Taxing choices for citizens

National Post


Eduardo Saverin, one of the founders of Facebook, could walk away with up to $3.4-billion for his 4% share of the company now the initial public offering is completed. His estimated tax bill is no chump change.

That's why tax experts were amused to learn that Mr. Saverin's name recently appeared on a U.S. Internal Revenue Service list of people who, as of April 30, chose to renounce their U.S. citizenship.

The U.S. is the only country that requires its citizens to file a tax return and report their worldwide income, no matter where in the world they might live and regardless of whether they hold another country's citizenship. Mr. Saverin is currently a resident of Singapore. By renouncing his U.S. citizenship, he could save millions of dollars of tax on his ultimate sale of his Facebook shares as Singapore doesn't have a capital gains tax.

Of course he won't get off scot-free as the U.S. has an "exit tax" that applies to Americans who renounce their U.S. citizenship. Essentially, the renouncing citizen is deemed to dispose of all of his or her property at fair market value resulting in a capital gains tax on any accrued appreciation of that property measured as of the date of renunciation.

Mr. Saverin's spokesperson says he renounced "around September" of 2011, well in advance of the upcoming Facebook IPO when presumably the value of the shares was substantially less than the IPO pricing. The value of private company shares has an inherent degree of uncertainty associated with it since there is no public market that automatically puts a price on those shares, as there would be once the shares are listed on an exchange.

In addition, U.S. long-term rates of capital gains and ordinary income are set to rise after 2012 providing another incentive to realize gains now instead of in the future. Now that Mr. Saverin is no longer a U.S. citizen, any profit expected from the appreciation of his Facebook stock since his renunciation date will be free and clear of capital gains tax - both in the U.S. and Singapore.

The rules in Canada are very similar, with the big exception that Canada doesn't tax based on citizenship but, like most other countries in the world, taxes based on residency. If you're a Canadian facing a looming tax bill on a sale of shares, you wouldn't have to renounce your Canadian citizenship but you would have to become a non-resident.

Becoming a non-resident for tax purposes means severing your residential ties, which can include selling your home, having your spouse and kids move with you, giving up club memberships, driver's licence and provincial medical insurance coverage.

Of course Canada also imposes a "departure tax" on any accrued gains on property held as of the date of emigration. If you're holding shares with substantial accrued gains, rather than becoming a non-resident of Canada, which would trigger the deemed disposition of those shares and impose an immediate capital gains tax, a better solution may be to wait until the year you plan to actually dispose of the shares and then move to a low-tax province before Dec. 31 of that year.

For example, for an Ontarian who is contemplating selling shares in 2013 such that they would face tax at a 25% capital gains tax rate (for income over $500,000), moving to Alberta by the end of the year would reduce the tax bill to a mere 19.5%.

Calgary vs. Singapore? The choice is yours.