Planning for U.S. expatriation under IRC 877A

Why expatriation isn't the quick fix it seems

For U.S. citizens and green card-holders living in Canada, navigating two distinct tax systems can be overwhelming and expensive. Over time, this complexity can also limit access to planning strategies that might otherwise support more efficient tax or estate outcomes (e.g. incorporation, family trusts, etc.). As a result, renouncing U.S. citizenship may appear to be a silver bullet to reduce professional fees, reduce complexity and allow for a more efficient tax structure. 

However, expatriation, meaning giving up U.S. citizenship or a green card, can result in real, immediate, and significant tax consequences. All U.S. taxpayers considering expatriation should carefully consider the U.S. expatriation rules under IRC 877A, as they can apply more broadly than expected and may carry substantial U.S. tax implications. 

Before taking any steps, it is critical to understand how these rules work and how they may affect your personal and financial situation.

The US$2 million threshold is lower than you think 

The U.S. expatriation rules apply to a “covered expatriate,” defined as an individual who expatriates and meets any one of the following three objective tests: 

Exemptions from the net worth test and tax liability test may apply for certain individuals, including those born with dual citizenship and individuals who expatriate prior to turning 18.5 years of age. Both exceptions require the individual to have resided outside of the U.S. for a certain period of time prior to expatriation. 

For many individuals, the US$2 million net worth threshold can be reached more quickly than anticipated, particularly given the range of assets that may be included. When combined with the consequences outlined below, these rules can be a significant deterrent to expatriation.   

Exit tax, transfer tax and the real cost of getting it wrong 

The implications for covered expatriates are, in some respects, similar to Canadian departure tax rules, but they are generally more severe. The primary consequences include the following: 

• Exit tax – The taxpayer is subject to immediate taxation on all unrealized gains and income; however, the first US$910,000 of gain is exempt for 2026. This amount is indexed annually for inflation. Special rules apply to deferred compensation, certain “specified” tax-deferred accounts and interests in foreign non-grantor trusts. 

• Transfer tax – Any future transfers by the taxpayer to U.S. persons, while living or as a consequence of death, are subject to U.S. transfer tax at a rate equal to the maximum U.S. estate/gift tax rate of 40 per cent. This tax is imposed on the recipient of the gift or bequest. 

The IRS is paying closer attention 

In 2023, the Internal Revenue Service (IRS) established an Expatriation Tax Practice Unit to support compliance and enforcement efforts. The unit was created in response to a Treasury Inspector General for Tax Administration report in 2020 that had identified significant deficiencies in the enforcement and collection of expatriation tax.  

The practice unit has released significant guidance confirming the extent of assets that are subject to inclusion (such as life insurance on third parties, litigation claims) and how to value them. The IRS has also taken additional steps to enforce compliance, such as requiring a Social Security number field on the Certificate of Loss of Nationality to help track individuals and pursue any failures to file the expatriation tax form. 

With efforts to enforce this tax mounting, proactive management is becoming increasingly important for individuals looking to renounce their citizenship. In addition, given the relatively small number of U.S. citizens renouncing annually (approximately 5,000 in 2024), the risk of enforcement action appears to be high relative to other areas of compliance.  

Planning moves that can change the outcome 

There are some basic planning techniques that can be used to avoid the application of the U.S. expatriation rules: 

If you are a green card-holder residing in Canada, you may not be subject to U.S. estate and gift tax rules on your worldwide assets. This is because only U.S. citizens and domiciliaries are subject to U.S. estate and gift tax on their worldwide assets. To that end, one may be able to gift assets exceeding the exemption amount without incurring gift tax. 

Finally, even if you cannot bring your net worth below the US$2 million threshold, you may be able to lessen the impact of the mark-to-market rules by gifting appreciated assets to another person, such as your spouse. 

Align Canadian taxation 

While not an ideal scenario, if covered expatriate status is inevitable and U.S. tax is going to be triggered by the expatriation rules, you should, at the very least, align Canadian tax to avoid the potential of double taxation in the future. This could be done by triggering actual realizations prior to expatriation or by utilizing preferential provisions in the tax treaty that would have a similar effect. 

This isn't a DIY exercise 

Cross-border tax planning is complex and comes with significant risk and uncertainty. Individuals considering expatriation should work with advisors who understand both U.S. and Canadian tax systems and can assess the implications in the context of their broader planning goals.  Our cross-border team works with clients navigating exactly these decisions — reach out to talk through how the rules apply to your situation. 

This is an updated version of a previously published article and reflects revised content and information.