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

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