Life After Expatriation – Common U.S. Tax Issues for Former Citizens and Green Card Holders Moving to Canada

Expatriation — the act of giving up U.S. citizenship or long-term green card status — is a life-changing decision. For many former Americans who relocate to Canada, it brings freedom from the complexities of U.S. worldwide taxation. But it also opens a new set of U.S. tax issues that can linger for years or even decades after the U.S. passport/green card is surrendered.

The U.S. has some of the most far-reaching expatriation rules in the world. These rules affect not only the exit itself, but also estate planning, retirement income, ongoing tax reporting, and even the ability to transfer wealth to U.S. family members.

In this blog, we explore the common U.S. tax issues for life after expatriation when moving to Canada, updated for 2025 rules. We begin with an overview of expatriation and the “covered expatriate” concept, then examine estate and transfer taxes, U.S. retirement income, double taxation risks, ongoing U.S. reporting, and practical planning strategies.

Expatriation: The Tax Definition

Who Is an Expatriate?

Expatriation in the tax sense occurs when:

• A U.S. citizen formally relinquishes or renounces citizenship, or
• A long-term green card holder (lawful permanent resident for 8 of the past 15 years) abandons that status.

Covered vs. Non-Covered Expatriates

The U.S. Internal Revenue Code (IRC §877A) distinguishes between expatriates who are “covered” and those who are not. Covered expatriates face punitive exit tax consequences.

To avoid covered expatriate status in 2025, an individual must be mindful of these tests:

1. Net worth test: Net worth must be below $2 million at expatriation.
2. Tax liability test: Average U.S. income tax liability for the five years before expatriation is $206,000 or less (2025 inflation-adjusted).
3. Certification test: Maintain compliance with all U.S. tax obligations for the five prior years, certified on Form 8854.

Failing any one of these tests = covered expatriate.

Exceptions
Even if the net worth or tax liability tests are failed, the following individuals can still avoid covered status if they pass the certification test:

• Dual citizens at birth, who remain citizens and tax residents of their other country.
• Young expatriates, who give up citizenship before age 18½.

Why It Matters

• Non-covered expatriates generally face no exit tax beyond a clean break from U.S. taxation.
• Covered expatriates face deemed sales of assets, taxation of pensions and IRAs, and exposure to a punitive 40% transfer tax on gifts and bequests to U.S. persons.

Estate and Transfer Tax Issues

Estate Tax After Expatriation

After expatriation, a former U.S. citizen/green card holder is treated as a non-resident, non-citizen (NRNC) for U.S. estate tax purposes. The key consequences:

• Worldwide estate vs. U.S. estate: Citizens/residents pay U.S. estate tax on their worldwide estate. NRNCs pay estate tax only on U.S. situs assets (e.g., U.S. real estate, tangible property located in the U.S., stock of U.S. corporations, certain U.S. debt, and U.S. retirement accounts).
• Exemption shrinkage: The estate tax exemption plunges from $13.99 million (2025) for citizens/residents to just $60,000 for NRNCs.
• Marital deduction limits: An unlimited marital deduction is unavailable if the surviving spouse is not a U.S. citizen, unless assets are left in a Qualified Domestic Trust (QDOT).

Planning tools:

• Holding U.S. assets through foreign corporations.
• Use of a QDOT for a non-U.S. citizen spouse.
• Strategic life insurance equal to anticipated estate tax.
• Debt structuring on U.S. real estate.
• Gifting U.S. intangibles (e.g., stock of U.S. companies) post-expatriation to non-U.S. recipients.

Gift Tax After Expatriation

For NRNCs, U.S. gift tax applies only to gifts of U.S. real estate, tangible property in the U.S., and cash physically transferred within the U.S.

• Annual gift exclusion (2025): $19,000 per recipient.
• Gifts to non-citizen spouses (2025): $190,000 annually tax-free.
• Tuition and medical expenses paid directly to providers: unlimited exclusion.

Section 2801 “Covered Gifts and Bequests” Tax (Effective 2025)

This is one of the most consequential post-expatriation rules. Beginning January 1, 2025, U.S. recipients of gifts or inheritances from a covered expatriate are subject to a flat 40% tax on the value received.

• Applies to worldwide assets of the covered expatriate, not just U.S. situs assets.
• Paid by the U.S. recipient, to be reported on new Form 708.
• Exceptions: transfers already subject to U.S. estate/gift tax, charitable gifts, transfers to U.S. citizen spouses, and annual exclusion amounts.

Planning options:

• Pre-expatriation gifting using the unified estate/gift tax credit.
• Structuring gifts to non-U.S. recipients.
• Use of life insurance or trusts.
• In some cases, encouraging U.S. heirs to consider their own expatriation.

U.S. Retirement Income After Expatriation

Most expatriates retain U.S. retirement accounts. How these accounts are treated depends on expatriate status:

• Eligible Deferred Compensation (e.g., 401(k), pensions with W-8CE)
  • No exit tax.
  • Future distributions subject to 30% U.S. withholding, no treaty reduction allowed.
  • Reportable on Form 1040NR, taxed at graduated rates.
• Ineligible Deferred Compensation (e.g., foreign pensions, U.S. plans without W-8CE)
  • Exit tax deemed distribution at expatriation.
  • Basis step-up for U.S. tax purposes.
  • Still subject to 30% withholding on distributions, though prior tax paid may reduce the effective tax burden.
• IRAs and Specified Tax-Deferred Accounts
  • Deemed distribution at expatriation.
  • Future distributions subject to 30% withholding.

Canadian Treaty Relief

For non-covered expatriates resident in Canada, the Canada-U.S. tax treaty may reduce or eliminate U.S. withholding. In practice:

• File Form W-8BEN with custodian to claim treaty benefits.
• Taxation then occurs in Canada, with credit for U.S. withholding if applicable.

Planning Ideas

• Evaluate whether to accelerate distributions pre-expatriation.
• Consider Roth conversions before expatriation (Roth distributions are generally not taxed in Canada as long as the proper election is filed and no contributions are made as a Canadian tax resident).
• For younger expatriates, planning around the 10% early withdrawal penalty is essential; exit tax rules provide an exception.

Double Taxation Risks
Expatriation often creates mismatches where the U.S. exit tax and Canadian taxation do not align, leading to double taxation. Common Scenarios include:

• Foreign real estate and U.S. equities: Exit tax deems a sale on expatriation day. Canada recognizes no sale as a result of U.S. expatriation, so no basis step-up at that time. Canada does however recognize a basis step-up upon becoming a Canadian tax resident, so the dates of U.S. expatriation and start of Canadian tax residency should be timed appropriately together to eliminate or avoid double taxation.
• Foreign pensions: Exit tax taxes the present value as if distributed; Canada can then later tax the actual distributions.

Solutions:

• Dispose of problematic assets before expatriation.
• Move to a jurisdiction (like Canada) with treaties that reduce conflicts, though treaty gaps remain.
• Possible use of trust planning or pre-expatriation restructuring.

Ongoing U.S. Reporting Obligations

Even after expatriation, certain U.S. filings may apply:

• Form 1040NR: Annual return if U.S. source income (rent, dividends, retirement distributions).
• Form 8854: Initial expatriation statement; for covered expatriates, may require ongoing filing.
• Form 709/709-NA: Gift tax returns for NRNCs.
• Form 706-NA: U.S. estate tax return for NRNCs.
• Form 708 (new in 2025): For U.S. recipients of covered gifts/bequests.
• Withholding forms (W-8BEN, W-8CE, etc.): Required for custodians to apply correct withholding.

Practical challenge: Many expatriates expect a clean break but discover they must continue filing 1040NRs and related forms for years, particularly if they retain U.S. retirement accounts or real estate.

Planning Roadmap

Before Expatriation:

• Ensure five years of tax compliance (Form 8854 certification).
• Consider pre-expatriation gifting strategies.
• Review estate plan, including QDOTs and life insurance.
• Model exit tax exposure and options to reduce net worth below $2M.

After Expatriation:

• Track U.S. situs assets carefully.
• Re-evaluate Canadian tax planning in light of potential U.S. estate exposure.
• Manage retirement account withdrawals strategically.
• Educate heirs about Section 2801 risks.

Conclusion

Expatriation may eliminate U.S. worldwide tax filing obligations, but it does not erase U.S. tax exposure. Estate tax, retirement income withholding, double taxation traps, and new Section 2801 transfer tax rules all continue to shape the financial life of former Americans living in Canada.

For high-net-worth families, the stakes are significant. The wrong move can result in 40% wealth transfer taxes, double taxation of retirement assets, or loss of treaty benefits.

At Cardinal Point Wealth Management, we specialize in helping families navigate these cross-border challenges. From pre-expatriation planning to life after expatriation, our integrated tax, estate, and investment approach ensures clients maximize after-tax wealth while minimizing risks on both sides of the border.