Many dual Canadian and U.S. citizens have toyed with the idea of renouncing one of their citizenships in order to remove themselves from a taxation system. Seeing as though it is the United States which has most recently passed new legislation, we will deal with the U.S. taxation issues for U.S. expatriate.
This new legislation entitled The Heroes Earnings Assistance and Relief Act, the “Heart Act” or the “Act,” was signed into law on June 17, 2008 and applies to individuals who relinquish their U.S. citizenship or long term U.S. residency on or after June 17, 2008 and who meet any one of the following: a) have an average annual net income tax liability of more than $139,000 USD for the five (5) years preceding expatriation; b) have a net worth greater than or equal to $2,000,000 USD on the date of departure; or c) have failed to provide certified compliance with U.S. tax obligations for the five (5) years prior to expatriation. Despite the criteria mentioned above, there are however exceptions for certain individuals which would remove them from the implications of the Heart Act.
One area in which the Act regulates is what can be called an exit tax, or more specifically know as mark to market tax. It states that most U.S. citizens and long-term residents are considered to have sold their entire worldwide estate at its fair market value the day prior to renouncing their U.S. citizenship or terminating their U.S. residency. Such a disposition means any gain on the deemed sale is applied to the taxable year of the sale, i.e. the taxable year of departure. However, a seemingly beneficial option is to defer such payments to your estate upon death. In order to take advantage of this election one must be prepared to pay interest during the deferral period and provide adequate security to guarantee payment of the taxes being deferred.
There is another point which is important to mention, especially for individuals who will be expatriating away from family members and loved ones. The U.S. will allow you no more than thirty (30) days within the country during any taxable year over a ten (10) year period following your expatriation. Anyone who remains within their borders for more than the allotted time will be treated as a U.S. citizen or resident for such taxable year and therefore, taxed on his or her worldwide income. Similarly, if such individual should die during any year in which he or she remained in the U.S. for more than thirty (30) days, they will be treated as a U.S. resident, and the individual’s worldwide estate will be subject to U.S. estate tax.
Due to the complexity of the issues and the immediate U.S. federal income tax obligation, it is strongly urged to consult a U.S. tax specialist prior to making any permanent decisions, which can cause devastating results down the road. It is always advisable to seek professional advice in tax and estate planning, as other strategies and solutions may better suit your needs and situation.