Americans living in Canada face tax-reporting obligations that can be burdensome—even to the point where one might consider renouncing their citizenship.
Our advice is to take a step back and think it through. As Terry Ritchie explained recently in this Globe and Mail video segment, renouncing one’s citizenship not only involves administrative hurdles, but can be quite expensive in terms of fees and taxes.
Americans must pay a $2,350 fee to the U.S. consulate. In addition, they must certify that they have been compliant through the filing of their IRS tax returns for the past five years. In addition, those who renounce their citizenship may be subject to two levels of income tax.
Those who have a net-worth over $2 million, or who have not filed returns in the previous five years, may face a capital gains “mark-to-market” tax as high as 23.8%. There is a fairly generous exemption that may eliminate some people from the mark-to-market tax. But those with qualified plans such as RRSPs or IRAs will face an immediate 30% tax on those assets.
Finally, bear in mind that you may not be able to change your mind: Provisions in U.S. law may bar those who renounce their citizenship from ever regaining it or being able to physically return to the U.S.