Almost every country taxes you where you live. A tiny club taxes you for who you are. Here’s the difference between residency-based and citizenship-based taxation, and what it can cost the people caught in between.
The mayor who got a bill from New York
In 2009, the mayor of London sold his house. In London. A British home, owned by a British politician. Under British law, the gain on a principal residence is tax-free. Case closed.
Five years later, the Internal Revenue Service disagreed.
The mayor was Boris Johnson, born in New York in 1964. His family left the United States when he was five. He had not lived there since. None of that mattered. In the eyes of Washington, he was an American citizen, and an American citizen owes the IRS a return on his worldwide income, wherever he lives, whatever the local law says.
Johnson did what any cornered taxpayer does on American public radio: he blew up. « They’re trying to hit me with some bill, can you believe it? » He called it « absolutely outrageous. » He said he would not pay.
He paid, reportedly in January 2015. Then, in 2016, he handed back his American passport.
A future prime minister of the United Kingdom, chased by the American tax man over a house in London. If it can happen to him, let’s call a spade a spade: it can happen to your neighbour.
A very exclusive club
Right off the bat, let’s be precise. Nearly every country on the planet taxes on the basis of residence. You live here, you pay here. You leave, you stop.
A handful of countries do it differently. They tax on the basis of citizenship: the passport, not the address, triggers the bill.
Who’s in the club? Eritrea, a one-party state that has held no national election since independence, levies a 2% « diaspora tax » on its citizens abroad. In December 2011, the UN Security Council ordered Eritrea to « cease using extortion, threats of violence, fraud and other illicit means » to collect it. Myanmar, still run by the generals who seized power in 2021 (now in civilian clothes), began taxing the foreign income of its non-resident citizens on October 1, 2023, with payment made through its embassies and proof demanded at passport renewal.
And the United States of America. (Some lists add Hungary or Tajikistan, on much narrower rules.)
Mind you, the comparison has limits. Eritrea takes a flat 2%. Myanmar takes 2% of foreign salaries and 10% of other foreign income. Only one country in the world demands a full, annual, worldwide tax return from every citizen abroad, on every source of income, with penalties that can run into the tens of thousands of dollars for a missed form. The superpower is the strictest member of the club.
Where did this come from?
The American rule dates back to the Civil War. Congress needed money and, the story goes, did not appreciate wealthy citizens sailing off to Europe to sit out the war (and the tax). By 1864, Americans living abroad were taxed on their worldwide income.
In 1924, the Supreme Court sealed it in Cook v. Tait: the United States may tax a citizen living abroad because citizenship brings protection, wherever you are. Pay for the umbrella, even if it never rains where you live.
For most of the twentieth century, the rule was a sword of Damocles hanging by a thick rope. On paper, every American abroad had to file. In practice, the IRS had no way of knowing who you were, where you lived, or what you owned.
Then came 2010.
FATCA: when your bank becomes an informant
After the 2008 crash, Congress went after Americans hiding money in Swiss accounts. The weapon was FATCA, the Foreign Account Tax Compliance Act. The mechanism is brutal in its simplicity: any foreign bank that fails to identify and report its American clients faces a 30% withholding tax on payments it receives from the United States.
No bank on earth can afford that. So banks everywhere started asking one question at account opening: were you born in the United States?
Canada signed on in 2014 through an intergovernmental agreement. Canadian banks do not report directly to the IRS. They report to the CRA, which forwards the information to Washington under the tax treaty. Ottawa as mailman for the IRS.
Canadians challenged it. In Deegan, the Federal Court (2019) and then the Federal Court of Appeal (2022 FCA 158) ruled that the regime does not violate the Charter’s protection against unreasonable search and seizure, nor, said the Federal Court, its equality guarantee. The Supreme Court of Canada refused to hear the appeal on July 13, 2023. End of the legal road.
What about the treaty between Canada and the United States? Surely it protects Canadian residents? Not on this point. Article XXIX, paragraph 2, known as the « saving clause, » says in black and white that nothing in the Convention prevents the United States from taxing « in the case of the United States, its citizens […] as if there were no convention. » The treaty prevents double taxation in most cases through foreign tax credits. It does not set you free.
The accidental American next door
Picture a Quebec couple spending the winter in Florida in 1990. The baby arrives early, in a Fort Lauderdale hospital. Thirty-six years later, that baby is a Montreal engineer who has never lived a day in the United States, has no Social Security number, and has never filed a U.S. return.
She is an American taxpayer. She simply doesn’t know it yet.
Now watch what happens when the rules of two countries rub against each other. Her TFSA, tax-free in Canada, means nothing to the IRS: the income is taxable in the United States. Her Canadian mutual funds and ETFs can fall under the punitive PFIC rules. And when she sells her home, the Canadian principal residence exemption does not follow her across the border: the U.S. exclusion is capped at US$250,000 of gain for a single filer. Above that, the IRS sends the bill.
Exactly Boris’s problem. With a smaller salary and no radio microphone.
So why not just leave?
Renouncing American citizenship is possible. It is neither free nor simple.
The State Department fee jumped from US$450 to US$2,350 in 2014, what Forbes called the highest in the world. On April 13, 2026, it came back down to US$450. A welcome relief. Just not the end of the story.
To renounce cleanly, you must certify five years of tax compliance with the IRS on Form 8854. Meaning: before leaving, you catch up on everything you never knew you owed. Skip that step, or show a net worth of US$2 million or more, or a high average tax bill over the prior five years, and you become a « covered expatriate ». Section 877A of the Internal Revenue Code then treats you as having sold all your assets the day before you renounce, with only about the first US$910,000 of gain exempt in 2026. An exit tax. On your way out the door.
One piece of good news for our Montreal engineer. A person born with dual citizenship, still a citizen and taxpayer of Canada, who has not lived in the United States for more than 10 of the last 15 years, escapes the wealth tests. The compliance certification, however, still applies.
On top of that, a 1996 provision known as the Reed Amendment allows the United States to bar entry to a former citizen who renounced to avoid taxes. Two documented refusals between 2002 and 2015. Still on the books.
And Canada? Free to go, but pay at the door
That said, before we get too smug on this side of the border, let’s look in the mirror.
Canada taxes on residence. Stop being a resident, and the CRA lets you go. No annual return from Lisbon on your Portuguese income, as long as nothing ties you back here. Freedom.
With one condition. The day you leave, paragraph 128.1(4)(b) of the Income Tax Act provides that « the taxpayer is deemed to have disposed » of most of his property at fair market value. Your non-registered portfolio, your shares in a private corporation: all deemed sold. The gain is taxable in the year of departure, even though you haven’t received a single dollar. Canadian real estate, RRSPs and pension plans are among the exceptions, but the principle holds.
Two philosophies, then. Washington keeps you on a leash for life. Ottawa lets you off the leash, but charges admission at the exit.
In short, nobody leaves a tax system for free. The only question is when you pay, and how much you knew beforehand.
Born in the wrong place
Bills have been tabled in Congress to move the United States to residency-based taxation. None has passed. Until one does, America will keep company with an African dictatorship and a military-run regime on this one question.
The land of the free taxes you for the crime of being born there.
And for the millions of Americans abroad, many of whom never lived under the flag their passport bears, the question is not whether the IRS will find them. FATCA already took care of that. The question is whether they will find out first.