Renouncing U.S. Citizenship: The Exit Tax

Giving up U.S. citizenship is one of the few decisions in cross-border tax that is genuinely irreversible, and it is governed by two systems that operate on different timelines. The first is immigration and nationality law: a formal act before a U.S. consular officer that ends your status as a U.S. citizen. The second is tax law: the expatriation regime in section 877A of the Internal Revenue Code, which can treat your departure as a taxable event and impose a one-time "exit tax" on the unrealized gain in everything you own. Many people assume that walking into a consulate and taking the oath is the whole story. It is not. The tax consequences are determined by tests applied as of the day you expatriate, and by a certification you make on a specific IRS form — and the worst outcomes happen when the consular appointment is booked before any of that has been worked out.

Why this matters before you act

For a U.S. citizen living in Canada, U.S. citizenship is a lifelong tax tether. The United States taxes its citizens on worldwide income no matter where they live, layers on annual information returns such as the FBAR and FATCA Form 8938, and imposes punishing rules on ordinary Canadian holdings — TFSAs, RESPs, Canadian mutual funds treated as passive foreign investment companies, and private corporations that become controlled foreign corporations exposed to Subpart F and GILTI. Renouncing ends that ongoing burden going forward. But the exit is itself a taxing event for some people, and once the oath is taken there is no going back to fix the timing. The point of planning is to find out, in advance, whether you fall into the category the statute calls a covered expatriate, and if so, how large the exposure is and what can be done about it before the renunciation date is fixed.

The stakes are not the same for everyone. A U.S. citizen with a modest net worth, current on filings, can often expatriate with little or no exit tax. A higher-net-worth person, or someone who has not filed U.S. returns in years, can face a substantial mark-to-market tax, special treatment of retirement accounts, and a continuing tax on gifts and bequests they later make to U.S. persons. Because the rules look back over a five-year compliance window, people who are behind on U.S. filing usually need to get clean before they renounce — often through the streamlined filing procedures or, where the facts call for it, a formal voluntary disclosure. Trying to renounce while non-compliant is one of the most common and most costly mistakes in this area.

The mechanics: who is a covered expatriate

Section 877A applies only to people who are "covered expatriates." You become one if you expatriate and meet any one of three tests, measured as of the date of expatriation:

• The net-worth test. Your net worth is US$2 million or more on the date you expatriate. This figure is set by statute and is not indexed for inflation, so it captures more people over time as asset values rise. Net worth here means the fair market value of everything you own worldwide, including your home, registered plans, business interests, and your share of jointly held property.
• The income-tax-liability test. Your average annual net income tax for the five tax years ending before the date of expatriation exceeds an inflation-indexed threshold. That threshold is US$206,000 for 2025 and US$211,000 for 2026. Note that this is your average U.S. tax liability, not your income — for a Canadian resident claiming foreign tax credits, the actual U.S. tax can be far lower than the income would suggest.
• The certification test. You fail to certify, under penalties of perjury on Form 8854, that you have complied with all U.S. federal tax obligations for the five tax years preceding expatriation. This test is independent of your wealth or income: even a person well under the net-worth and income thresholds becomes a covered expatriate — and exposes themselves to the exit tax — simply by not being able to make that five-year certification. It is why getting current on filings is the threshold task.

Long-term green-card holders are pulled into the same regime. A long-term resident (LTR) is someone who was a lawful permanent resident of the United States in at least 8 of the last 15 tax years ending with the year their permanent-resident status ends. When an LTR abandons the green card or is treated as having ceased to be a permanent resident (including by claiming treaty non-residence under Article IV of the Canada-U.S. treaty), that act is an "expatriation" for these purposes, and the same covered-expatriate tests apply. People who held a green card, moved back to Canada, and assumed the card simply lapsed are sometimes surprised to learn they triggered an expatriation event. Our work on departure tax planning and cross-border tax covers the residency side of these moves.

The exit tax: a deemed sale of everything

If you are a covered expatriate, section 877A treats you as having sold all of your worldwide property at fair market value on the day before your expatriation date. This is a mark-to-market deemed disposition: you recognize the built-in gain (and loss) on essentially everything you own, whether or not you actually sell anything. The resulting net capital gain is then reduced by an inflation-indexed exclusion amount before tax is calculated. That exclusion is US$890,000 for 2025 and US$910,000 for 2026. Only the net gain above the exclusion is subject to U.S. tax, and the exclusion is generally allocated proportionately across your appreciated assets.

Two categories of property are carved out of the basic mark-to-market rule and handled separately, often less favourably:

• Deferred compensation and tax-deferred accounts. Items such as IRAs, certain pensions, and "eligible" versus "ineligible" deferred compensation are not subject to the deemed sale in the same way. An IRA is generally treated as fully distributed the day before expatriation. "Eligible" deferred compensation can instead be subject to a flat 30% withholding tax on later payments if the payer is notified and you waive treaty benefits, while "ineligible" deferred compensation is treated as received on the day before expatriation. The mechanics are technical and the elections matter.
• Interests in non-grantor trusts. Distributions to a covered expatriate from a non-grantor trust are subject to a special 30% withholding regime rather than the mark-to-market rule.

There is also a long tail. Under section 2801, a U.S. citizen or resident who later receives a gift or bequest from a covered expatriate can owe a transfer tax on it — meaning the consequences of being a covered expatriate can reach your U.S.-person children and other beneficiaries years after you have renounced. This is a frequently overlooked reason to avoid covered-expatriate status where the facts allow it, and it ties into the broader planning we describe on our U.S. estate tax for Canadians page.

The renunciation process itself

The act of giving up citizenship is governed by the U.S. Department of State, not the IRS, and it is deliberately formal. The general path is: attend an in-person appointment at a U.S. consulate or embassy, sign the Form DS-4081 statement of understanding acknowledging the consequences, and take a sworn oath of renunciation on Form DS-4080 before a consular officer. (A separate questionnaire, Form DS-4079, is used mainly to document relinquishment based on an earlier expatriating act rather than a present-day renunciation.) Your citizenship is lost as of the date you take that oath; the State Department later issues a Certificate of Loss of Nationality (CLN), Form DS-4083, confirming it. The administrative fee for processing a CLN was reduced from US$2,350 to US$450 effective April 13, 2026, after litigation over the previous fee. Renunciation is intended to be irrevocable, and consular officers will confirm that you understand the consequences.

The tax filing runs on its own track. For the year of expatriation you generally file a dual-status return (a Form 1040 for the part of the year you were a citizen and a Form 1040-NR for the part after), and you attach Form 8854, the initial and annual expatriation statement. Form 8854 is where you make the five-year compliance certification, report your net worth and the deemed-sale calculation, and establish whether you are a covered expatriate. The date you take the oath — your expatriation date — is the date as of which all the tests are applied, which is exactly why the consular timing and the tax planning have to be coordinated rather than handled in isolation.

Common traps

• Renouncing while behind on U.S. filings. If you cannot certify five years of compliance on Form 8854, you are a covered expatriate by default — even with modest assets and income. Getting current first, often through the streamlined procedures, is usually the single most important step.
• Forgetting to file Form 8854 at all. Failing to file the expatriation statement triggers covered-expatriate status and a separate penalty. The State Department oath does not satisfy your IRS obligations.
• Assuming green-card holders are exempt. A long-term resident who abandons a green card — or who quietly lets it lapse, or claims treaty non-residence — can trigger an expatriation event under the same rules. The 8-of-15-years test catches many people who never thought of themselves as "expatriating."
• Counting Canadian assets at the wrong value. The net-worth test and the deemed sale are measured in U.S. dollars at fair market value worldwide, including your principal residence, RRSPs, TFSAs, and any private-company shares. Exchange-rate movement and illiquid business valuations can push someone over the US$2 million line unexpectedly.
• Ignoring registered and deferred accounts. RRSPs, IRAs, and pensions are not all treated the same way under section 877A; some are deemed distributed, some face 30% withholding, and the elections you make affect the result. The TFSA and RESP, already problematic for U.S. citizens, raise additional issues on exit.
• Overlooking the section 2801 gift/bequest tax. Becoming a covered expatriate can impose a future U.S. transfer tax on gifts and inheritances you later give to U.S.-person family members — a cost that outlives the renunciation itself.

How Barrett Tax Law approaches renunciation and the exit tax

We begin by establishing where you stand against the three covered-expatriate tests before any consular appointment is booked. That means reviewing your worldwide net worth in U.S. dollars, your average U.S. tax liability over the relevant five years, and — critically — your U.S. filing history, since the certification test can make a covered expatriate of someone who would otherwise be well under the thresholds. Where past returns or information forms are missing, we look at whether the streamlined filing procedures or a voluntary disclosure is the right route to get clean first. We then model the mark-to-market deemed sale, identify how registered plans, pensions, and any trust or corporate interests are treated, and consider whether the timing of the renunciation, or steps taken beforehand, change the outcome. We coordinate the Form 8854 and dual-status return with the consular process and, where relevant, with the Canadian side of the move and the FATCA and FBAR compliance that continues until you expatriate. Because Simone Barrett is admitted in Ontario and Florida, the analysis is done with both legal systems in view. We offer a free initial consultation to scope your situation and identify the decisions that have to be made before you renounce; you are welcome to reach out through the cross-border tax page.

This page provides general information only and is not legal or tax advice. Cross-border tax depends on your specific facts and on the rules of both Canada and the United States, which change over time; the figures, thresholds, and procedures described here should be confirmed for your situation and year before you act. Please obtain advice tailored to your circumstances before making any decision about renouncing U.S. citizenship or abandoning permanent-resident status.