A 2015 fee hike for renouncing U.S. citizenship has been a barrier for some Americans in Canada contemplating U.S. expatriation.rarrarorro/iStockPhoto / Getty Images
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The U.S. government’s decision to decrease its citizenship renunciation fee by more than 80 per cent may result in more Americans in Canada giving up their U.S. citizenship, cross-border tax experts say, as the deadline for Americans abroad to file their taxes approaches.
Earlier this month, the U.S. State Department announced that the consular services fee charged to Americans giving up their citizenship will drop to US$450, down from US$2,350, effective April 13.
Unlike Canada and most other countries, the U.S. bases its tax system on citizenship rather than residency. That means a U.S. citizen must file a U.S. tax return every year regardless of where they live. In addition, the U.S. requires Americans to report on their foreign financial accounts annually.
The deadline for filing a U.S. tax return is April 15, but Americans living abroad receive an automatic filing and payment extension until June 15, and a possible further extension to Oct. 15, if they request it. To avoid interest charges, any taxes are still due by April 15.
The tax treaty between Canada and the U.S. generally protects Americans in Canada from double taxation, but the compliance costs associated with meeting annual tax-filing requirements for two countries can be high.
The U.S. government promised in 2023 to reduce the citizenship renunciation fee following legal challenges from Americans living abroad. The move reverses the 2015 fee hike to US$2,350 from US$450, the amount set in 2010 when the government first began charging a renunciation fee.
The high fee has been a barrier for many Americans in Canada contemplating U.S. expatriation, says Max Reed, a cross-border tax lawyer and founding partner of Polaris Tax Counsel in Vancouver, in a response sent by e-mail to questions from The Globe and Mail.
He expects the reduced fee will encourage renunciations among those clients already considering doing so.
Kris Rossignoli, senior private wealth manager with Cardinal Point Wealth Management in New York, also says he expects to see “some increase in completed renunciations, but not a mass exodus.”
Mr. Rossignoli says in an e-mail to The Globe that the “real friction” for Americans considering renunciation is the requirement to file the previous five years’ U.S. tax returns and forms, the possibility of being hit with an exit tax, “and the emotional finality of giving up citizenship.”
Saba Naqvi, a partner and national practice leader, immigration services, with BDO Law LLP in Vancouver, says while the lower fee might lead to “a slight uptick” in renunciations, the amount of the fee “has never been a barrier.”
Instead, clients typically decide to renounce only after years of consideration, motivated by a desire to rid themselves of the cost and stress associated with meeting their annual U.S. tax-filing requirements, and a feeling of permanent connection to Canada, she says.
Mr. Reed says not many clients renounce their citizenship solely because of political disagreements with the U.S. administration of the day.
“It is mostly related to taxes,” he says. “The burden and expense of filing the U.S. tax returns annually are considerable, and some clients actually owe taxes to the U.S., which increases their overall tax burden.”
Mr. Rossignoli says he has seen an increasing trend of Americans in Canada renouncing their U.S. citizenship, whether for tax planning or political reasons.
He says renouncing may be an appropriate option for Canadians born in the U.S. or dual citizens with few U.S. connections; those with certain bank and investment accounts subject to U.S. reporting; and “older clients whose estate and [tax-filing] compliance burden is out of proportion to any practical benefit of keeping U.S. citizenship.”
Ms. Naqvi agrees that older clients are more likely to renounce U.S. citizenship relative to younger clients, who may still want to live or work in the U.S. in the future.
Mr. Reed adds that the “tightening of the U.S. immigration rules is also a factor and may dissuade some people from renouncing to ensure they have access to the United States.”