Moving back to Canada, expatriation exit tax and cap gains

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Topic Author
ee22bee
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Joined: Mon Jan 01, 2018 12:24 pm

Moving back to Canada, expatriation exit tax and cap gains

Post by ee22bee »

A friend and I are reading up about the expatriation exit tax, including BH wiki on Expatriation tax and Permanently leaving the US

My friend has been in the US for 15+ years, green card holder since 2015, and is planning to move back to Canada in a few years, relinquishing her green card.

We're trying to understand/confirm some details about the exit tax's $2 million threshold and cap gains.

About the $2M threshold:

My understanding is that, if your worldwide net worth is below $2M, then there's no exit tax at all. But if you're at $2M or more, then the exit tax applies. Using two examples, say if one has $1M in unrealized cap gains, with total net worth of all assets is $1,999,999, there'd be no exit tax. But for the same $1M in unrealized cap gains, if total net worth is even just one dollar more, at $2M, then you'd need to pay exit tax on $256k (1M deemed gain minus 744k exclusion (as of 2021))? Is this understanding correct?

About realizing cap gains:

In the case where net worth is $1.9M with no exit tax, sounds like you'd be taxed on realized cap gains on a regular tax return. Taxed by the US if sold before expatriation. Taxed by Canada if sold after expatriation. Correct?

In the case where net worth is $2M+ and you pay the exit tax on the deemed $1M gain minus exclusion amount, I assume you'd additionally pay regular cap gains tax when sold afterwards. In this case, would the cap gains be the entire $1M + gains since expatriation, or only the gains since expatriation? If the latter, then seems there's 744k of realized gain that is never taxed (not by the exit tax and not by regular cap gains tax by either country). Seems too good to be true, so surely I'm missing some detail.

My friend is doing some decluttering/reorganizing of her taxable account, so want to confirm whether there's really an opportunity for tax-free cap gains down the road.
assyadh
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Re: Moving back to Canada, expatriation exit tax and cap gains

Post by assyadh »

If you're not subject to the exit tax and wait to be in Canada before selling you won't have any tax due because Canada has a deemed acquisition rule.
gougou
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Re: Moving back to Canada, expatriation exit tax and cap gains

Post by gougou »

No you won’t be taxed in Canada because your cost basis will step up to the market value when you enter the Canadian tax system.

So if your unrealized capital gain is below 744k you won’t pay US exit tax at all and you won’t pay Canadian capital gain tax either.
retire2022
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Re: Moving back to Canada, expatriation exit tax and cap gains

Post by retire2022 »

ee22bee wrote: Sun Jan 23, 2022 5:39 pm A friend and I are reading up about the expatriation exit tax, including BH wiki on Expatriation tax and Permanently leaving the US

My friend has been in the US for 15+ years, green card holder since 2015, and is planning to move back to Canada in a few years, relinquishing her green card.

We're trying to understand/confirm some details about the exit tax's $2 million threshold and cap gains.

About the $2M threshold:

My understanding is that, if your worldwide net worth is below $2M, then there's no exit tax at all. But if you're at $2M or more, then the exit tax applies. Using two examples, say if one has $1M in unrealized cap gains, with total net worth of all assets is $1,999,999, there'd be no exit tax. But for the same $1M in unrealized cap gains, if total net worth is even just one dollar more, at $2M, then you'd need to pay exit tax on $256k (1M deemed gain minus 744k exclusion (as of 2021))? Is this understanding correct?

About realizing cap gains:

In the case where net worth is $1.9M with no exit tax, sounds like you'd be taxed on realized cap gains on a regular tax return. Taxed by the US if sold before expatriation. Taxed by Canada if sold after expatriation. Correct?

In the case where net worth is $2M+ and you pay the exit tax on the deemed $1M gain minus exclusion amount, I assume you'd additionally pay regular cap gains tax when sold afterwards. In this case, would the cap gains be the entire $1M + gains since expatriation, or only the gains since expatriation? If the latter, then seems there's 744k of realized gain that is never taxed (not by the exit tax and not by regular cap gains tax by either country). Seems too good to be true, so surely I'm missing some detail.

My friend is doing some decluttering/reorganizing of her taxable account, so want to confirm whether there's really an opportunity for tax-free cap gains down the road.
Any children who are born in USA? you could gift them some assets
Topic Author
ee22bee
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Re: Moving back to Canada, expatriation exit tax and cap gains

Post by ee22bee »

retire2022 wrote: Sun Jan 23, 2022 6:31 pm Any children who are born in USA? you could gift them some assets
Thanks for the suggestion on gifting.

No kids. And Single filing status.

We were learning about gifting as well, because net worth is currently right at $2M. So learning/planning ahead in case it's still this close when she moves.

Is it true that, if you gift more than 15k/person, you just file IRS Form 709, and that is ok, just a reporting requirement, no tax, and no complication to eventual expatriation?

Also, what is the lookback timeframe? I read on a couple of sites that there's a 3-year lookback, for recent gifts to not be counted, but was not able to confirm this on irs.gov.
Topic Author
ee22bee
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Re: Moving back to Canada, expatriation exit tax and cap gains

Post by ee22bee »

Thank you everyone for the replies!

Did not know about the Canada step-up. That's perfect! I'll recommend that she continues to let the unrealized gains pile up then.

Her net worth is currently around $2M. Gains in taxable account is projected to be less than the exclusion amount. Even if net worth exceeds $2M, the 744k tax-free gains that get step-up is still wonderful.

As for unrealized value gain on primary US home, does that also get step-up if hold off to sell until after expatriation? Home value has increased 350k since purchase. So we were thinking if she sells the house just before expatration, she can still get 250k of the house gains tax-free. Sounds like if there's room in the 744k to include both the house gain + taxable account gains, then it's better to sell the house after expatration, correct?
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Hyperborea
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Re: Moving back to Canada, expatriation exit tax and cap gains

Post by Hyperborea »

ee22bee wrote: Sun Jan 23, 2022 9:29 pm We were learning about gifting as well, because net worth is currently right at $2M. So learning/planning ahead in case it's still this close when she moves.
If I were exiting the US as a single person and my assets were just above the US$2M boundary then I would get rid of the amount over that limit. Give it away, spend it on lavish hedonistic fun, donate it to a charity, anything. The extra tax and the hassle and cost of being a covered expatriate make it the right choice to avoid this.

If this person has a trusted partner who is also exiting with them then they could gift the amount over the limit to their partner. When they exit they and their partner would be below the limit individually. The exit tax is applied on individuals not on couples.

ee22bee wrote: Sun Jan 23, 2022 9:29 pm Is it true that, if you gift more than 15k/person, you just file IRS Form 709, and that is ok, just a reporting requirement, no tax, and no complication to eventual expatriation?
If you give more than the gift tax limit (now US$16K) then you can count it as part of your estate tax exemption. You do that by filing form 709 as you state.

ee22bee wrote: Sun Jan 23, 2022 9:29 pm Also, what is the lookback timeframe? I read on a couple of sites that there's a 3-year lookback, for recent gifts to not be counted, but was not able to confirm this on irs.gov.
This came up recently and it appears to be somebody reading the rules for gifts before death and trying to apply it to expatriation. viewtopic.php?f=22&t=362120
It’s not just that facts don’t seem to matter anymore. It’s that it doesn’t seem to matter that facts don’t matter.
todaysBob
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Re: Moving back to Canada, expatriation exit tax and cap gains

Post by todaysBob »

gougou wrote: Sun Jan 23, 2022 6:26 pm No you won’t be taxed in Canada because your cost basis will step up to the market value when you enter the Canadian tax system.

So if your unrealized capital gain is below 744k you won’t pay US exit tax at all and you won’t pay Canadian capital gain tax either.
This is amazing. Is this unique to Canada or same for all countries? I know if person sells in US and buys again in new country, then cost basis will be "reset", but sounds like one can just keep holding the same positions and still reset the cost basis?
TedSwippet
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Re: Moving back to Canada, expatriation exit tax and cap gains

Post by TedSwippet »

todaysBob wrote: Mon Jan 24, 2022 3:14 am
gougou wrote: Sun Jan 23, 2022 6:26 pm No you won’t be taxed in Canada because your cost basis will step up to the market value when you enter the Canadian tax system.

So if your unrealized capital gain is below 744k you won’t pay US exit tax at all and you won’t pay Canadian capital gain tax either.
This is amazing. Is this unique to Canada or same for all countries? I know if person sells in US and buys again in new country, then cost basis will be "reset", but sounds like one can just keep holding the same positions and still reset the cost basis?
I suspect Canada may be the exception rather than the rule -- this is certainly not the case for the two countries I know best.

Both the UK and the US will cheerfully levy their full capital gains tax on asset sales by new residents, without any regard to how much of the gain might have accrued before the person became resident. Also, neither country accounts for exchange rate fluctuation rather than actual capital gain, making it possible to face paying tax on a GBP or USD "gain" that is in reality a non-GBP/USD loss.
Valuethinker
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Re: Moving back to Canada, expatriation exit tax and cap gains

Post by Valuethinker »

ee22bee wrote: Sun Jan 23, 2022 5:39 pm A friend and I are reading up about the expatriation exit tax, including BH wiki on Expatriation tax and Permanently leaving the US

My friend has been in the US for 15+ years, green card holder since 2015, and is planning to move back to Canada in a few years, relinquishing her green card.

We're trying to understand/confirm some details about the exit tax's $2 million threshold and cap gains.

About the $2M threshold:

My understanding is that, if your worldwide net worth is below $2M, then there's no exit tax at all. But if you're at $2M or more, then the exit tax applies. Using two examples, say if one has $1M in unrealized cap gains, with total net worth of all assets is $1,999,999, there'd be no exit tax. But for the same $1M in unrealized cap gains, if total net worth is even just one dollar more, at $2M, then you'd need to pay exit tax on $256k (1M deemed gain minus 744k exclusion (as of 2021))? Is this understanding correct?

About realizing cap gains:

In the case where net worth is $1.9M with no exit tax, sounds like you'd be taxed on realized cap gains on a regular tax return. Taxed by the US if sold before expatriation. Taxed by Canada if sold after expatriation. Correct?

In the case where net worth is $2M+ and you pay the exit tax on the deemed $1M gain minus exclusion amount, I assume you'd additionally pay regular cap gains tax when sold afterwards. In this case, would the cap gains be the entire $1M + gains since expatriation, or only the gains since expatriation? If the latter, then seems there's 744k of realized gain that is never taxed (not by the exit tax and not by regular cap gains tax by either country). Seems too good to be true, so surely I'm missing some detail.

My friend is doing some decluttering/reorganizing of her taxable account, so want to confirm whether there's really an opportunity for tax-free cap gains down the road.
There is a Canadian Financial Wisdom Forum which is linked through from these boards (under non US investors).

I would join that and ask the same question. Very helpful people. Someone will for sure have been through this.
TedSwippet
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Re: Moving back to Canada, expatriation exit tax and cap gains

Post by TedSwippet »

ee22bee wrote: Sun Jan 23, 2022 9:31 pm As for unrealized value gain on primary US home, does that also get step-up if hold off to sell until after expatriation? Home value has increased 350k since purchase. So we were thinking if she sells the house just before expatration, she can still get 250k of the house gains tax-free. Sounds like if there's room in the 744k to include both the house gain + taxable account gains, then it's better to sell the house after expatration, correct?
Maybe not. On the US side of things, if hit by the US's shameful expatriation tax, not only can you not use the standard $250k primary home allowance, but when you do then sell US real estate as a nonresident alien -- which is what you are after expatriation -- you now have to tangle with the US's FIRPTA tax rule, something that could conceivably leave you worse off than if you sell before expatriation.

From the sound of things, section 2801 tax is unlikely to be a problem in future, but I take it your friend is fully aware of the massive tax threat that the expatriation tax poses to IRAs and other retirement accounts?
Topic Author
ee22bee
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Re: Moving back to Canada, expatriation exit tax and cap gains

Post by ee22bee »

Hyperborea wrote: Mon Jan 24, 2022 2:16 am
ee22bee wrote: Sun Jan 23, 2022 9:29 pm Also, what is the lookback timeframe? I read on a couple of sites that there's a 3-year lookback, for recent gifts to not be counted, but was not able to confirm this on irs.gov.
This came up recently and it appears to be somebody reading the rules for gifts before death and trying to apply it to expatriation. viewtopic.php?f=22&t=362120
Hyperborea, thanks for pointing out that other thread and the useful details by you and TedSwippet in there. The referenced wiki's Note 12 was particularly helpful in clarifying the confusion. Thank you both!
Hyperborea wrote: Mon Jan 24, 2022 2:16 am
ee22bee wrote: Sun Jan 23, 2022 9:29 pm We were learning about gifting as well, because net worth is currently right at $2M. So learning/planning ahead in case it's still this close when she moves.
If I were exiting the US as a single person and my assets were just above the US$2M boundary then I would get rid of the amount over that limit. Give it away, spend it on lavish hedonistic fun, donate it to a charity, anything. The extra tax and the hassle and cost of being a covered expatriate make it the right choice to avoid this.
:sharebeer
Last edited by ee22bee on Tue Jan 25, 2022 4:36 pm, edited 1 time in total.
Topic Author
ee22bee
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Re: Moving back to Canada, expatriation exit tax and cap gains

Post by ee22bee »

Valuethinker wrote: Mon Jan 24, 2022 4:26 am There is a Canadian Financial Wisdom Forum which is linked through from these boards (under non US investors).

I would join that and ask the same question. Very helpful people. Someone will for sure have been through this.
Sounds good. Will have my friend do that now! Thanks Valuethinker!
Topic Author
ee22bee
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Re: Moving back to Canada, expatriation exit tax and cap gains

Post by ee22bee »

TedSwippet wrote: Mon Jan 24, 2022 8:00 am
ee22bee wrote: Sun Jan 23, 2022 9:31 pm As for unrealized value gain on primary US home, does that also get step-up if hold off to sell until after expatriation? Home value has increased 350k since purchase. So we were thinking if she sells the house just before expatration, she can still get 250k of the house gains tax-free. Sounds like if there's room in the 744k to include both the house gain + taxable account gains, then it's better to sell the house after expatration, correct?
Maybe not. On the US side of things, if hit by the US's shameful expatriation tax, not only can you not use the standard $250k primary home allowance, but when you do then sell US real estate as a nonresident alien -- which is what you are after expatriation -- you now have to tangle with the US's FIRPTA tax rule, something that could conceivably leave you worse off than if you sell before expatriation.
TedSwippet, thanks for the warning! Was thinking if the house gets step-up on date of expatriation, then the taxed gain from that date would be minimal if sold shortly after. But good thing you pointed out FIRPTA, thank you! I had helped another friend (a nonresident) deal with that a year ago (it wasn't in the context of expatriation, so my brain didn't make the connection, but you're right, same nonresident scenario after expatriation). I had forgotten the hassle of Form 8288 and 8288-A/B and the large sum (15% of gross, not just of gains) tied up in interest-free loan to the IRS. Thank you very much for pointing this out!
TedSwippet wrote: Mon Jan 24, 2022 8:00 am From the sound of things, section 2801 tax is unlikely to be a problem in future, ...
I myself am aware of the 40% tax on US recipients of gifts/bequests from a covered expatriate. Not sure if my friend is aware. I'll be sure to mention to her, better to be thorough than assume it's not relevant to her. In fact, I'll be pointing her to this thread for all the details. Thanks very much for the heads-up!
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ee22bee
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Re: Moving back to Canada, expatriation exit tax and cap gains

Post by ee22bee »

TedSwippet wrote: Mon Jan 24, 2022 8:00 am ... I take it your friend is fully aware of the massive tax threat that the expatriation tax poses to IRAs and other retirement accounts?
We actually have not fully read up on retirement accounts yet. Thanks for bringing it up. We'd appreciate some double-checking on our current (limited) understanding.

My friend currently has three retirement account types:
  • Pre-Tax 401k
  • Roth 401k (in-plan conversions from After-Tax mega backdoor Roth, if that matters)
  • Roth IRA
No Traditional IRA.

Bulk of it is in pre-tax 401k.

Upon learning about the expatriation process and exit tax recently, we switched her new/future contributions from pre-tax 401k to Roth 401k. Our current (limited) understanding is that withdrawals from Roth 401k and Roth IRA will be tax-free upon expatriation, and pre-tax 401k can be deferred/spread over years. She prefers to close all US accounts when she expatriates, but she might spread pre-tax 401k withdrawals over a handful of years to ease the tax hit if needed. She'll be age 59.5+ when all this happens.
ccompounder
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Re: Moving back to Canada, expatriation exit tax and cap gains

Post by ccompounder »

Another option for your friend, since they have been a Green Card holder for 15 years, is to request citizenship.
There will be no US expatriation tax.

But there will be world-wide US taxation now, including future Canadian sourced income.
student
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Re: Moving back to Canada, expatriation exit tax and cap gains

Post by student »

ccompounder wrote: Tue Jan 25, 2022 4:31 pm Another option for your friend, since they have been a Green Card holder for 15 years, is to request citizenship.
There will be no US expatriation tax.

But there will be world-wide US taxation now, including future Canadian sourced income.
I think since US taxation is in general lower than Canadian tax, there will likely be no additional taxes. I believe after tax credit, one essentially pays higher of the two, which will likely be Canadian tax.
TedSwippet
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Re: Moving back to Canada, expatriation exit tax and cap gains

Post by TedSwippet »

student wrote: Tue Jan 25, 2022 5:05 pm
ccompounder wrote: Tue Jan 25, 2022 4:31 pm Another option for your friend, since they have been a Green Card holder for 15 years, is to request citizenship.
There will be no US expatriation tax.

But there will be world-wide US taxation now, including future Canadian sourced income.
I think since US taxation is in general lower than Canadian tax, there will likely be no additional taxes. I believe after tax credit, one essentially pays higher of the two, which will likely be Canadian tax.
Superficially sometimes somewhat true. However, this wiki page list the many, many ways in which US expats abroad can still wind up with a US tax liability in excess of anything paid to Canada or another residence country:

US tax pitfalls for a US person living abroad - Bogleheads

Most of the issues boil down to differences across the two countries in the nature of the investment (for example, Canadian TFSAs are tax free to Canada, but the US does not recognise them as a tax shelter), the timing of income recognition (GILTI, say), and phantom gains caused purely by exchange rate fluctuations between the USD and CAD or other currency.
assyadh
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Re: Moving back to Canada, expatriation exit tax and cap gains

Post by assyadh »

TedSwippet wrote: Tue Jan 25, 2022 5:36 pm
student wrote: Tue Jan 25, 2022 5:05 pm
ccompounder wrote: Tue Jan 25, 2022 4:31 pm Another option for your friend, since they have been a Green Card holder for 15 years, is to request citizenship.
There will be no US expatriation tax.

But there will be world-wide US taxation now, including future Canadian sourced income.
I think since US taxation is in general lower than Canadian tax, there will likely be no additional taxes. I believe after tax credit, one essentially pays higher of the two, which will likely be Canadian tax.
Superficially sometimes somewhat true. However, this wiki page list the many, many ways in which US expats abroad can still wind up with a US tax liability in excess of anything paid to Canada or another residence country:

US tax pitfalls for a US person living abroad - Bogleheads

Most of the issues boil down to differences across the two countries in the nature of the investment (for example, Canadian TFSAs are tax free to Canada, but the US does not recognise them as a tax shelter), the timing of income recognition (GILTI, say), and phantom gains caused purely by exchange rate fluctuations between the USD and CAD or other currency.
Canadian has unlimited tax free capital gains for primary residence sale, not the US. This burnt A LOT OF PEOPLE in areas like Vancouver or Toronto
TedSwippet
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Re: Moving back to Canada, expatriation exit tax and cap gains

Post by TedSwippet »

assyadh wrote: Tue Jan 25, 2022 6:18 pm
Most of the issues boil down to differences across the two countries in the nature of the investment (for example, Canadian TFSAs are tax free to Canada, but the US does not recognise them as a tax shelter), the timing of income recognition (GILTI, say), and phantom gains caused purely by exchange rate fluctuations between the USD and CAD or other currency.
Canadian has unlimited tax free capital gains for primary residence sale, not the US. This burnt A LOT OF PEOPLE in areas like Vancouver or Toronto
Indeed. This exact issue is what drove UK PM Boris Johnson to renounce his US citizenship in 2017.
Topic Author
ee22bee
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Re: Moving back to Canada, expatriation exit tax and cap gains

Post by ee22bee »

Thanks again, everyone, for the helpful info and interesting details.

My friend does actually have Canada real estate: a condo that was her primary residence before she moved to the US more than 15 years ago. She's been renting it out (rental income reported on Canada and US tax returns annually, foreign tax credit claimed on US tax return).

Will this Canadian property, which she's owned since before becoming a US resident, be counted in the $2M net worth test? I think the answer is yes, but want to confirm.

If yes, that means the unrealized gain on this Canadian property will also be included for purpose of whether total cap gains exceed the 744k exclusion, correct? That is, cap gains include worldwide cap gains, correct?
TedSwippet
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Re: Moving back to Canada, expatriation exit tax and cap gains

Post by TedSwippet »

ee22bee wrote: Wed Jan 26, 2022 4:45 am Will this Canadian property, which she's owned since before becoming a US resident, be counted in the $2M net worth test? I think the answer is yes, but want to confirm.
Yes. See Section B line 16 of IRS form 8854.
ee22bee wrote: Wed Jan 26, 2022 4:45 am If yes, that means the unrealized gain on this Canadian property will also be included for purpose of whether total cap gains exceed the 744k exclusion, correct? That is, cap gains include worldwide cap gains, correct?
Again yes. Section C line 2 of the same form. Note however that this is the one area in which the US permits a 'step up' basis for property owned from before becoming a US 'taxable person'. That may or may not reduce the exit tax hit.

Finally, as a general rule it is worth making some effort to avoid 'covered expatriate' status. A properly executed gifting strategy can help duck under the $2mm asset bar. Or, just leave the US earlier than planned and before reaching this level of assets. The US exit tax is a spiteful and nasty tax -- not to mention an economically dumb one -- and nobody should pay it.
assyadh
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Re: Moving back to Canada, expatriation exit tax and cap gains

Post by assyadh »

ee22bee wrote: Wed Jan 26, 2022 4:45 am Thanks again, everyone, for the helpful info and interesting details.

My friend does actually have Canada real estate: a condo that was her primary residence before she moved to the US more than 15 years ago. She's been renting it out (rental income reported on Canada and US tax returns annually, foreign tax credit claimed on US tax return).

Will this Canadian property, which she's owned since before becoming a US resident, be counted in the $2M net worth test? I think the answer is yes, but want to confirm.

If yes, that means the unrealized gain on this Canadian property will also be included for purpose of whether total cap gains exceed the 744k exclusion, correct? That is, cap gains include worldwide cap gains, correct?
Yes the unrealized gain will be added to the 2M/744k exclusion. Keep in mind if it's unrealized, it doesn't open the door for tax credits. It may not matter for you but for others it will.

Essentially with the US you should see things like this:

You have a financial life BEFORE being a US Person
You have a financial life as a US Person
You have a financial life AFTER being a US Person

These are 3 chapters of ones life. and unfortunately they hardly overlap with no tax consequences. Canada is one of the few countries where it's doable but still a lot of pitfalls (TFSA, RRSP, RESP taxation etc..)
Topic Author
ee22bee
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Re: Moving back to Canada, expatriation exit tax and cap gains

Post by ee22bee »

Thank you assyadh and TedSwippet for the additional replies.

I see 877A(h)(2) now, about the step-up basis for the pre-US-resident property. Thanks!
TedSwippet wrote: Wed Jan 26, 2022 6:58 am Finally, as a general rule it is worth making some effort to avoid 'covered expatriate' status. A properly executed gifting strategy can help duck under the $2mm asset bar. Or, just leave the US earlier than planned and before reaching this level of assets. The US exit tax is a spiteful and nasty tax -- not to mention an economically dumb one -- and nobody should pay it.
I agree.

My friend is right around $2M currently and is planning to move back to Canada when she retires in 5-7 years. Great for my friend if the market goes flat, but I hope not, for the sake of all Bogleheads. :beer

Say net worth becomes $2.5M, are there gifting strategies aside from gifting to individuals and charities?

Summarizing what we've learned, seems her options ahead are:

A) Avoid being a covered expatriate by gifting or by leaving the US much earlier. Continue career in Canada, which for her career category is a 40-50% salary cut.

B) Avoid being a covered expatriate by becoming a US citizen and not expatriate. Move to Canada when retired, and keep filing US tax returns.

C) On current course, deal with being a covered expatriate. After expatriation, don't die before getting rid of US assets (only 60k estate tax exemption). Don't have US heirs (40% tax on recipient).

Edit: 60k exemption limit does not apply because of tax treaty. See TedSwippet's post below.
Last edited by ee22bee on Sat Jan 29, 2022 1:44 am, edited 1 time in total.
TedSwippet
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Re: Moving back to Canada, expatriation exit tax and cap gains

Post by TedSwippet »

ee22bee wrote: Fri Jan 28, 2022 5:42 am Say net worth becomes $2.5M, are there gifting strategies aside from gifting to individuals and charities?
Probably limited. A google around the web will find some sites that talk about 'expatriation trusts', but I've never looked into these (happily for me, I am not a US citizen and not a 'covered expatriate'). My guess though is that these would at best defer the US tax rather than entirely defeat the whole nasty exit tax business. Worth a look though, I guess, if only to round out a full investigation of the options.
ee22bee wrote: Fri Jan 28, 2022 5:42 am A) Avoid being a covered expatriate by gifting or by leaving the US much earlier. Continue career in Canada, which for her career category is a 40-50% salary cut.
Gifting sounds like the better option of the two. Burning your US gift/estate tax lifetime exemption is no issue if you're going to separate entirely from US tax in future anyway.

Beyond this, and more creatively, there might be a way to arrange things so that you drop the green card now and then return to the US for a limited period under a work visa. That way you limbo under the 'exit tax' hurdle while still below the asset limit. This is probably easier for Canadians than most other nationalities thanks to NAFTA.
ee22bee wrote: Fri Jan 28, 2022 5:42 am B) Avoid being a covered expatriate by becoming a US citizen and not expatriate. Move to Canada when retired, and keep filing US tax returns.
Strictly, you could not become a US citizen but just not drop the green card either. That way, you remain a US 'taxable person' but without any practical right to live in the US. Not really recommended, and in fact would probably just be a giant PITA for any future visits to the US, but would at least save the cost of naturalising and the potential follow-on cost of renouncing later, and when spending or market falls cause asset levels drop below the exit tax threshold. The fee for renouncing US citizenship is by far the world's highest, and more than three times the fee for naturalisation.

Either way, you would have to live with all of the tax hassles of US citizenship potentially for the rest of your life. No TFSA, for example. No unlimited tax-free gains on your primary home. Tax on 'phantom' currency gains. And so on. And you would also need to spend the entire time watching over your shoulder for whatever bonkers new anti-expat law the US comes up with in future.
ee22bee wrote: Fri Jan 28, 2022 5:42 am C) On current course, deal with being a covered expatriate. After expatriation, don't die before getting rid of US assets (only 60k estate tax exemption). Don't have US heirs (40% tax on recipient).
For a non-US citizen Canadian resident the $60k shouldn't be a problem. The US/Canada tax treaty protects Canadians holding US situs assets up to the same level as US citizens ("pro rata unified credit"). Of course, you'd still have to watch for any changes to the general US estate tax exemption; it changes regularly, and not always to the benefit of investors.

But yes, afterwards, be sure not to give or bequeath anything above around $15k to US residents or US citizens. Asinine, isn't it?
Last edited by TedSwippet on Fri Jan 28, 2022 3:04 pm, edited 2 times in total.
Valuethinker
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Re: Moving back to Canada, expatriation exit tax and cap gains

Post by Valuethinker »

ee22bee wrote: Fri Jan 28, 2022 5:42 am Thank you assyadh and TedSwippet for the additional replies.

I see 877A(h)(2) now, about the step-up basis for the pre-US-resident property. Thanks!
TedSwippet wrote: Wed Jan 26, 2022 6:58 am Finally, as a general rule it is worth making some effort to avoid 'covered expatriate' status. A properly executed gifting strategy can help duck under the $2mm asset bar. Or, just leave the US earlier than planned and before reaching this level of assets. The US exit tax is a spiteful and nasty tax -- not to mention an economically dumb one -- and nobody should pay it.
I agree.

My friend is right around $2M currently and is planning to move back to Canada when she retires in 5-7 years. Great for my friend if the market goes flat, but I hope not, for the sake of all Bogleheads. :beer

Say net worth becomes $2.5M, are there gifting strategies aside from gifting to individuals and charities?

Summarizing what we've learned, seems her options ahead are:

A) Avoid being a covered expatriate by gifting or by leaving the US much earlier. Continue career in Canada, which for her career category is a 40-50% salary cut.
Depending upon her financial position, US Social Security is much more generous than the Canadian equivalent (CPP/ QPP). Thus it's worth getting as much credit in the US system as possible, providing a higher level of inflation-indexed income.

It may not matter given her financial position. I don't know how it would work re Medicare. Generally I would perceive the Canadian system as being superior (all inclusive) however some types of specialised care one would be better off in the US. It's certainly true that the recent Covid crisis has exposed Ontario (and perhaps other provinces?) as having a shortage of hospital beds.

These things are hard to legislate for. I have a relation who is receiving a (very expensive) cancer drug (in Ontario). It took a while to get approval, but she is getting it - -and since it is hospital delivered, paying nothing for it. Insulin, as another example, seems to be much cheaper in Canada.
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ee22bee
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Re: Moving back to Canada, expatriation exit tax and cap gains

Post by ee22bee »

TedSwippet wrote: Fri Jan 28, 2022 7:15 am
ee22bee wrote: Fri Jan 28, 2022 5:42 am Say net worth becomes $2.5M, are there gifting strategies aside from gifting to individuals and charities?
Probably limited. A google around the web will find some sites that talk about 'expatriation trusts', but I've never looked into these (happily for me, I am not a US citizen and not a 'covered expatriate'). My guess though is that these would at best defer the US tax rather than entirely defeat the whole nasty exit tax business. Worth a look though, I guess, if only to round out a full investigation of the options.
Took another glimpse at the expatriation trust/nongrantor trust just now. Seems this trust type, being in §877A(c)'s list of exceptions, makes those assets not included in the $2M. As to how eventual sale of assets and distributions are taxed, a few articles seem to indicate it's a deferral or shuffling game of some sort. Unfortunately anything that's not DIY'able, I lose attention and didn't read further, lol. It's good, as you said, that at least it's now on the list, to be investigated further if can't apply the other options.
TedSwippet wrote: Fri Jan 28, 2022 7:15 am
ee22bee wrote: Fri Jan 28, 2022 5:42 am A) Avoid being a covered expatriate by gifting or by leaving the US much earlier. Continue career in Canada, which for her career category is a 40-50% salary cut.
Gifting sounds like the better option of the two. Burning your US gift/estate tax lifetime exemption is no issue if you're going to separate entirely from US tax in future anyway.

Beyond this, and more creatively, there might be a way to arrange things so that you drop the green card now and then return to the US for a limited period under a work visa. That way you limbo under the 'exit tax' hurdle while still below the asset limit. This is probably easier for Canadians than most other nationalities thanks to NAFTA.
Wow, interesting idea!
TedSwippet wrote: Fri Jan 28, 2022 7:15 am
ee22bee wrote: Fri Jan 28, 2022 5:42 am C) On current course, deal with being a covered expatriate. After expatriation, don't die before getting rid of US assets (only 60k estate tax exemption). Don't have US heirs (40% tax on recipient).
For a non-US citizen Canadian resident the $60k shouldn't be a problem. The US/Canada tax treaty protects Canadians holding US situs assets up to the same level as US citizens ("pro rata unified credit"). Of course, you'd still have to watch for any changes to the general US estate tax exemption; it changes regularly, and not always to the benefit of investors.

But yes, afterwards, be sure not to give or bequeath anything above around $15k to US residents or US citizens. Asinine, isn't it?
Ah, thanks for pointing out the treaty treatment on the estate tax exemption!
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ee22bee
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Re: Moving back to Canada, expatriation exit tax and cap gains

Post by ee22bee »

Valuethinker wrote: Fri Jan 28, 2022 8:01 am
ee22bee wrote: Fri Jan 28, 2022 5:42 am A) Avoid being a covered expatriate by gifting or by leaving the US much earlier. Continue career in Canada, which for her career category is a 40-50% salary cut.
Depending upon her financial position, US Social Security is much more generous than the Canadian equivalent (CPP/ QPP). Thus it's worth getting as much credit in the US system as possible, providing a higher level of inflation-indexed income.

It may not matter given her financial position. I don't know how it would work re Medicare. Generally I would perceive the Canadian system as being superior (all inclusive) however some types of specialised care one would be better off in the US. It's certainly true that the recent Covid crisis has exposed Ontario (and perhaps other provinces?) as having a shortage of hospital beds.

These things are hard to legislate for. I have a relation who is receiving a (very expensive) cancer drug (in Ontario). It took a while to get approval, but she is getting it - -and since it is hospital delivered, paying nothing for it. Insulin, as another example, seems to be much cheaper in Canada.
Good points, Valuethinker. Good factors to consider. Thanks very much!
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ee22bee
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Re: Moving back to Canada, expatriation exit tax and cap gains

Post by ee22bee »

Many thanks, everyone, for the great info and insights on this thread!

It's great to know that all available options have been listed, so that my friend (and anyone else) can choose their path and take actions in advance as needed.

Thanks again!
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Re: Moving back to Canada, expatriation exit tax and cap gains

Post by gougou »

TedSwippet wrote: Fri Jan 28, 2022 7:15 am
Beyond this, and more creatively, there might be a way to arrange things so that you drop the green card now and then return to the US for a limited period under a work visa. That way you limbo under the 'exit tax' hurdle while still below the asset limit. This is probably easier for Canadians than most other nationalities thanks to NAFTA.
I believe it's too late for OP to do that. They got their green cards in 2015 and now it's 2022. So they have already been on green card for 8 years even if they drop the green cards today. Being 8 years on green card means you are forever considered a long term resident thus subject to the US exit tax rules.
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Re: Moving back to Canada, expatriation exit tax and cap gains

Post by gougou »

ee22bee wrote: Fri Jan 28, 2022 5:42 am Thank you assyadh and TedSwippet for the additional replies.

I see 877A(h)(2) now, about the step-up basis for the pre-US-resident property. Thanks!
TedSwippet wrote: Wed Jan 26, 2022 6:58 am Finally, as a general rule it is worth making some effort to avoid 'covered expatriate' status. A properly executed gifting strategy can help duck under the $2mm asset bar. Or, just leave the US earlier than planned and before reaching this level of assets. The US exit tax is a spiteful and nasty tax -- not to mention an economically dumb one -- and nobody should pay it.
I agree.

My friend is right around $2M currently and is planning to move back to Canada when she retires in 5-7 years. Great for my friend if the market goes flat, but I hope not, for the sake of all Bogleheads. :beer

Say net worth becomes $2.5M, are there gifting strategies aside from gifting to individuals and charities?

Summarizing what we've learned, seems her options ahead are:

A) Avoid being a covered expatriate by gifting or by leaving the US much earlier. Continue career in Canada, which for her career category is a 40-50% salary cut.

B) Avoid being a covered expatriate by becoming a US citizen and not expatriate. Move to Canada when retired, and keep filing US tax returns.

C) On current course, deal with being a covered expatriate. After expatriation, don't die before getting rid of US assets (only 60k estate tax exemption). Don't have US heirs (40% tax on recipient).

Edit: 60k exemption limit does not apply because of tax treaty. See TedSwippet's post below.
A) is not possible since she got her green card in 2015 and it's 2022 already. So she's considered a long term resident because she has had a green card for 8 calendar years.

B) It's a huge PITA to deal with both IRS and the CRA. If she wants to retire in Canada she should drop her green card. I would only consider keeping the green card or becoming US citizen if I want to retire in the USA

C) It's best to avoid being a covered expat especially since she's so close to the threshold.
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Re: Moving back to Canada, expatriation exit tax and cap gains

Post by TedSwippet »

gougou wrote: Sat Jan 29, 2022 2:54 am
TedSwippet wrote: Fri Jan 28, 2022 7:15 am
Beyond this, and more creatively, there might be a way to arrange things so that you drop the green card now and then return to the US for a limited period under a work visa. That way you limbo under the 'exit tax' hurdle while still below the asset limit. This is probably easier for Canadians than most other nationalities thanks to NAFTA.
I believe it's too late for OP to do that. They got their green cards in 2015 and now it's 2022. So they have already been on green card for 8 years even if they drop the green cards today. Being 8 years on green card means you are forever considered a long term resident thus subject to the US exit tax rules.
It may be too late to avoid the long term test, but it is not too late to avoid the other exit tax tests. The exit tax provides a clean break from US taxable person-ness.

As long as one is not a covered expatriate on ditching the green card -- done not by avoiding the eight-year long term test (indeed, now too late) but rather by ducking below the $2mm asset test -- a return to the US on a later work visa should not be a problem. Covered expatriate is indeed a taint for life, but non-covered expatriates don't have the same tax baggage.
gougou wrote: Sat Jan 29, 2022 3:00 am A) is not possible since she got her green card in 2015 and it's 2022 already. So she's considered a long term resident because she has had a green card for 8 calendar years.
No. It's entirely possible. She is a long term resident, but if she ditches the green card while below the $2mm asset limit then she is not a covered expatriate.

The US's soviet-style exit tax only applies to covered expatriates. Gifting to reduce assets to below $2mm before filing the I-407 avoids being covered.
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Re: Moving back to Canada, expatriation exit tax and cap gains

Post by Hyperborea »

TedSwippet wrote: Sat Jan 29, 2022 3:39 am Gifting to reduce assets to below $2mm before filing the I-407 avoids being covered.
One crazy idea about this that I had before was to make large estimated tax payments in the year before you expatriate. Then when you expatriate you are down that amount. You will get it back later the following year but during the time of expatriation it's not "yours". I suppose similarly one could prepay other large expenses such as rent for a year or two. Might be enough between large estimated taxes and rent to drop US$100-200K from your net worth.

Somebody is probably going to explain why this won't work so don't try it just yet.
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ee22bee
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Re: Moving back to Canada, expatriation exit tax and cap gains

Post by ee22bee »

Hyperborea wrote: Sat Jan 29, 2022 7:24 am
TedSwippet wrote: Sat Jan 29, 2022 3:39 am Gifting to reduce assets to below $2mm before filing the I-407 avoids being covered.
One crazy idea about this that I had before was to make large estimated tax payments in the year before you expatriate. Then when you expatriate you are down that amount. You will get it back later the following year but during the time of expatriation it's not "yours". I suppose similarly one could prepay other large expenses such as rent for a year or two. Might be enough between large estimated taxes and rent to drop US$100-200K from your net worth.

Somebody is probably going to explain why this won't work so don't try it just yet.
Creative indeed!

On the large estimated tax payments, seems if made to the Canada side (as opposed to the IRS), seems that would/should be pretty clean!
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