Why is the United States imposing an “Exit Tax” on the Canadian pensions of Canadian citizens living in Canada?

This post is based on (but is NOT identical to) a July 17, 2017 submission in response to Senator Hatch’s request for Feedback on Tax Reform

“Re the impact of the S. 877A “Exit Tax” on those “Americans living abroad” who relinquish U.S. citizenship:

Why is the United States imposing an “Exit Tax” on their “non-U.S. pensions” and “non-U.S. assets”? After all, these were earned or accumulated AFTER the person moved from the United States?”

Part A – Why certain aspects of the Exit should be repealed

In a global world it is common for people to establish residence outside the United States. Many who establish residence abroad either are or become citizens of other nations. Some who become citizens of other nations do NOT wish to be “dual citizens”. As a result, they “expatriate” – meaning they relinquish their U.S. citizenship. By relinquishing their U.S. citizenship they are cutting political ties to the United States. They are signalling that they do NOT wish the  opportunities, benefits and protection from/of the United States.

Yet Internal Revenue Code S. 877A imposes a separate tax on “expatriation”. The “expatriation tax” is discussed in a series of posts found here.

Specific examples of HOW the “Exit Tax Rules” effectively confiscate pensions earned outside the United States are here.

Assuming, “covered expatriate status” and NO “dual-citizen exemption to the Exit Tax“, the S. 877A “Exit Tax” rules operate to:

  1. Virtually “confiscate” non-U.S. pensions that were earned when the individual was NOT a  United States resident; and
  2. Allow for the retention of “U.S. pensions” which were earned while the individual WAS a resident of the United States.

(One would think that the result should be THE EXACT OPPOSITE!”)

Specific request: The S. 877A Exit Tax should be repealed. If the United States is to impose a tax on expatriation, the tax should not extend to “non-U.S. pensions” earned while the individual was NOT a U.S. resident. Furthermore, the tax should NOT extend to “non-U.S. assets” that were accumulated while the individual was NOT a U.S. resident.

But, that’s assuming that the United States should have ANY kind of “Exit Tax!”

Part B – Why The S. 877A “Exit Tax” is a “perfectly bad idea” and should never have been enacted

The people primarily impacted by the S. 877A “Exit Tax” are NOT wealthy Homelanders but U.S. citizens and Green Card Holders residing outside the United States!

 

As noted in the 2006 (unusually prescient) article – “The Exit Tax – A Perfectly Bad Idea” – by Charles Bruce, Lewis Saret, Stephane Leganico and Steve Trow:

“The provisions affect more than just wealthy Americans that want to stop paying tax in the United States, which is a very small group consisting of perhaps two dozen millionaires per year.

Those provisions also affect tens of thousands of individuals who are dual nationals — that is, of U.S. and some other nationality — because they were born in the United States or were born to a U.S.parent.5

Many of those individuals live outside the United States. Also, those provisions also affect many thousands of long-term residents (that is, individuals who came to the United States and ended up staying for one reason or another). Surprisingly, there are large numbers of green card holders living in places like London, Paris, Geneva, Hong Kong, and Taipei.

. . .

Imposition of an exit tax will discourage highly skilled immigrants from coming to and staying in the United States.9

An exit tax will cause people wanting to work in the United States to avoid applying for a green card. The avenue of choice will become one of the non-immigrant visas. Those include specialty workers (H-1B), intracompany transferees (L-1), treaty trad-ers and investors (E-1/E-2), persons of extraordinary ability (O-1), artists and entertainers (P-1/-2/-3), religious workers (R-1), and North American Free Trade Agreement treaty professionals (TN). The system will become more problematic and more arbitrary. The H-1B category is already overrun.

The treaty trader/treaty investor (E-1/E-2) category is only available to nationals of a country that has a Treaty of Friendship, Commerce, or Navigation orequivalent treaty with the United States.10

. . .

The conferees should discard the exit tax proposal. In doing so, they should make clear that this type of proposal would not simply be put back on the shelf but retired for all time. Even the cloud of an exit tax will discourage talented and well-to-do immigrants from coming to the United States. It is a perfectly bad idea.”

http://www.citizenshipsolutions.ca/wp-content/uploads/2016/09/TAX-The-Exit-Tax-Trow.pdf

Charles Bruce, Lewis Saret, Stephane Leganico and Steve Trow accurately predicted what the effects of the (then) proposed “Exit Tax” would be. The “Exit Tax” is and was a “Perfectly Bad Idea”.

Specific request: The S. 877A Exit Tax should be fully repealed. If the United States is to impose a tax on expatriation, the tax should not extend to “non-U.S. pensions” earned while the individual was NOT a U.S. resident. Furthermore, the tax should NOT extend to “non-U.S. assets” that were accumulated while the individual was NOT a U.S. resident.

John Richardson