Divorce Uncle Sam?
There has been a lot of talk lately about Americans who want to move to Canada due to the recent election.
Realistically, though, most of these folks will never do anything more than post this intention on their social media platform of choice and then move on to the next hot topic to complain.
However, what about dual citizens though who already live in Canada?
Politics aside, the recent changes to tax laws and the U.S. Foreign Account Tax Compliance Act are causing many Canadians who have American citizenship, but don’t live or work in the U.S, to look more seriously at renunciation.
There are many pros to giving up U.S. citizenship if you don’t intend to work or live there ever again.
You can rid yourself of the complex annual U.S. tax-filing requirements and the associated costs and paperwork.
You will no longer be subject to taxation by both countries and can potentially save a lot of tax money on both income and your investment portfolio.
Future obligations to American citizens residing outside of the country may become more onerous as well and renouncing now will protect you from potential future risks.
With proper legal and tax advice, many people in this situation can renounce their U.S. citizenship without paying any additional taxes and future leisure travel south of the border should not be affected in any way.
However, you need to be fully aware of the Reed Agreement, which refers to the potential of entry being denied to someone who has renounced U.S. citizenship for tax reasons.
This is almost never applied, but it does still exist.
In order to renounce without tax consequences, you cannot be considered a covered expatriate. That means you: 1. Must have a net worth of less than $2 million US.
2. Your annual U.S. income tax liability for the five years preceding the year of expatriation must be less than $161,000 US.
3. You need to have filed correct U.S. tax returns for five years prior.
Those with a net worth or average income above the thresholds may still be able to renounce tax free by meeting other criteria. But no matter what, you need to be up to date on your U.S. tax filings.
The exit taxes for someone who is a covered expatriate can be quite steep and substantial accounting advice should be sought before making any decisions for those who fit the bill.
For those who want to renounce but are not current on their tax filings, the IRS has introduced a streamlined procedure to get caught up.
As stated above, anyone considering renouncing their U.S. citizenship should seek out appropriate legal and accounting advice. It should be possible for most people to divorce Uncle Sam without any tax or immigration consequences, but I urge anyone considering doing so to take some time to plan your split properly.
Brett Millard is the owner of SPEIR Wealth Management in Kelowna. Reach him at brett@speirwealth.com.