only under certain circumstances, and only by revoking U.S. citizenship before a consular officer.
Revoking U.S. Citizenship or Long Term U.S. Residence
Mark to Market Tax:
Effective June 17, 2008, new Internal Revenue Code section 877A provides for an expatriation tax for "covered expatriates". Effectively, this means that the expatriate is deemed to have disposed of all capital property at fair market value as of the date of expatriation, and must pay tax on the net gain if it exceeds $600,000 (indexed for inflation). This is called the "mark to market" tax.
In order to be subject to the "mark to market" tax, an individual must first be considered an "expatriate" and then must meet one of several tests to become a "covered expatriate".
U.S. Citizen Expatriates
A U.S. citizen becomes an "expatriate" on the earliest of the following dates:
- The date U.S. nationality is renounced before a U.S. consular officer;
- The date the individual provides a written statement of voluntary relinquishment of U.S. nationality which is accepted by the State Department;
- The date the State Department issues a certificate of loss of nationality; or
- The date a U.S. court cancels a certificate of naturalization.
Long Term Resident Expatriates
An individual is considered a "long term resident" of the U.S. is a person who was a lawful permanent resident of the U.S. for at least eight of the past 15 tax years. Long-term residential status is terminated by losing a green card status, either through revocation or by abandoning residential status. An individual also ceases to be treated as a long-term permanent resident of the U.S. if they are treated as a resident of another country with which the U.S. has a Treaty, and if they do not waive rights under that Treaty, and notifies the Secretary of State of that treatment.
Caution is therefore required by any long term green card holder who does not meet the residential requirements of that status, since they may inadvertently become expatriates under IRS code 877A.
A U.S. citizen who lives abroad and who does not revoke the application of any foreign tax treaty, is deemed for U.S. purposes to be taxable in the U.S. Accordingly, the 10 year period begins only after the revocation of citizenship and the cessation of the use of treaty provisions.
In order to be subject to the "mark to market" tax, an expatriate must be considered a "covered expatriate" by meeting one of the following tests:
- Average net income tax liability in the U.S. for the past five years must exceed $124,000 per year;
- The individual must have a net worth exceeding $2 million dollars; or
- The individual has not complied with U.S. tax filing obligations for the prior five years.
Note the importance for all persons who hold U.S. citizenship or residential status to file U.S. income tax returns each year.
The above tests do not apply to minors, or persons who were born both as a U.S. citizen, and the citizen of another country.
Calculation of the Tax
Any individual who expatriates on or after June 17, 2008 must complete and file form 8854 to satisfy whether they meet the "expatriate" and "covered expatriate" tests, and to provide net worth, income, and basis information required to calculate the tax, if it is applicable.
The tax is calculated under normal IRS code provisions as if all property was disposed of at fair market value as of the expatriation date, but only if the net gain exceeds $600,000. Wash sale rules, deferral benefits such as incomplete like-kind exchanges, and involuntary conversions are eliminated. The stepped up basis rule applies to property that was held on the date an individual first became a U.S. resident as defined in IRC 7701(b), unless an irrevocable election is made not to have this rule apply.
Download our article "The Effect of Expatriation on Tax".