What are the tax consequences of renouncing US citizenship from Canada?

What has to be in place before you renounce

Renunciation is a legal act performed in person at a US embassy or consulate: you swear an oath before a consular officer, pay the fee, and later receive a Certificate of Loss of Nationality. The State Department does not check your tax status before accepting the oath, which is exactly why people get into trouble. The tax system checks afterward, through Form 8854, and one of the questions on that form is whether you have complied with all US tax obligations for the five preceding years. Answer no, or fail to file the form, and you are automatically a covered expatriate regardless of your wealth.

For a Canadian resident who has never filed, the practical sequence is therefore: catch up first, renounce second. The Streamlined Foreign Offshore Procedures supply three compliant years without penalty; two ordinary years on top of those reach five.

Some people can shortcut this. The IRS Relief Procedures for Certain Former Citizens allow someone with net worth under US$2 million and a total US tax liability of no more than US$25,000 across the six years involved to renounce first and file afterward, with the tax forgiven, provided they never held a Social Security number and meet the other conditions. It is narrow, but it fits many accidental Americans.

The consular fee is US$2,350 as at the time of writing; confirm the current figure with the US Embassy in Ottawa or the consulate you book with. Appointment wait times in Canada have at times run to many months, so the tax catch-up and the booking are usually started in parallel.

Who is a covered expatriate

A covered expatriate is a renouncing citizen (or long-term green-card holder) who meets any one of three tests on the date of expatriation:

• Net worth test: your worldwide net worth is US$2,000,000 or more, counting your share of the family home, RRSPs, pensions, businesses and everything else, converted to US dollars.
• Tax liability test: your average annual net US income tax liability for the five preceding years exceeds an inflation-indexed threshold - a little over US$200,000 as at the time of writing. Because the foreign tax credit reduces most Canadian residents' US liability to near zero, this test rarely catches anyone living in Canada.
• Certification test: you cannot certify on Form 8854, under penalties of perjury, that you have met all US federal tax obligations for the five preceding years.

Two exceptions rescue people who would otherwise fail the net worth or liability test, though not the certification test. A person who was a dual citizen at birth, is still a citizen and tax resident of the other country, and has been a US resident for no more than 10 of the last 15 years is excluded from covered status. So is a person renouncing before age 18 and a half who has been a US resident for no more than 10 years.

Someone born in the United States to a Canadian parent is a Canadian citizen from birth, so many "accidental Americans" living in Canada fit the first exception even with substantial assets, provided their filings are complete. The rules are explained further in our dual citizen tax guide.

How the exit tax works if you are covered

A covered expatriate is treated as having sold all worldwide property at fair market value on the day before expatriation, and the resulting net gain is taxed on the final return. The first slice of gain is excluded - roughly US$890,000 for 2025, indexed each year, so confirm the current amount - and the remainder is taxed at normal US rates, with long-term capital gains rates applying to assets held more than a year. A payment deferral is available with security and interest. The deemed sale gives the assets a new US cost basis, which matters little to someone who will never file a US return again.

Certain assets are pulled out of the deemed sale and handled separately, and this is where Canadian residents are most often surprised:

• RRSPs, RRIFs and pensions are generally treated as deferred compensation items. Where the payer is Canadian, the present value of the plan is treated as received the day before expatriation and taxed as ordinary income, outside the exclusion amount, without the usual deferral. On a large RRSP that can be the biggest single number on the return.
• TFSAs and RESPs are not retirement plans in US eyes, so the investments inside them go through the ordinary mark-to-market sale.
• The principal residence is included in the deemed sale. The US home-sale exclusion may shelter part of the gain, subject to its conditions, but a long-held GTA home can carry a gain well beyond it.

Canada does nothing on the same day. There is no Canadian deemed disposition on renouncing US citizenship, no step-up in Canadian cost basis, and the Canada-US treaty does not relieve the exit tax. That means the US tax paid on the deemed gain may never be creditable against the Canadian tax charged when the asset is eventually sold for real. Planning before the date - gifts, timing of sales, RRSP withdrawals spread across years - is how that double charge is reduced, and it has to happen before the oath, not after.

What changes after the oath

Your final year is a dual-status year: a Form 1040 covering January 1 to the day before expatriation, and a Form 1040-NR for the rest of the year covering any US-source income, with Form 8854 attached and a copy sent separately to the IRS. Form 8854 is due with that return, by June 15 for someone living in Canada, and missing it carries a US$10,000 penalty and covered status. Covered expatriates with deferred items file Form 8854 annually thereafter.

From then on you are a non-resident alien. US dividends are withheld at the treaty rate of 15%, US real estate and business income still need a 1040-NR, and your Canadian income is of no further interest to the IRS. Renouncing does not by itself cancel US Social Security benefits you have earned, which continue to be paid and are taxed only in Canada under the treaty; our Social Security answer explains that treatment.

One lasting consequence applies to covered expatriates only: under section 2801, US-citizen or resident children and grandchildren who later receive gifts or inheritances from a covered expatriate can owe a US transfer tax on what they receive, at the top estate tax rate. Your Canadian tax position is unchanged throughout.

How we handle renunciation files

We start by establishing where you stand on the five-year test and, where returns are missing, we scope a streamlined submission so the certification can be made honestly. We then run the covered expatriate tests with a full net worth statement in US dollars, including RRSPs and the home, and if you are close to or over US$2 million we model the exit tax and the planning options before you book the consular appointment.

On the final year we prepare the dual-status return, Form 8854 and the Canadian T1 together, so the RRSP and property figures agree on both sides. This is one of the few engagements where the sequence matters more than the forms, and we set it out in writing at the start. The full range of what we do across the border is on our cross-border tax services page.

Source: IRS - Expatriation Tax.