Renouncing US Citizenship From Canada: The Covered Expatriate Tests, the Mark-to-Market Exit Tax, and What It Actually Costs

Short version: Expatriation Tax Explained: Renouncing U.S. Citizenship

A US citizen living in Canada who renounces US citizenship stops filing US returns, FBARs, and the account-specific forms that come with them. What they may not stop is paying: the expatriation rules under section 877A treat a covered expatriate as having sold every asset the day before expatriation, tax the gain above an exclusion, tax deferred compensation and retirement accounts immediately or by withholding, and impose a tax on US persons who later receive gifts or bequests from the former citizen. Whether the renunciation is expensive depends on three tests, and Americans in Canada who plan the exit can often fail all three.

Key takeaways

• Covered expatriate: a person who meets any of three tests at expatriation: net worth of $2 million or more; average annual net US income tax liability over the five prior years above an indexed threshold (about $200,000 for 2025); or failure to certify on Form 8854 that all US tax obligations for the five prior years were met. An exception applies to dual citizens at birth who have lived in the other country and to certain minors.
• Mark-to-market tax: a covered expatriate is treated as having sold all worldwide property at fair market value on the day before expatriation; net gain above an inflation-indexed exclusion (about $890,000 for 2025) is taxed. An election defers the tax on specified assets with security and interest.
• Deferred compensation and retirement accounts: eligible deferred compensation (US-based plans where the payer agrees to withhold) is taxed at 30% withholding on payment; ineligible deferred compensation (including most foreign pensions and RRSPs) is taxed on its present value at expatriation; specified tax-deferred accounts (IRAs, 529s, HSAs) are deemed distributed and taxed in full with no early withdrawal penalty.
• Section 2801: US-person recipients of gifts or bequests from a covered expatriate pay tax at the highest estate or gift rate on the amount above the annual exclusion, indefinitely.
• Process: an appointment at a US consulate, the oath of renunciation, a $2,350 fee, a Certificate of Loss of Nationality, a final dual-status return for the year, and Form 8854 by the following June 15.

The three tests

Net worth. Worldwide net worth of $2 million or more on the expatriation date, including the home, RRSPs, pensions (present value), and everything else, at fair market value. Not indexed. A couple is tested individually; assets are attributed by ownership.

Tax liability. Average annual net US income tax liability for the five years before expatriation above the indexed threshold. Most Americans in Canada have a net US liability near zero after the foreign tax credit and fail this test easily.

Certification. Form 8854 requires the expatriate to certify under penalty of perjury that they have complied with all US federal tax obligations for the five preceding years. A person who has not filed, or has filed incompletely (missing FBARs, Forms 3520, 8621, 5471), cannot certify and is a covered expatriate regardless of wealth. The streamlined procedures are the usual route to get the five years compliant before renouncing.

The dual-citizen-at-birth exception. A person who became a US citizen and a citizen of another country at birth, who remains a citizen and tax resident of that other country, and who has been a US resident for no more than 10 of the last 15 years, is not a covered expatriate under the net worth or tax liability tests (the certification test still applies). Many Canadians born in the US to Canadian parents, or born in Canada to a US parent, qualify.

What a covered expatriate pays

Mark-to-market. Every asset (other than deferred compensation, specified tax-deferred accounts, and interests in non-grantor trusts) is deemed sold at fair market value on the day before expatriation. The gains and losses are netted; the net gain above the exclusion (about $890,000) is taxed at the applicable rates (long-term capital gains for most assets). The Canadian principal residence has US basis and a US-dollar gain; Canadian mutual funds are PFICs with their own regime. The taxpayer can elect to defer the tax on any asset until it is actually sold, by posting security and paying interest.

Deferred compensation. Canadian employer pensions, RRSPs, RRIFs, and other foreign plans are ineligible deferred compensation: the present value of the accrued benefit is included in income as if received the day before expatriation, with no exclusion. This is the item that makes renunciation expensive for Americans in Canada with large RRSPs, because the treaty deferral does not protect them from section 877A. US plans (401(k)s, US employer pensions) can be eligible deferred compensation if the payer agrees to withhold 30% on future payments, deferring the tax.

Specified tax-deferred accounts. IRAs, 529 plans, HSAs, and similar accounts are deemed fully distributed the day before expatriation, taxed as ordinary income, with no early withdrawal penalty.

Section 2801. A US citizen or resident who receives a gift or bequest from a covered expatriate pays a tax equal to the highest gift or estate tax rate (40%) on the amount above the annual exclusion, reported on Form 708. The obligation is the recipient's and lasts for the expatriate's lifetime and estate. An American in Canada with US-citizen children who plans to leave them an estate faces this tax on the inheritance if a covered expatriate.

Planning the exit

• Get compliant first. Five years of complete returns and six of FBARs; the streamlined procedures if behind.
• Test the net worth. Gifts to a non-US spouse (within the annual limit for a non-citizen spouse) or to children before expatriation can bring net worth under $2 million; the gifts are subject to US gift tax rules and Canadian deemed dispositions.
• Time it. Expatriate before a liquidity event; a founder with private shares below $2 million in value can exit before the value rises.
• Check the dual-citizen exception. Many Canadian-born Americans qualify and can renounce without regard to net worth.
• Understand the RRSP. A covered expatriate's RRSP is taxed on its present value at expatriation, with a foreign tax credit unavailable because Canada has not taxed it yet; the double tax arrives when Canada taxes the eventual withdrawal.
• The relinquishment alternative. A person who committed an expatriating act with intent (naturalizing in Canada with intent to relinquish, for example) years ago can claim to have lost US citizenship as of that date, with tax consequences determined under the rules of that year; this requires documentation and consular acceptance.

Worked example

A US citizen who has lived in Toronto since 2005 has a $1.4 million home (US basis $600,000), a $900,000 RRSP, a $400,000 taxable portfolio, and has filed US returns and FBARs each year. She was born in Ohio.

• Net worth. $2.7 million; covered expatriate.
• Mark-to-market. Home gain about $800,000 USD; portfolio gain about $150,000; total $950,000 less the $890,000 exclusion: about $60,000 taxed. Modest.
• RRSP. Ineligible deferred compensation; $900,000 present value included in income; about $300,000 of US tax, with no Canadian credit (Canada has not taxed it). This is the cost.
• Section 2801. Her US-citizen son will owe 40% on any inheritance above the annual exclusion.
• Alternative. Gift $500,000 of the portfolio and home equity to her Canadian husband over time (within the non-citizen spouse limit each year) and to her son (using lifetime exemption), bringing net worth under $2 million before expatriating; no covered expatriate status; no RRSP inclusion; no 2801. The Canadian side: gifts to the spouse roll over; gifts of appreciated assets to the son are deemed dispositions.

Official sources

"Form 8854 is used by individuals who have expatriated on or after June 4, 2004." It is the Initial and Annual Expatriation Statement. — Internal Revenue Service, About Form 8854, https://www.irs.gov/forms-pubs/about-form-8854

"IRC 877A imposes a mark-to-market regime, which generally means that all property of a covered expatriate is deemed sold for its fair market value on the day before the expatriation date." — Internal Revenue Service, Expatriation Tax, https://www.irs.gov/individuals/international-taxpayers/expatriation-tax

Practitioner note

The exit tax is rarely the mark-to-market gain; for Americans in Canada it is the RRSP, which section 877A taxes in full at expatriation with no Canadian credit. Clients who plan the net worth test before the appointment usually avoid covered status entirely; clients who book the consulate first and call us second usually cannot. Five years of clean compliance and a net worth plan come before the oath.

See also: Planning a move? Start with the Canada-to-US tax checklist and browse every corridor by city, province, and state.

Next step

Fairlight prepares the covered expatriate analysis, the pre-expatriation compliance and net worth planning, the final dual-status return, and Form 8854. See cross-border pricing or book a call.