11

Leaving the US

There can be many reasons for leaving the US; returning to Canada from a temporary work assignment, your family situation changes, or you simply don’t like living in the US. Regardless of the reason, there will most likely be tax ramifications to your move back to Canada. From a tax perspective, there are three broad categories that people fall into when leaving the US and each has a different tax ramification. The categories are US citizens, long-term permanent residents (green card holders), and anyone that is neither a US citizen nor a long-term green card holder.

The easiest category, from a tax perspective, includes those people that are not US citizens and are not long-term green card holders. Before leaving the US, all aliens (non-US citizens) are required to obtain a Certificate of Compliance (also known as a “sailing permit”). To get a Certificate of Compliance, you must go to a local IRS office between two and four weeks before leaving the US. You must file either the US Departing Alien Income Tax Statement (Form 2063 — short form) or the US Departing Alien Income Tax Return (Form 1040-C — long form) and take it with you to an IRS office to obtain a clearance certificate. The certificate cannot be issued more than 30 days before you leave. If you are married, you each must receive a clearance certificate, therefore you and your spouse must each file one of the forms and go to the IRS office.

Form 2063 is the short form that asks for basic information, but does not compute the tax due. Those that qualify for using the short form are people who have filed a least one tax return (and paid tax, if applicable) in the US, and are people who —

• had no taxable income during the year up to the date of departure; or

• have taxable income during the year or preceding year and “whose departure will not hinder the collection of any tax.” If the IRS has information indicating that the person is leaving to avoid paying tax, he or she must file Form 1040-C and pay the tax.

Examples of aliens not required to obtain a Certificate of Compliance are diplomats, students, those receiving no taxable income, and alien residents of Canada or Mexico who commute and have wages that are subject to withholding.

We strongly recommend that you call two or more months ahead to schedule an appointment. It will likely be very difficult to find an IRS agent that will know what to do when you call for an appointment. Calling ahead will give you and the agent time to find someone who knows what to do, or at least will spend the time to learn what to do.

1. Expatriation

US citizens and lawful permanent residents (green card holders) are required to report and pay tax on their worldwide income, regardless of where they reside. To remove yourself from the US tax system, you must give up your citizenship or green card and become a nonresident alien. If you are a US citizen who wants to become a nonresident alien, you must renounce your citizenship and move to another country.

An expatriation tax applies to US citizens that renounced their citizenship and long-term residents who have ended their residency. A long-term resident is defined as someone who has been a green card holder for at least 8 of the last 15 years prior to expatriation.

If you are deciding whether you should become a US citizen, we would say that if you have the opportunity, you should become a US citizen, unless you do not believe citizenship will be permanent. No one should be a citizen of any country unless they believe it will be permanent. However, circumstances can change and the issue of renouncing your US citizenship may come up in the future. Note that there is no income tax difference between a citizen and a long-term green card holder, before, during, or after expatriation.

The advantages of citizenship over being a green card holder include the following:

• Estate tax advantage: US citizens are allowed to receive unlimited assets from their spouse (traditional marriage), without the deceased spouse paying US estate tax at his or her death.

• The right to vote in elections.

• Protection or assistance by the government when overseas.

The following are the benefits of a green card holder:

• Easier to give up citizenship, if that time ever comes.

• It is possible to relinquish and reacquire green card status, where it is impossible to reacquire citizenship if it surrendered.

You are considered to have relinquished your US citizenship on the earliest of the following dates:

• The date you renounce your US citizenship before a diplomatic or consular officer of the US, assuming the renouncement was later confirmed by the issuance of a Certificate of Loss of Nationality of the United States.

• The date you furnished to the State Department a signed statement of your voluntary relinquishment of US nationality confirming the performance of an expatriating act, providing the voluntary relinquishment was later confirmed by the issuance of a Certificate of Loss of Nationality of the United States.

• The date the State Department issues a Certificate of Loss of Nationality of the United States.

• The date a US court canceled your Certificate of US Naturalization.

If you are a long-term resident that is terminating your residency, it will be on the earliest of the following dates:

• The date you file the Department of Homeland Security Abandonment of Lawful Permanent Resident Status (Form I-407) with a US consular or immigration officer, and Homeland Security has determined that you have in fact, abandoned your lawful permanent resident status.

• The date you became subject to a final administrative order for your removal from the US under the Immigration and Nationality Act, and you have actually left the US as a result of that order.

• If you were a dual resident of the US and a country with which the US has an income tax treaty (e.g., Canada), the date you commenced to be treated as a resident of that country and you determined that, for purposes of the treaty, you are a resident of the treaty country and gave notice to the Secretary of such treatment.

Although a person that expatriates will be treated as a nonresident alien, he or she may be classified as a “covered expatriate,” which would subject the person to an exit tax, similar to the tax Canada imposes on its residents when they leave Canada and become residents of another country. The exit tax imposes an immediate tax, as well as potential future taxes on the expatriate. A covered expatriate is either a US citizen or long-term resident who abandons or loses his or her status as a US citizen or permanent resident, and as of the day before expatriation has —

• an average net income tax for the last five years that is more than $151,000 (2012);

• a net worth on the date of expatriation that is $2 million or more; or

• failed to certify, under penalty of perjury, that he or she has complied with all US federal tax obligations for the five years preceding the date of his or her expatriation or termination of residency. Certification is done using the Initial and Annual Expatriation Statement (Form 8854). This form is completed when filing Form 1040 (or 1040NR) for the year of expatriation.

The income tax amount of $151,000 is increased for cost-of-living adjustments each year. There is no adjustment for the net worth amount of $2 million.

Note: The $151,000 amount is the tax, not the income. This means that if you assume an average or effective tax rate of 30 percent, you need more than $500,000 of taxable income (not gross income). This seems like a much higher threshold than $2 million net worth, so the vast majority of those expatriating will be considered a covered expatriate due to having a net worth in excess of $2 million.

If you expatriate and you are considered a covered expatriate, you will be subject to a mark-to-market tax, also known as a “deemed disposition of your worldwide assets,” and will be required to recognize gain on those assets as if they were sold at their fair market value, as of the day prior to your expatriation.

If you are a long-term resident, you have the option of using the fair market value of you assets on the day your US residency began. For the assets you owned when you moved to the US, this will, in most cases, be a higher number and therefore produce a lower gain than using the original purchase price.

There are three groups of assets that are not subject to the mark-to-market tax, but will be taxed using a different method: deferred compensation, tax-deferred accounts, and an interest in a non-grantor trust. If you have one or more of these types of accounts, you must file a Notice of Expatriation and Waiver of Treaty Benefits (Form W-8CE) within 30 days of expatriation. (For more detailed information regarding the mark-to-market regime, refer to Notice 2009-85.)

Deferred compensation is divided into two types:

• The US payor is required to withhold on all payments.

• All other deferred compensation arrangements.

Where US withholding is required, payment can be deferred until payment is made, but the withholding must be 30 percent. The covered expatriate cannot claim, under the Treaty, to reduce the withholding. For all other deferred compensation arrangements, the accrued benefit will be treated as being received the day before expatriation. Examples of deferred compensation plans include a company pension or profit-sharing plan (including 401(k) and 403(b) accounts), simplified employee pensions (SEP), and simplified retirement accounts (SIMPLE plans).

Important: Any interests in a foreign pension or retirement account are considered deferred compensation plans and are included in the expatriation tax. This includes your RRSPs, RRIFs, LIRAs, any Canadian company pension, government, or military pension, but does not include Canadian Pension Plan (CPP) or Old Age Security (OAS), which are forms of social security.

Tax deferred accounts are individual retirement plans, a qualified tuition plan (i.e., Section 529 Plan), a Coverdell Education Savings Account, a health savings account, and an Archer MSA. However, SEP and SIMPLE plans of a covered expatriate are treated as deferred compensation items. These plans are treated as if the entire interest was paid out on the day prior to expatriation.

The definition of a non-grantor trust is a trust occurs when the grantor gives the control of the trust property to a trustee other than himself or herself. In other words, a non-grantor trust is a trust that someone established for the benefit of someone other than himself or herself.

So, if someone (e.g., your parents) established a trust in which you are the beneficiary, or at least one of the beneficiaries, the value of your share of the trust is subject to the expatriation tax. If you are the beneficiary of such a trust, the trustee must withhold 30 percent of any direct or indirect distributions. This withholding rule applies to both domestic (US) and foreign (non-US) trusts.

There are two exceptions from the automatic treatment of the tax described above. The first is for a dual-citizen who became a US citizen at birth and must have also become a citizen of the other country at birth; or the person was a resident of the US for 10 years or less, out of the last 15, prior to the year in which the expatriation occurred. This refers to naturalized citizens (those that went through the process of becoming a US citizen).

The second exception is for minors, if all of the following conditions are met:

• The person became a US citizen at birth.

• Expatriation occurs before attaining age 18.5.

• The person was not a US resident for more than ten years before expatriation occurs.

If you are subject to the expatriate tax regime, the US provides an exemption from tax in amount of $651,000 (2012 and indexed for inflation). This means that many of you will not owe tax upon expatriating. If your gain is greater than $651,000, you pay tax on the difference.

You can make an irrevocable election to defer the payment of the tax. If you make the election, the following rules apply.

• You must make the election on a property-by-property basis.

• The deferred tax on a particular property is due on the return for the tax year in which you dispose of the property.

• Interest is charged for the period the tax is deferred.

• The due date for the payment of the deferred tax cannot be extended beyond the earlier of the following dates:

• The due date of the return required for the year of death.

• The time that the security provided for the property fails to be adequate (see the next point).

• You must provide adequate security, such as a bond.

• You must make an irrevocable waiver of any right under any treaty of the US that would preclude assessment or collection of any tax imposed under this expatriation regime.

• You must file the Initial and Annual Expatriation Statement (Form 8854) annually for each year, up to and including, the year in which the full amount of deferred tax and interest is paid.

The consequence of being in the US for more than 30 days, in any calendar year, after expatriation is that you will be treated as a US citizen for tax purposes and taxed on your worldwide income. This rule will apply for the longer of ten years or until the full amount of deferred tax and interest is paid. There is one exception to this rule. You can be in the US for up to 60 days without being treated as a US citizen if either of the following requirements is met:

• You were performing personal services in the US for an employer who is not related to you, and you meet these additional requirements:

You were a US citizen and, within a reasonable period of time following your expatriation, you became a citizen or resident, fully liable to tax in the country in which you, your spouse, or either of your parents were born.

For each year, in the 10 years prior to your expatriation, you were physically present in the US for 30 days or less.

Form 8854 must be filed upon the date of renunciation with the American Citizens Services Unit, Consular Section, of the nearest American Embassy or consulate.

In addition to the information discussed above, the following information is required:

• Taxpayer’s identification number (Social Security number)

• Mailing address of the principal foreign residence

• Expatriation date

• Foreign country in which you are residing

• Foreign country or countries of which you are a citizen and the date you became a citizen of those foreign countries

• Information detailing your income, assets, and liabilities

• Number of days during any portion of which you were physically present in the US during the taxable year

• How you became a US citizen (birth or naturalization)

A helpful resource is the Renunciation website (renunciationguide.com/Renunciation-Process-Step-By-Step.html). This site was established by a couple of people that renounced citizenship, so they have real world experiences to share with you. It is not a government site and we have not verified the information on the site, so we suggest that you double check any information you receive from the site.

1.1 Your rights after renunciation of US citizenship

After your renunciation, you will have the same rights in the US as any other citizen of Canada or whatever country you are a citizen of.

If you renounce your citizenship when you expatriate, you will lose the following rights in the US:

• You lose the right to live and work in the US.

• You will not be able to vote in US elections.

• You will not be entitled to the protection of the US overseas.

• You will no longer be able to enter, and remain indefinitely, in the US.

• Any children you have who are born after your renunciation will not receive US citizenship from you (although they may receive US citizenship from the other parent, from birth on US soil, or from naturalization later in life).

There are no temporary renunciations or options to reacquire US citizenship. Renunciation of US citizenship is irrevocable; you lose your citizenship for the rest of your life. In contrast, a British citizen is allowed to renounce his or her citizenship in order to acquire another nationality, and then later reapply for and “resume” his or her British citizenship at a future date. In the US, there is no such provision. Once you renounce, you can never resume your citizenship.

After your renunciation, your biometric information (i.e., ten-digit fingerprints and digital photograph) will be taken and stored by the US either when you apply for a visa or when you enter the US. This policy applies to all non-US citizens from the ages of 14 to 79.

1.2 The Reed Amendment

The only law that calls for different treatment is the Reed Amendment. In 1996, Congress included a provision in the expatriation law to bar entry to any individual “who officially renounces United States citizenship and who is determined by the Attorney General to have renounced United States citizenship for the purpose of avoiding taxation by the United States.”

This section of the 1996 immigration law, known as the Reed Amendment, added ex-citizens to the list of other “inadmissibles” which includes practicing polygamists, international child abductors, and aliens who have unlawfully voted in US elections. However, to date the Reed Amendment has never been imposed.

So while in theory, it’s possible that the US could bar you from entry to the US because the Attorney General believes you expatriated with the primary purpose of avoiding US taxation, we think the chances are extremely low that this would ever happen under current law.

2. Tax Planning before You Leave

Most of you will not be subject to the expatriation tax, but you should still have tax planning done before you leave to maximize your planning opportunities; once you leave the US a number of planning options will no longer be available. In fact, the best tax-planning opportunities exist only while you are still a US taxpayer.

We recommend reading Robert Keats’ book, The Border Guide before moving to Canada. Mr. Keats devotes an entire chapter on the subject of moving to Canada. Also, The Taxation of Americans in Canada is scheduled to print in 2013. If you are an American or Canadian who is retaining a green card, this book will discuss the Canadian and US tax laws that you will need to comply with.

Because a complete discussion of this topic is outside of the scope of this book, we will only highlight some of the issues to consider before leaving the US:

• What should you do with your savings and non-qualified (non-registered) accounts in the US?

• What should you do with your qualified (registered) accounts in the US?

• If you still have registered accounts (e.g., RRSPs) in Canada, should you cash them out before returning?

• What should you do with your home in the US? If you do not sell it before leaving, what are the tax consequences?

• If you have entities such as US corporations or partnerships, what should you do with them?

• If applicable, what should you do regarding social security and/or Medicare?

• If you are not a US citizen, should a pre-immigration trust be used?

As we explained before, we recommend talking to a cross-border tax specialist to get these questions and any other questions answered before you leave the US.