Navigating US Expatriation for Canadians

Considering giving up your US citizenship or Green Card? The consideration comes to mind for many Americans living in Canada, as impacted individuals want to escape the associated US annual tax reporting, administrative burdens, and potential additional taxes tied to their US status.

The US is one of only two countries in the world that tax based on citizenship, making it a significant challenge for those living abroad. This article will discuss some important US expatriation tax matters and offer some planning opportunities to help reduce the potential tax impact.

Why do US persons expatriate? Some common reasons include:

• Reporting Requirements: US citizens and green card holders living in Canada must file annual US tax returns and abide by various disclosure requirements. This includes reporting worldwide income, even if it's sheltered in Canadian accounts like TFSAs, RESPs, and FHSAs. Annual professional accounting fees for cross border tax filings may also come at a high cost.
• Disclosure Costs, Penalties, and Investment Options: There are potentially high accounting costs and complexities, and risk of substantial non-compliance penalties for US persons having an interest in non-US or ‘foreign’ financial accounts, trusts, corporations, and certain investments, such as those considered Passive Foreign Investment Companies or “PFICs”.
• Primary Residence: While Canada offers an unlimited principal residence exemption, the US limits the primary residence exclusion to $250,000 USD per individual. This can result in significant unexpected taxes for US persons in Canada who sell their home at a large gain.

Potential Exceptions for Certain US Citizens and Green Card Holders

• US Citizens: To avoid being considered a covered expatriate, US citizens should consider if they meet certain exceptions, like the Dual-Citizen Exception (US citizens at birth with another nationality) and the Exception for Minors (those who renounce citizenship before 18½ years old).
• Green Card Holders: Only those who have held a green card for at least 8 of the last 15 years are considered former long-term residents (“FLTR”) and may be considered a Covered Expatriate.

Covered Expatriate Test

If you do not meet US citizen exceptions or are a Green Card holder who is a FLTR, to determine if you are a "covered expatriate" and potentially subject to the expatriation tax regime, you must consider if you meet any of the following three criteria:

1. Net Worth Test: Your net worth is $2,000,000 USD or more.
2. Average Income Tax Test: Your average annual US tax net income tax liability over the past 5 years is $206,000 USD or more (2025 figure, adjusted annually for inflation).
3. Certification Test: You have not certified that you complied with all US tax obligations for the past 5 years.

Implications of Being a Covered Expatriate

If you are a covered expatriate due to meeting any of the three tests above, here are some, but not all, of the common potential tax implications:

• Capital Gains Tax: You may need to recognize unrealized capital gains on certain capital assets as if they were sold the day before expatriation. Covered expatriates can apply a mark-to-market exclusion on unrealized gains up to $890,000 USD (2025 figure, adjusted annually for inflation). This means that if your unrealized gains are below this threshold, you may not owe tax on the deemed sale of your capital assets.
• Deemed Distribution and Liquidation of Certain Retirement Accounts: This applies not only to Canadian accounts like RRSPs and RRIFs, but also to Traditional IRAs and HSAs. These accounts are treated as if fully distributed or liquidated at fair market value, potentially leading to significant tax liabilities.
• Eligible Deferred Compensation Plans: Accounts such as 401(k)s can benefit from deferring the deemed liquidation until actual distributions are made. However, doing so results in waiving treaty benefits, meaning distributions will be subject to a 30% non-resident US withholding tax rather than the 15% treaty rate. If you're a Canadian resident with a higher marginal tax rate, this may not significantly impact your overall tax liability.

It is crucial to work with a qualified cross-border tax professional to understand the implications of being a Covered Expatriate, as well as potential planning opportunities and filing requirements.

Planning Opportunities

To reduce the tax exposure or to alleviate the risk of being a Covered Expatriate, some strategies may include, but are not limited to:

• Gifting: Reduce your net worth below $2M USD by gifting assets to family members, while considering the US gift and estate tax regime.
• Donating:  Along with reducing net worth, donating to charity provides other great tax and non-tax benefits, such as giving back to important causes. Specifically, donating publicly traded securities with unrealized gains provides substantial tax benefits for both US and Canadian tax purposes compared to just donating cash.
• Separate Filings: If you file jointly with your spouse, consider separate filings to reduce your average tax liability.

At Raymond James, our cross-border tax consultants work with financial advisors and their clients to understand and plan for the tax implications of expatriation. Contact your Raymond James financial advisor if you’d like to discuss any of the matters discussed in this article.

This has been prepared by the Total Wealth Solutions Group of Raymond James Ltd. (RJL). Statistics and factual data and other information are from sources RJL believes to be reliable but their accuracy cannot be guaranteed. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities nor is it meant to replace legal, accounting, taxation or other professional advice. We are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax-related matters. The information is furnished on the basis and understanding that RJL is to be under no liability whatsoever in respect thereof. This is intended for distribution only in those jurisdictions where RJL and the author are registered. Securities-related products and services are offered through Raymond James Ltd., Member - Canadian Investor Protection Fund. Insurance products and services are offered through Raymond James Financial Planning Ltd. (“RJFP”), a subsidiary of Raymond James Ltd., which is not a Member - Canadian Investor Protection Fund. When providing life insurance products, Financial Advisors are acting as Insurance Representatives of RJFP. Raymond James Ltd.’s trust services are offered by Solus Trust Company (“STC”). STC is an affiliate of Raymond James Ltd. and provides trust services across Canada. STC is not a Member of the Canadian Investor Protection Fund. Raymond James advisors are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax-related matters.