Taxes, and dealing with the IRS, are the most common reasons people want to ditch their U.S. citizenship. But amid a highly polarized American electorate, and Donald Trump’s odds of becoming the next president, the United States may be looking at even more citizens renouncing.
After the Foreign Account Tax Compliance Act (FATCA) became law in 2010, U.S. citizens abroad started facing a requirement to annually report their financial accounts and foreign banks have had to disclose American’s foreign assets. Another, related impact? U.S. citizens have been renouncing their nationality at a faster rate.
CNN has reported that the number of Americans renouncing has consistently hit new highs in recent years, reaching a record 4,279 in 2015, up from 742 in 2009. But renouncing your U.S. citizenship isn’t as simple as signing forms.
Before your dual-citizen client makes an appointment at a consulate to renounce, ensure they have legal representation, says Henry Chang, partner with Blaney McMurtry in Toronto and a U.S.-licensed lawyer, because there can be legal pitfalls and significant tax obligations. (See, for instance, information about a so-called “exit tax” if your net worth is over US$2 million).
While renouncing nationality may be the easiest route, you may be better off arguing you intentionally relinquished citizenship many years ago. It could be significantly lighter on your tax bill—perhaps 20 tax years lighter if you can prove relinquishment that long ago.
Read: Can clients ditch U.S. citizenship retroactively?
The initial process for relinquishing is largely the same as renouncing, starting with an appointment through the consulate. Instead of renouncing, however, you’re aiming for a Certificate of Loss of Nationality applied retroactively.
“At the time of appointment, instead of claiming you want to do an oath of renunciation, what you’re really doing is saying, ‘I believe I’ve already lost it. I’d like you to make a decision and issue me a loss of nationality certificate,’” Chang says.
There are several ways U.S. citizens can claim the retroactive loss of citizenship provided that, at the time of committing a so-called “expatriating act,” they also had the intention of losing their nationality. According to U.S. immigration law, these expatriating acts include:
- applying for and receiving naturalization in a foreign state;
- taking an oath or making a formal declaration of allegiance to a foreign state; or
- accepting employment in or serving in a foreign state government (see the full list of expatriating acts here).
“You have to show you did the act voluntarily,” Chang says, adding that it’s up to you to prove you lost the citizenship. “But that’s only half the test. The other test is, when [you] did it, did [you] do it with the express intention that [you] would lose U.S. citizenship?”
Take, for instance, someone not familiar with the law who did not believe an oath of citizenship in Canada would affect their U.S. nationality. If that was the case, they may not have had the intention of relinquishing it, he says, and wouldn’t qualify, particularly if they continued to vote in the U.S. and renewed their U.S. passport.
There is also a presumption that oaths of citizenship do not in themselves express an intent to lose U.S. citizenship.
But here’s a tip: Anyone who took the Canadian oath of allegiance prior to 1973 took an allegiance that included language saying that the reader was knowingly relinquishing all former citizenships, Chang says. That means anyone who took the oath before 1973 has evidence of intent. But that language was removed from the oath in 1973, so after that year you’re out of luck for such evidence in the oath.
Don’t be discouraged if you took a Canadian oath after this date. It’s still possible to prove evidence of intent.
Perhaps you spoke to someone at the U.S. consulate who misinformed you that an oath would automatically cause a loss of American citizenship. Or, perhaps after committing an expatriating act, there’s evidence of your intent through your immigration history: you never got a U.S. passport, never went to school in the U.S. as a resident, never voted there, and only ever entered the U.S. as a visitor.
Renouncing U.S. nationality is an easier process, but it’s important to be aware that you’re on the hook for any tax obligations prior to the renunciation.
“What if they’ve never filed a U.S. tax return? That’s a problem,” Chang says. “If they renounce today, those obligations don’t go away.”
Also, be sure you have another nationality before starting a renunciation or a relinquishing process. Otherwise, you could become stateless and the application likely would not proceed.
An American citizen residing in the U.S. wishing to renounce their nationality and move to Canada would first have to qualify for Canadian residency, then live in the country for at about four years or more before becoming a citizen. Only then could they renounce.
Be sure you have a good reason to renounce U.S. citizenship—one that’s not related to taxes.
“There’s a ground of admissibility in the Immigration and Nationality Act that says if you’re a former citizen who’s renounced citizenship in order to avoid tax, then you are barred from the United States,” Chang says. While no one that he’s aware of has been barred under this provision, he says, there remain risks.
When Chang assists people with renunciations, he has them submit a sworn affidavit explaining all the non-tax reasons why the person is giving up their U.S. nationality. The affidavit protects you from the possibility of the U.S. government someday deciding to go after former U.S. citizens it believes renounced primarily to avoid tax.
“What if Trump becomes president and they start going after people? Or let’s say they start going after people 20, 30 years from now,” Chang says. “You can point to an affidavit that was provided at the same time as the renunciation, which explained under oath why you were doing it.”