Abandoning citizenship is often a last desperate way for Americans living outside the U.S. to escape a lifetime of onerous tax filings.
But it’s about to become a much costlier exit strategy.
Citing “dramatically” increased numbers of Americans abandoning their citizenship, the U.S. State Department is raising its renunciation fee to $2,350 (U.S.) a person on Sept. 12, up from the current $450.
The new fee represents the “full cost” incurred by U.S. consular officials to deliver the service, according to a list of consular fee changes published in the U.S. Federal Register.
“Documenting a U.S. citizen’s renunciation of citizenship is extremely costly, requiring American consular officers overseas to spend substantial amounts of time to accept, process and adjudicate cases,” the notice said.
But Patricia Moon of Toronto, a Canadian who renounced her citizenship two years ago, said the fee hike is unwarranted and punitive.
“It’s another stab in the back to Canadian families,” said Ms. Moon, who works for the Alliance for the Defence of Canadian Sovereignty, which recently filed a lawsuit against the Canadian government over its decision to exchange personal financial information with U.S. tax authorities.
Ms. Moon, 59, said Americans looking to renounce already face steep accounting and legal fees as well as potentially significant tax obligations.
Ann Vanderhoof, 62, who has been waiting since June for a renunciation meeting at the U.S. Consulate in Toronto, was notified via e-mail last week that she must pay the new higher fee. The Toronto resident, who came to Canada in 1979, called the steep increase “egregious,” particularly because the delay was not her fault.
A State Department official said the new fee reflects the “real, unsubsidized cost of providing this service.” Substantial time is spent in embassies and consulates as well as in Washington to process and adjudicate cases, the official added.
The new higher fee is particularly unfair to the majority of American living outside the country who typically owe no taxes, pointed out Kevyn Nightingale, a U.S. tax specialist at accountancy firm MNP LLP in Toronto.
“It’s already expensive to comply … This fee just made it much nastier,” he said. “Stay in, get dinged. Leave, get dinged. It just feels like a kick in the butt on the way out the door.”
Canada is home to hundreds of thousands of Americans and dual citizens – many of whom have not filed taxes and other mandatory U.S. disclosures for years. Many Canadians who were born in the U.S. may not even know they are required by U.S. law to file with the Internal Revenue Service every year as well as file annual reports on all their financial assets.
Through the first half of this year, 1,577 Americans worldwide renounced their citizenship or gave up their green cards. In 2013, a record 3,000 of Americans renounced, up from just a few hundred a year in the mid-1990s and early 2000s.
Adding urgency to the exodus is a new U.S. law – the Foreign Account Tax Compliance Act – that is forcing foreign financial institutions to share much more information about their American customers. The law, which came into effect July, is being phased in over several years. Earlier this year, Canada signed an agreement with the U.S., under which the Canada Revenue Agency will begin collecting information on all financial accounts worth more than $50,000, starting at the end of 2015, and remit it to the IRS.
Unlike Canada, and virtually all other countries, the U.S. taxes people based on citizenship, not residency. That means that Americans must file taxes in the U.S., for their entire lives, regardless of where they live.