A growing number of American business owners in Canada are considering renouncing their U.S. citizenship following the recent overhaul of the U.S. tax system. The changes could mean a huge financial hit for some American business owners living abroad.
Some lawyers who specialize in helping Americans give up their U.S. citizenship are reporting a spike in interest from potential clients since the Trump administration's Tax Cuts and Jobs Act was passed in late December.
"We have definitely seen an uptick" in outreach, said Alexander Marino, a U.S. tax lawyer at Calgary-based Moodys Gartner Tax Law, who heads the firm's expatriation-practice group and specializes in U.S. citizenship renunciation.
While the U.S. tax changes – which include a cut in the corporate-tax rate to 21 per cent from 35 per cent – are considered good news for companies operating and doing business south of the border, U.S. citizens living and running privately held companies in other countries could face a one-time "transition tax" of up to 15.5 per cent. The retroactive tax is on corporate assets not taxed in the United States since 1986, which was the last time the country's tax code was overhauled.
While it's too late for Americans to give up their U.S. citizenship to avoid the transition tax, there is concern about a new annual tax, going forward, on assets of certain American-owned companies operating outside of the United States. The tax is on global, intangible low-taxed income and is known as the GILTI tax. It can be imposed on a U.S. citizen shareholder if, under the new law, more than 10-per-cent of the non-U.S. corporation's earnings are deemed to come from intangible assets. The rules are very complicated and vary greatly in how they apply, "but have the potential to affect many Canadian-resident, U.S. citizens," Mr. Marino said.
More than 230 people signed up for an information seminar on renunciation Mr. Marino's firm held over the weekend in Toronto, which is more than double the attendance of their past events, even as the number of Americans revoking their citizenship has risen in recent years.
Citing data from the U.S. Internal Revenue Service's Federal Register, Mr. Marino said 5,411 Americans worldwide renounced their citizenship in 2016, the highest annual number in the country's history. That's up 26 per cent from 4,279 in 2015 and nearly triple the 1,781 renouncers recorded in 2011. More Americans are giving up their U.S. citizenship amid stepped up enforcement of the Foreign Account Tax Compliance Act (FACTA), passed in 2010, which requires foreign financial institutions to report assets held by Americans living outside of the United States. It took effect in Canada in mid-2014.
For the first three months of 2017, the most recent data available the Federal Register list, 4,448 Americans surrendered their U.S. citizenship. When fourth-quarter results are released in the coming weeks, Mr. Marino expects it to be another record year for the number of Americans revoking their U.S. citizenship.
Max Reed, a cross-border tax lawyer with Vancouver-based SKL Tax, says his office has had nearly a dozen inquiries about renunciation since the tax changes passed about a month ago.
"Absolutely, we've had people who have started the process either because of the mandatory repatriation tax or the GILTI [tax]," Mr. Reed said. "Those new tax rules … will make life much more complicated and expensive for Americans in Canada."
The downside of renunciation for some is no longer being able to easily move to or work in the United States, vote in U.S. elections or hold a U.S. passport. Some of the benefits include no longer having to file tax returns in more than one country, which saves time and money. Mr. Reed said there could also be other changes down the road that could make being an American citizen living outside of the United States more expensive. "Renouncing now insures against this risk," he said.
There are U.S. rules governing renunciation. For instance, Americans looking to give up their U.S. citizenship must pay a fee of $2,350 (U.S.) and go through an in-person interview at a U.S. consul or embassy explaining why they wish to give up their passport.
They might also have to pay an "exit tax," based on certain criteria. The exit tax can be triggered if an American citizen has a net worth of more than $2-million on the day they renounce, has an average net tax liability for the five preceding years of $165,000 (2018 amount adjusted for inflation) or if they haven't met their U.S. tax obligations for the past five years.
With renunciation, there is also the risk of being banned from travelling to the United States under what's known as the Reed Amendment (named after Rhode Island Democratic Senator Jack Reed). This can happen if the person renouncing is considered by the U.S. attorney-general to be "motivated by tax avoidance purposes," according to the government.
While cases of renouncers being banned from the United States are rare, Mr. Marino said it's a risk. "Professional advice, if you decide to renounce, is always recommended to avoid the exit tax, to get ready for the interview, or to not be barred," from the United States, he said.