# covered expatriate question - tax shortcut for renouncing



## Nononymous

So I had a thought.

What would be the consequences of renouncing US citizenship (as a dual US-Canadian citizen living in Canada etc.) and simply filing form 8854 stating that you are not tax-compliant? This would make me a "covered expatriate" subject to the exit tax regime. As I understand it, the first $650,000 in net worth is not taxable in this case. If if I take my RRSPs and add them to my half of our real estate equity, I'm well under the limit. 

In other words, as long as I'm worth less than $650k, can I just file this one declaration and be done with it, rather than five years of returns and FBARs yada yada?


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## BBCWatcher

You mean check "No" on Line 6 in Part IV of Form 8854? I guess you could. That checkbox is on the form. It'd be "interesting" to see what happens if you do.


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## Nononymous

Exactly. Check no, and you go into the exit tax regime. This is considered to be a bad idea if you have heaps of money (i.e. the net gain on all your assets exceeds $650k). But in my case it certainly does not. (Net gain on two properties, divided in half, plus net gain on some RRSPs equals not even close.)

The only examples I can find online seem to involve unhappy fictional millionaires. I would be none of the three. It seems almost too simple to be true.

Of course they could get all cranky and try to stick you with huge FBAR fines on the RRSPs or something, but those are not collectible in Canada.

Downside - there are some confusing and possibly unpleasant ramifications for a US citizen child inheriting from a covered expatriate, but I'm sure there's workarounds and I've got a few decades left in me.


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## Bevdeforges

Nononymous said:


> Downside - there are some confusing and possibly unpleasant ramifications for a US citizen child inheriting from a covered expatriate, but I'm sure there's workarounds and I've got a few decades left in me.


And the solution to that is what the professor told us in our "estate planning" class: just arrange to spend your last penny on your last day. Let the next generation earn their own dosh! (Easy for me to say: only child, no kids.) 
Cheers,
Bev


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## BBCWatcher

Nononymous said:


> Of course they could get all cranky and try to stick you with huge FBAR fines on the RRSPs or something, but those are not collectible in Canada.


At present, true. However, you periodically travel to the U.S. and thus become physically subject to U.S. jurisdiction. So I'd send in the FBARs while the Treasury Department is still in a relatively pleasant mood.

I suppose I could point out that Canada is showing the way, pulling up DUI and other records of U.S. citizens as they attempt to enter Canada. Every government has its moments of tyranny. 



> Downside - there are some confusing and possibly unpleasant ramifications for a US citizen child inheriting from a covered expatriate, but I'm sure there's workarounds and I've got a few decades left in me.


This part might already be complicated. My survivor (I hope!) would presently have a lot of complexity, and while the taxes are one thing (and perhaps unavoidable) I'd prefer at least to keep such complexity to a minimum. I need to do some more homework on that.

One thing that seems to work well (to echo Bev) is to take care of dependents' full needs as much as possible. A well educated, healthy, documented, tax compliant, criminal record-free, housed, fed, debt free, and insured dependent is pretty well off, especially if that dependent is then able to pile up his/her own nest egg. That is, if you've got a future heir/dependent in the house, don't let the dependent pay for anything consumption-related (i.e. anything not a gift in tax terms), especially for things that act like investments but which aren't considered gifts (e.g. education). Pay for all the groceries, pay the electric bill every month, etc., etc. -- none of that should be coming out of the dependent's/foreign spouse's assets if the goal is to boost those assets. "First do no harm," basically. Any income the dependent/foreign spouse earns should go straight into his/her savings as much as possible.


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## Nononymous

I did get an answer (as blog post - thanks) from a jet-lagged Phil Hodgen. Theoretically possible, though probably not advisable. An amusing out-of-the-box idea that might make travel to the US a bit awkward. 

To the second issue, if nature follows its normal course a modest lump of wealth will pass from a preceding generation through this one and on to the next. My daughter might be wise to ditch her US citizenship come 18, though she was not born in the US so it may be less urgent. That will be her decision. I'm not privy to all the details but apparently things are being structured such that I won't necessarily need to get rid of my citizenship either, said lump will be protected from any exposure to the US.


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## BBCWatcher

Bevdeforges said:


> (Easy for me to say: only child, no kids.)


I'd be very happy indeed to inherit from you, Bev, if you're looking for a volunteer.  Naturally I hope such an event would be far, far into the future.


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## BBCWatcher

Nononymous said:


> I'm not privy to all the details but apparently things are being structured such that I won't necessarily need to get rid of my citizenship either, said lump will be protected from any exposure to the US.


The U.S. estate exemption for citizen-to-citizen transfers is $5,250,000 (2013) per decedent and indexed to inflation. I might have missed the part where there would be any tax issue. Are you referring to a tax advantaged Canadian retirement account perhaps? What's the complication?


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## Nononymous

BBCWatcher said:


> The U.S. estate exemption for citizen-to-citizen transfers is $5,250,000 (2013) per decedent and indexed to inflation. I might have missed the part where there would be any tax issue. Are you referring to a tax advantaged Canadian retirement account perhaps? What's the complication?


I actually have no idea, to be honest. I'm just following some indirect professional advice that I don't need to worry about giving up the citizenship at this point. I think the concern is more the cost of compliance and reporting rather than the potential for money to be owed.


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## BBCWatcher

U.S. to U.S. citizen and foreign citizen to U.S. citizen bequests seem to be relatively straightforward (generally) at least for estates up to that rather big $5.25M number. From what I can determine transfers from a U.S. citizen to a foreign citizen are the complicated, more taxable ones. I've got a lot more studying to do, though.


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## Nononymous

I think I've officially crossed the line and now reached this level of obstinacy.


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## Bevdeforges

BBCWatcher said:


> I'd be very happy indeed to inherit from you, Bev, if you're looking for a volunteer.  Naturally I hope such an event would be far, far into the future.


Care and maintenance of two donkeys and about $100 or whatever is left in the bank accounts at that point? Nah, I think I'm leaving it to the kids next door... Sorry.
Cheers,
Bev


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