More years ago than I care to recall, I graduated from the Edmund A. Walsh School of Foreign Service (SFS) at Georgetown University in Washington, D.C. (and GU Law too).
One of my SFS classmates from Canada told a memorable story about how his grandfather was constantly troubled about the possibility that “the Yanks were coming.” This elder Canadian, steeped in colonial history, was convinced that someday those ornery Americans would storm north across the border and invade again.
Well, in truth, a small number of Americans have headed north across that 5,525-mile long United States-Canadian border, famously styled as “the longest undefended border in the world.”
The objective of this migration is not to conquer, but to become Canadian citizens—and thereby reduce the American migrant’s U.S. taxes to zero.
Canada is not an offshore tax haven. Commonwealth and provincial taxes are relatively high. Except in specific programs designed to entice new immigrants to come to Canada (more on that below), there are few tax breaks for foreigners. However, little-known Canadian trust and tax laws, when properly employed, offer Americans a legal way to forever end the obligation to pay U.S. taxes—by becoming Canadians.
This unusual tax freedom is accomplished by a process known as “expatriation” in which a U.S. person voluntarily ends U.S. citizenship. That may seem extreme, but it can be done legally and consistent with U.S. and Canadian law—with the right expert professional legal and tax advisors.
American tax laws require “U.S. persons”—citizens or resident aliens—to pay income taxes on earnings from any source anywhere in the world no matter where they live. Unlike most other countries with “territorial” tax systems, a U.S. person can’t escape taxes by moving offshore.
By contrast, most other countries tax only the people who actually live within their borders. Canada for example, does impose taxes on the worldwide income of residents. But if a Canadian moves out of Canada and establishes a new residence in another country, the legal duty to pay Canadian taxes ends with few exceptions. This feature of Canadian tax law is an important part of our tax-saving expatriation plan.
Tax-Free New Residents
However tough taxes may be for the average Canadian, wealthy immigrants can take advantage of tax-free loopholes available only to them. Here are some of the options for high net worth immigrants who come to Canada:
1) A qualified immigrant accepted for eventual Canadian citizenship is eligible for a complete personal income tax moratorium for the first five calendar years of residence in Canada. They pay no taxes if the source of their income is a previously existing offshore, non-Canadian trust, (known as an “immigrant trust”) or an offshore corporation.
Because the high establishment and administrative costs of such a trust, it generally is best suited for immigrants who have at least $1 million or more in assets that can be placed in the offshore immigrant trust.
2) After living five years tax-free in Canada as a new citizen, the new Canadian can move his or her residence (and tax domicile) to another country, preferably a tax haven, and afterwards pay taxes only on income earned or paid from within Canada. They pay no taxes on their worldwide income. (There is a Canadian “departure” tax to be paid after filing a notice of intent to live abroad. There is no way of determining the exact rate of this tax since various types of property are taxed at differing rates.)
3) Canadian citizens and resident aliens employed by certain “international financial centers” are forgiven 50 percent of all income taxes.
4) Canada has abolished all national death (estate) taxes (but the provinces do have such taxes).
Canadian law favors a specific class of preferred immigrants including investors, entrepreneurs, the self-employed and those who will add to the “cultural and artistic life” of the nation. With minor variations in each of the provinces, investor immigrants generally must have a net worth in excess of C$500,000 (US$443,000) and be willing to invest at least C$250,000 (US$222,000) in a Canadian business for a minimum three- to five-year period. Purchase of a residence usually does not qualify as an investment, although it may if you work from home.
American Tax Burden
While most foreigners can relocate to a tax haven as a legal way to avoid home country income taxes, U.S. persons cannot. The only way a U.S. person can escape taxes is to end U.S. citizenship and residency—but only after acquiring a new citizenship from another country, another important step in the expatriation process. (No one wants to be the man or woman without a country!)
Let me assure doubters that, yes, this is legal. The U.S. Supreme Court has upheld Americans’ right to acquire another citizenship, to end their U.S. citizenship and to expatriate.
Q: Which Americans should consider expatriation?
A: Those concerned with high taxes. Without good estate planning, U.S. death taxes can take up to 55 percent of your assets from your heirs when you pass away—and that final tax insult comes after a working lifetime of paying up to 40 percent of your earnings in federal income taxes every year. Add in state and local income and sales taxes and you stand to lose in taxes well over half your earnings during your lifetime—and your heirs lose another half of what’s left at death.
The potential emigrant from America eventually must surrender U.S. citizenship in order to end U.S. tax obligations. But be aware of the new (2008) U.S. “exit tax” now in effect. If you qualify as what the law calls a “covered person” the exit tax may outweigh any benefit to be gained by immigration to Canada.
A Potential Savings of Millions of Dollars
There you have it. It may seem a difficult road to travel, but becoming a Canadian citizen investor can save a U.S. citizen millions of dollars that would otherwise go directly to the Internal Revenue Service.
Yes, these savings are predicated on major changes—including surrender of your U.S. citizenship. You must move yourself, your family and your business to Canada and possibly to another country later on. Despite these drawbacks, the true bottom line measured in dollar savings can be enormous.
–By Robert E. Bauman JD