This post appeared on the RenouceUScitizenship blog.
— U.S. Citizen Abroad (@USCitizenAbroad) October 6, 2014
Almost two years ago to the day, I wrote a post explaining how:
Those wishing to understand how exchange rates affect possible U.S. capital gains liability for Americans abroad should revisit that post. The “Readers Digest” version is as follows:
1. For the purpose of U.S. taxes, all transactions are converted to U.S. dollars (using the applicable rate at the time of the transaction);
2. The result is that fluctuating exchange rates can generate “phantom” capital gains and losses, which can generate U.S. tax liability for Americans abroad.
As the Canadian dollar rises in value, fewer Canadian dollars are needed to purchase a U.S. dollar. The capital gains measured in U.S. dollars would increase.
As the Canadian dollar falls in value, more Canadian dollars are need to purchase a U.S. dollar. The capital gains measured in U.S. dollars would decrease.
The Canadian dollar has fallen by about 10% in the last two years. The above tweet references a video suggesting that, the decline of the Canadian dollar or (as a Homelander would say), the strengthening of the U.S. dollar is EXCELLENT for Americans in Canada considering renouncing U.S. citizenship.
There are at at least three reasons for this:
First: Remember the “asset test” when determining whether you are a “covered expatriate”. As you know those with asssets worth at least two million U.S. dollars are “covered expatriates” (and deserving of punishment). As the Canadian dollar falls, more Canadian dollars are required to purchase a U.S. dollar. Every 10% fall in the Canadian dollar means that one can have approximately 10% more Canadian dollar assets before one is a “covered expatriate”.
Second: If you are a “covered expatriate” you are subject to the U.S. Exit Tax. An interesting Wikipedia article that discusses past and present Exit taxes (including the Nazis but not including Soviet Exit Taxes) is here. The Exit Tax includes (but is NOT limited to) the payment of a capital gains tax on the “pretend sale” of your worldwide assets. Notice that as the Canadian dollar falls in value, the amount of the capital gain also falls.
Third: Although this is an oversimplification, “covered expatriates” are given an exemption on the first (approximate 660,000 of capital gains calculated in U.S. dollars). As the Canadian dollar falls fewer of the capital gains will be subject to the Exit Tax.
Bottom line: The decline in the value of the Canadian dollar is good for Canadian exporters. It is also good for Canadians wishing to renounce U.S. citizenship.
As Phil Hodgen once said: