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U.S. Expatriates May See Exit Tax Relief under New IRS Program

U.S. Expatriates May See Exit Tax Relief under New IRS

The IRS has announced welcome new relief for qualifying Canadian individuals who relinquish their U.S. citizenship after 2010.

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Canadian individuals who are also U.S. citizens may benefit from new IRS procedures to allow them to relinquish citizenship without triggering the U.S. exit tax or being liable for unpaid U.S. federal income tax or penalties. The relief, which was announced September 6, 2019, is available to certain qualifying individuals who relinquish U.S. citizenship (or have already relinquished U.S. citizenship) at any time after March 18, 2010.

Background

Under U.S. tax law, U.S. citizens must annually report and pay U.S. income tax on their worldwide income and disclose certain financial accounts. Generally, all persons born in the United States acquire U.S. citizenship, and persons born outside the United States to a U.S. citizen parent may acquire U.S. citizenship at birth if the parent meets certain conditions.

Some Canadian individuals may seek to relinquish their U.S. citizenship when they become aware of these ongoing tax and reporting obligations. However, if these individuals don't first comply with their U.S. tax obligations they may be subject to the U.S. exit tax.

Eligibility

Individuals who are considering relinquishing their U.S. citizenship, or who have relinquished their U.S. citizenship at any time after March 18, 2010, may be able to benefit from new relief where they meet the eligibility criteria. To qualify for these measures, the IRS notes that the individual must:

  • Be able to attribute past compliance failures to non-willful conduct (i.e., conduct that is due to negligence, inadvertence, or mistake, or conduct that is the result of a good faith misunderstanding of the requirements of the law)
  • Have no filing history as a U.S. citizen or resident
  • Have an average annual net income tax liability for the period of five tax years ending before the date of expatriation below a certain annually-adjusted threshold (for 2019, the threshold is $168,000)
  • Have a net worth less than $2 million at the time of expatriation and at the time of making a relief submission
  • Have an aggregate total tax liability of $25,000 or less for the five tax years preceding expatriation and in the year of expatriation
  • Agree to complete and submit with the relief submission all required federal tax returns for the six tax years at issue, including all required schedules and information returns.

The IRS states that an individual that meets all this criteria and files all required federal tax returns for the six tax years at issue (including all required schedules and information returns) is relieved from paying U.S. taxes and will not be assessed penalties and interest.  In addition, the individual will not generally be subject to the U.S. exit tax.

For more information, contact your KPMG advisor

Information is current to September 17, 2019. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500.

© 2020 KPMG LLP, a Canada limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

KPMG International Cooperative (“KPMG International”) is a Swiss entity.  Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.

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