Liberty and justice for all United States persons abroad

The Isaac Brock Society

Posted on by Posted in Issues regarding US persons abroad 36 Comments

cross posted from citizenshipsolutions.ca

The above tweet references a “guest post” written by Dominic Ferszt of Cape Town South Africa. The post demonstrates how the “dual citizen from birth” exemption to the S. 877A “Exit Tax” relies on the citizenship laws of other nations. In some cases those laws of other nations are arbitrary and unjust. If these laws were U.S. laws, they might violate the equal protection and/or due process guarantees found in the United States constitution. For example, Mr. Ferszt describes how the “dual citizenship exemption” to the “Ext Tax” is dependent on South African “Apartheid Laws”. He describes a situation where a “black” U.S. citizen from birth is denied the benefits of the dual citizen exemption to the Exit Tax, which are available to a “white” dual citizen from birth.
(During the “Apartheid Era” Blacks were not entitled to South African citizenship.)

So, what’s the S. 877A “Exit Tax” dual citizen exemption and how does it work?

The dual citizen exemption, which I have discussed in previous posts, is found in Internal Revenue Code S. 877A(g)(1)(B) and reads:

(B) Exceptions An individual shall not be treated as meeting the requirements of subparagraph (A) or (B) of section 877(a)(2) if—
(i) the individual—
(I) became at birth a citizen of the United States and a citizen of another country and, as of the expatriation date, continues to be a citizen of, and is taxed as a resident of, such other country, and
(II) has been a resident of the United States (as defined in section
7701(b)(1)(A)(ii)) for not more than 10 taxable years during the 15-taxable year period ending with the taxable year during which the expatriation date occurs, or

Entitlement to the “dual citizen exemption” depends entirely on the citizenship laws of other countries …


Virginia La Torre Jeker recently wrote a post, discussing the “dual citizen exemption” titled “Relinquishing US Citizenship – Exception for A Dual National at Birth“. In addition to providing an excellent summary of the “dual citizen exemption”, she writes:

Whether one acquires the nationality of another country “at birth” depends entirely on the nationality laws of the other country involved. I have recently learned that some of the foreign nationality laws can result in some very harsh discrimination. For this I reference the eye-opening article written by Mr. Dominic Ferszt of Cape Town, South Africa, titled “The Accidental Tax Invasion” and published in Forbes in 2014. My colleague John Richardson hosted Mr. Ferszt as a guest
blogger on his website to write about this topic.

Provided below are some real life examples from Mr. Ferszt. These examples demonstrate how the laws of nationality of a particular country when compared to those of another country can bring about some very discriminatory results when applying the “dual national” exception.
Quoting Mr. Ferszt’s blog piece:

“Example 1: U.S. citizenship acquired by birth in the United States:

Two babies are born next to each other in an American hospital: one to Argentinian parents, the other to Italian parents. Both families return back to their homelands. Thirty years later, the children choose to
expatriate: the Argentinian (because he did NOT acquire Argentinian citizenship at birth) must pay the exit tax, while the Italian (because he DID acquire Italian citizenship at birth) is exempt from the exit tax.

Example 2: U.S. citizenship acquired by birth outside the United States to U.S. citizen parent(s):

Two American families emigrate; one to Australia the other to Greece.
Shortly after arrival they have children. 30 years later, the children
expatriate: the Australian pays no exit tax (the child was born an Australian citizen) , while the Greek citizen must pay the exit tax (the child was NOT born a Greek citizen).

Example 3: Dual citizenship denied on account of apartheid

This is my favourite hypothetical: two U.S. couples, one white and one black, emigrate to South Africa in the 1970s and start families. The babies are U.S. citizens at birth. Yet, under South African apartheid, blacks were denied citizenship of South Africa. In such circumstances, the black U.S. citizen would be required to pay the exit tax; while the white one wouldn’t.”

These are only illustrative examples. Many other fact patterns can come into play that will have a similar discriminatory result (e.g., until recently many nationality laws provided for rampant gender discrimination — fathers could pass on citizenship, whereas mothers could not) .

Interestingly and regrettably, Canadian citizenship laws have been written in ways that could deprive “U.S. citizens at birth” the benefits of the “dual citizenship exemption to the Exit Tax.

Canadian citizenship law: The “became at birth a citizen of the United States and a citizen of another country” requirement …

The post referenced in the above tweet describes how a person born outside of Canada, in wedlock, to a non-Canadian father and Canadian mother, would NOT have been born a Canadian citizen.

To quote from the post:

If born in wedlock outside of Canada and the father is a Canadian then the child is a Canadian provided that his birth is registered; or

If born out of wedlock outside of Canada and the mother is a Canadian then the child is a Canadian provided that the birth is registered

Question: Under the 1947 Canada Citizenship Act, would a person born outside of Canada to a non-Canadian father and a Canadian mother be entitled to Canadian citizenship from birth?

Answer: No pursuant to S. 5 of the 1947 Canada Citizenship Act, the Canadian mother was NOT entitled to pass Canadian citizenship to the child. (This was changed in the 1977 Canada Citizenship Act.)

Conclusion: This is an example of a group of people who were NOT “Canadian citizens at birth” because of discriminatory citizenship laws. Changes to Canadian citizenship laws since 1947 have rectified this injustice. Canada’s citizenship laws now grant Canadian citizenship to those born abroad to Canadian citizen mothers on both a prospective and retroactive basis. In the context of U.S. expatriation law, this raises at least the following two questions:

  1. Did these people who were retroactively granted Canadian
    citizenship from birth, “become at birth” a “citizen of
    Canada”?
  2. If they did NOT retroactively “become at birth” a citizen of
    Canada, could their later acceptance of Canadian citizenship
    “from birth”, be considered to be an “expatriating act” under
    S. 349(a) of the U.S. Immigration and
    Nationality Act    ?

I would start from the presumption that because amendments to “Canadian law” made them “citizens from birth”, that they ARE entitled to the “dual citizen exemption” to the Exit Tax.

Canadian citizenship law: The “as of the expatriation date, continues to be a citizen” of, …, such other country” requirement …

Entitlement to the “dual citizen exemption” depends on one continuing to be a citizen of Canada on the expatriation date. There is one group of people who were “Canadian citizens” at birth who lost their Canadian citizenship pursuant to an unknown (and rather unjust in application) law. This is described in the articles referenced in the following two tweets.

In human terms, the situation is described in one of the articles as follows:

VANCOUVER — Byrdie Funk had what some would call a quintessential, small-town Canadian upbringing.

At two months old, she moved from Mexico with her Canadian parents to a farming community in southern Manitoba. She learned to skate on a backyard pond and trudged between snowdrifts to school, where she would stand with fellow students to sing the national anthem before class.

She used her Canadian passport to travel to South Africa, toting a suitcase sporting the maple leaf, and was later married at a historic trading post on the banks of Winnipeg’s Red River.

But earlier this year the 36-year-old woman’s life was upended when she received a letter from Citizenship and Immigration Canada informing her she was no longer a Canadian citizen.

“It took my breath away,” Funk said in an interview from her home in Squamish, B.C.

“I had no idea that anything like this could even happen.”

The issue raised in this article is worthy of a separate post. At the risk of oversimplification, S. 8 of the 1977 Canada Citizenship Act contained a provision that applied to people who were born:

– between February 15, 1977 and April 16, 1981; and
– to parents who who were also born outside of Canada

Those persons automatically lost their Canadian citizenship on their 28th birthday unless, prior to their 28th birthday, they made an application to retain their Canadian citizenship.

This rather “draconian” rule
was explained (in part) by the Government of Canada:

Loss under section 8

As the loss under section 8 was repealed on April 17, 2009, only persons born between February 15, 1977 and April 16, 1981 are subject to loss on attaining 28. These persons had to make an application to retain citizenship before their 28th birthday and had their application approved to remain Canadian citizens.

Loss occurs even if the person resided in Canada. This means that persons residing in Canada who ceased to be citizens before April 17,
2009 under section 8 have no legal status in Canada. Persons who ceased to be a citizen under section 8 can apply for permanent resident status and subsequently resume citizenship under subsection 11(1) of the Act.
Requirements of section 8

There were three requirements for retention of citizenship under section
8 of the Citizenship Act:

register as a citizen;
have residence in Canada or a “substantial connection” with Canada; and make an application for retention.

Registration

Before April 17, 2009, a person born outside Canada in the second generation was automatically a Canadian citizen at birth. For second generation born outside Canada, the approved application for proof of citizenship fulfilled the registration requirement of subsection 8(b) of the Citizenship Act.

Conclusion:

A person born born in the United States between February 15, 1977 and April 16, 1981, who was:

– born a citizen of BOTH the United States and Canada
– born in the United States to a Canadian citizen who was NOT born in Canada
– failed to register to retain his Canadian citizenship prior to his 28th birthday
– lost his Canadian citizenship because of the failure to register the retention of Canadian citizenship

would NOT be entitled to the “dual citizen” exemption to the “Exit Tax”!

The consequences of being subject to the Internal Revenue Code S. 877A “Exit Tax” …

For a complete discussion of the inner workings of the Exit Tax and how punitive it can be read here. I guarantee that you will see the benefits of the “dual citizen” exemption.

When it comes to this kind of unfairness (whether Canadian or American laws):

#YouCantMakeThisUP!

John Richardson

36 thoughts on “The “Exit Tax”: Dual US/Canada citizen from birth, no Canada citizenship today = no exemption to US “Exit Tax””

  1. If we look at a two people. A citizen of the UK at birth who is later a long term green card holder and a citizen of the US by birth and a citizen of the UK at birth.
    Then we look at the tax treaty:

    ARTICLE 25
    Non-Discrimination
    1. Nationals of a Contracting State shall not be subjected in the other Contracting State
    to any taxation or any requirement connected therewith that is more burdensome than the
    taxation and connected requirements to which nationals of that other State in the same
    circumstances, particularly with respect to taxation on worldwide income, are or may be
    subjected.

    It’s a clear violation of the tax treaty. It just needs somebody to fight it to pull it all down.

  2. @Neill

    That particular article also appears in the US CDN treaty and was part of our complaint in the ADCS suit. Specifically that CDNs with US taint ARE subjected to exactly that. The judge ruled that the IGA did not subject such CDNs to more burdensome requirements. Will check on the Denton’s commentary on this Article. Other parts of the Treaty have seemed easy enough to understand but when I read up on them, had all sorts of context that seemed to suggest the opposite of what I understood….
    The Article seems to contradict the savings clause…

  3. What does George think? For the many that are receiving retroactive citizenship by registration, you are a dual from birth. That is the ethical position to take.

    If USA does not like that, they can challenge it in court.

    Let them eat cake.

  4. @Neill

    Here is the explanation given by Denton’s on that paragraph which is the same in the US CDN treaty (Article XXV Non-Discrimination):

    Paragraph 1 provides a rule to prevent nationals of one Contracting State who are residents in the other Contracting State, from being discriminated against on the basis of their nationality. Thus, the United States cannot impose more burdensome taxes (or other requirements connected with taxes) on CDN nationals residing in the United States than it does on U.S. nationals who are in the same circumstances, i.e., U.S. citizens residing in the United States.

    I find that I think I understand what is stated in an Article only to find that what it means is something different than the way I read it. So if Denton’s is right, this Article would not apply to the treatment of non-resident U.S. nationals by the United States.

    But what it (still) SHOULD mean is that Canada will not treat U.S. nationals residing in Canada, differently than it would other Canadians. And the judge seems to think it is not Canada treating these CDNS differently but the U.S. which the savings clause allows.

    I hate it, but that’s what it seems to mean……..

    from Canada-U.S. Tax Treaty: A Practical Interpretation 4th ed., 2015, Dentons Canada LLP published by Wolters Kluwer p 122

    Am I missing something?

  5. Two individuals aren’t considered to be in the same circumstances if one is subject to US CBT and the other isn’t.

    If you look at the US Model Tax Treaty from 2006, this is stated more bluntly:

    Nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith that is more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances, in particular with respect to residence, are or may be subjected. This provision shall also apply to persons who are not residents of one or both of the Contracting States. However, for the purposes of United States taxation, United States nationals who are subject to tax on a worldwide basis are not in the same circumstances as nationals of ——— who are not residents of the United States.

    In other words, two Canadians, one a USP and the other not, both living in Canada, are not considered to be in the same circumstances because one is treated by the US as a “tax-citizen” and other isn’t. If they were both living in the US, they would be considered to be in the same circumstances because they’d both be treated as “tax-citizens”.

    I suspect Article 25 is there mainly for entities and arguments about transfer pricing.

  6. Thanks iota. Interesting. Neill’s comment as I understand it, was based upon different applications of the Exit Tax on individuals who are at least somewhat, in the same circumstances.

    If we look at a two people. A citizen of the UK at birth who is later a long term green card holder and a citizen of the US by birth and a citizen of the UK at birth.

    So the green card holder decides to expatriate and is liable to the Exit Tax whereas the other is not. Both share UK citizenship (and I presume living in the UK). Would you see this as discrimination?

  7. Unfortunately, assuming they’re both living in the UK, it would only be discrimination (according to the treaty) if one was a US national and one was a UK national, and the UK was taxing the US national more onerously than it was taxing its own national.

    The wording of Article 25 is about a cross-border situation: when the State of residence (say, the US) is treating UK nationals worse than it treats its own nationals. Expatriation is not a cross-border situation.

  8. Maybe a bit off-topic but just in case anyone is not aware, there are some added stipulations about US treatment of UK-resident former LPRs in an Exchange of Notes dated March 2001 which is right at the back of the “Consolidated” US/UK Tax Convention.

  9. @iota

    The notes you refer to in the US/UK Tax Convention purport to provide guidance on how a country determines whether the LPR or citizen renounced with a ‘principle purpose’ of avoiding tax. Things like whether you were born in the UK, if your parents were born in the UK, and so on. They are all circumstantial, but superficially might be considered reasonable enough.

    However, the “bright line” asset and income tax tests the US uses to presume tax avoidance — no rebuttal allowed — and so trigger the 877A exit tax sweep past all of them. Prior to the exit tax, section 877 also swept past them unimpeded, but since 877 was comparatively mild, at least in comparison with 877A, the effects were less worrisome.

    The lesson here, and of course it is hardly a revelation, is that the US repeatedly waters down, backpedals on, and in some cases simply overrides entirely, portions of tax treaties that it has signed but which it finds inconvenient.

  10. @Watcher – the provision I thought might be useful for some expatriating LPRs is this:

    With reference to paragraph 6 of Article 1 (General Scope)
    :
    (1) it is understood that an individual shall be regarded as a former long-term resident of a Contracting State only if that individual (not being a citizen of that Contracting State) was a lawful permanent resident of that Contracting State in at least eight of the fifteen fiscal years ending with the fiscal year in which the individual ceased to be a long-term resident of that Contracting State;

    Probably everyone who could use this provision already knows about it but I mention it in case. Always best for each person to examine the rules – all the rules – and work out for themselves what works, doesn’t work, or could be made to work, for their particular situation.

  11. More generally, with regard to the “dual citizen exemption” – those of my acquaintance who could have qualified for it weren’t interested. A law that seeks to impose an “exit” tax on those who have never “entered” (the US tax system), and then offers exemption only on condition of entry, is best ignored, if circumstances permit. IMO.

  12. @IOTA, lets pretend you had not been through what you went through.

    Would you have believed someone explaining this to you?

  13. I myself am not dual from birth and have a US birthplace and a SSN, so the “dual citizen exemption” was not something I had to decide about.

    Duals of my acquaintance who don’t have those stigmata, didn’t need a CLN, so they didn’t have to consider the “dual-citizen exemption”. I suspect the world is well sprinkled with individuals with inherited US citizenship and no visible signs, who’ve similarly been able to ignore the whole business.

    For others, the “dual citizen exemption” may be the least worst option. It all depends. That’s why I said “if circumstances permit.”

  14. @George
    No one who hasn’t been through it believes it.
    It has caused so much friction in our family, they either think I am exagerating, or they don’t want to know. I have learned to tread really carefully with the American contingent as they do not wish to hear anything bad against the ‘land of the free’. Even if they aware of it, they believe it is a mistake and will all be put right in the end.

  15. The homelanders may or may not be correct if they mean it will all be put right in the end.

    But they sure are correct if they mean that for now it will all be put right in the end.

  16. The issue of whether or not you qualify for this exemption is relevant only if either your net worth or recent tax liability are in excess of the limits – if both are below then you’re not a covered expat (as long as you are up-to-date on the last five years of taxes with the IRS, and if not then you’d be a covered expat even if you’d qualify for one of the exemptions).

  17. Yes but the point is the innate unfairness. Why should someone born dual be exempt from the Exit Tax when another who say, came as a child and is dual now, with all assets earned in the 2nd country, not be exempt?

    The idea is to make folks aware of the very long list of the unfairness of CBT.

  19. @Patricia Moon –

    “…the point is the innate unfairness. Why should someone born dual be exempt from the Exit Tax when another who say, came as a child and is dual now, with all assets earned in the 2nd country, not be exempt?”

    I don’t think the “dual citizen exemption” has anything to do with fairness. I speculate that perhaps it’s there because they’re afraid of a test case being brought by a dual who has never worked in America, never invested in America, never even set foot in America. Kind of hard to see how Cook v. Tait could apply.

  20. I commented (above) on the following treaty provision:

    With reference to paragraph 6 of Article 1 (General Scope)
    :
    (1) it is understood that an individual shall be regarded as a former long-term resident of a Contracting State only if that individual (not being a citizen of that Contracting State) was a lawful permanent resident of that Contracting State in at least eight of the fifteen fiscal years ending with the fiscal year in which the individual ceased to be a long-term resident of that Contracting State;

    I see Phil Hodgen has written in his blog this week about how to count these years if you’re trying to avoid the exit tax.

    http://hodgen.com/easy-math-for-determining-long-term-resident-status/

  21. @iota “… they’re afraid of a test case….”

    The IRS is also very afraid of a test case about the current tax citizenship of someone with a pre-June 2004 relinquishment.

    No, the IRS can’t issue guidance that contravenes what the tax citizenship law says on its face.

    But they’re not going to start issuing collection letters based on that flawed law, either. So long as there’s no test case forced by their direct attempts at collection, the IRS can keep stripping taxes and penalties off pre-2004 relinquishers who continue to be herded into compliance by then likes of Moodys and Roy Berg. That money just drops into their laps.

    So if you relinquished pre-2004, don’t expect a collection letter from the IRS any time soon (if ever). The IRS has too much to lose by precipitating a test case.

  22. @ iota “Kind of hard to see how Cook v. Tait could apply.”

    All you have to do is assert the presumption that American citizenship benefits the citizen and his property wherever found. That’s what Justice McKenna in Cook v, Tait did in his 1924 state of mental impairment.

    “McKenna resigned from the [U.S. Supreme] Court in January 1925 at the suggestion of Chief Justice William Howard Taft. McKenna’s ability to perform his duties had been diminished significantly by a stroke suffered ten years earlier, and by the end of his tenure McKenna could not be counted on to write coherent opinions.”
    https://en.wikipedia.org/wiki/Joseph_McKenna

  23. @Shovel – I guess we’ll never know if a present-day court would simply reaffirm Cook v. Tait in a test case to determine whether a dual-from-birth former US citizen with no US links and no IRS filing history (hence no jurat) should be held liable to pay the exit tax or pay a $10,000 penalty. It’s hypothetical, since the “dual citizen exemption” does exist. I do think that might be why it exists, but it’s only speculation.

  24. “No, the IRS can’t issue guidance that contravenes what the tax citizenship law says on its face.”

    The IRS can and does issue guidance that contravenes what tax law says on its face. A court can decide at random whether or not to order the IRS to obey a law. A court can decide at random whether or not to order the IRS to obey a court ruling. The IRS can decide at random whether or not to obey.

    Maybe you mean that the IRS can’t LEGALLY violate a law. Well sure, but that’s a tautology. As for what the IRS can ACTUALLY do, see above.

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