Exit Tax: A Comparative Analysis of United States and Canada Legislation and Practice

Abstract
Tax systems across countries are increasingly converging in line with OECD directives and similar international initiatives. However, significant differences still exist not only in tax rates and filing procedures but also in institutional mechanisms. One of these differences is the exit tax. The Exit Tax is a mechanism that allows tax to be assessed on unrealized gains (i.e., gains not arising from an actual sale) when an individual or entity terminates their tax residency in a particular country.

The purpose of this work is to provide information on the application of this tax in the United States and Canada and to discuss its possible application within Turkish tax legislation.

Keywords: Exit Tax, Internal Revenue Service (IRS), Canada Revenue Agency (CRA)

 
1. Introduction
Although the term may initially resemble the foreign travel exit stamp, the exit tax is not a transaction tax but rather a proactive approach designed to prevent the loss of income tax revenue.

Known as “Departure Tax,” “Expatriation Tax,” “Emigration Tax,” or “Exit Tax,” this tax refers to a mechanism that enables taxation of unrealized gains on assets when a person or entity leaves the tax residency of a particular country (for example, by renouncing citizenship or terminating permanent residence status).

In this context, exit tax is a taxation method based on the concept of “deemed disposition”, under which the taxpayer’s assets are treated as if they were sold at the time their tax obligations in the country end.

The primary purpose of the exit tax is to ensure that accumulated value increases are taxed before the taxpayer severs their economic ties with the country. In other words, it aims to prevent individuals or entities leaving tax residency from avoiding tax on capital gains that accumulated during their residency but have not yet been taxed.

Accordingly, the state treats assets that have appreciated during the residency period but have not yet been sold (such as stocks, real estate, or investment instruments) as if they were sold, thereby creating a tax liability.

In the following sections of this study, the practices in the United States and Canada, which differ in several significant respects, will be examined. Subsequently, an evaluation will be made within the context of Turkish tax legislation.

 
2. United States Practice
2.1 Legal Framework and Scope
In the United States, the exit tax (“exit tax” or “expatriation tax”) is regulated under Sections 877 and 877A of the Internal Revenue Code (IRC).

The provisions apply to individuals who renounce U.S. citizenship or who relinquish long-term permanent residency status (Green Card holders).

In the United States, exit tax rules are primarily designed for individuals. Sections 877 and 877A form part of Subchapter A regulating nonresident individuals and do not contain provisions applicable to corporations.

 
2.2 The “Covered Expatriate” Test
To be subject to U.S. exit tax rules, an individual must qualify as a “covered expatriate.”

This determination is based on three criteria. Meeting any one of these criteria results in the individual being classified as a covered expatriate:

Net worth threshold: Net worth (assets minus liabilities) at the date of expatriation must exceed $2 million, indexed annually for inflation.
Average tax liability test: The individual’s average annual income tax liability for the five years preceding expatriation must exceed a specified threshold. For example, the threshold is $206,000 for individuals expatriating in 2025.
Tax compliance certification: If the individual cannot certify that they have complied with all tax obligations for the previous five years, they are treated as a covered expatriate.

 
2.3 Operation of the Tax
If the individual is classified as a covered expatriate, the Internal Revenue Service (IRS) treats all worldwide assets as if they were sold one day before expatriation (deemed sale). Capital gains tax is then calculated on the hypothetical gain arising from this deemed sale.

However, for 2025, the first $890,000 of gain is excluded. After applying this exclusion, normal capital gains tax rates apply.

At this point, it is useful to mention a recent decision of the U.S. Supreme Court. Although the case Moore et ux. v. United States (2024) concerned the Mandatory Repatriation Tax introduced in 2017, the Court also stated that the taxation of unrealized income does not violate constitutional rights.

Accordingly, the decision effectively confirmed that taxation based on hypothetical income under the exit tax regime is also constitutional.

 
3. Canadian Practice
Although Canada’s exit tax (referred to as departure tax or emigration tax) is based on similar principles, there are several fundamental differences in practice.

 
3.1 Legal Framework and Scope
The Canada Revenue Agency (CRA) regulates taxation of individuals leaving Canadian tax residency under Section 128.1(4) of the Income Tax Act, under the heading “Leaving Canada (emigrants).”

Compared to the U.S., the scope of Canada’s exit tax is broader because there is no net worth threshold of $2 million and no minimum average income tax liability requirement.

For example, a person in the United States with $150,000 average annual income tax liability and $1 million net worth would not be subject to exit tax. However, if that person were a Canadian tax resident, they would be subject to exit tax upon departure.

Thus, the U.S. regime effectively targets only very high-income individuals (generally those earning at least $700,000–$800,000 annually).

On the other hand, unlike the U.S., Canada excludes many assets from the scope of the tax, including certain real estate and business property. According to Section 4(b) of the legislation, assets such as:

inventory recorded in Canadian business establishments,
real estate located in Canada,
pension rights

are not considered disposed of upon departure.

As a result, the tax base is narrower in Canada than in the United States.

Another important difference is that Canada applies exit tax rules to corporations as well. When a corporation ceases to be a Canadian tax resident, it is subject to the same deemed disposition rules as individuals.

 
3.2 Deferral Option
Perhaps the most significant difference between the Canadian and U.S. systems is that Canada allows deferral of the tax.

If the taxpayer chooses deferral, payment of the tax can be postponed until the asset is actually sold. When the asset is eventually sold, the deferred tax must be paid.

Importantly, no interest accrues on the deferred tax amount.

The deferral system was partly introduced to account for the possibility that individuals may re-establish Canadian tax residency in the future. If residency is re-established, taxpayers who elected deferral may request the reversal (unwinding) of the deemed disposition previously calculated.

 
3.3 Operation of the Tax
Similar to the U.S. system, certain assets owned at the time of departure are treated as if they were sold at their fair market value on the departure date, and the resulting gain is taxed.

Under Canada’s capital gains regime, only 50% of the capital gain is included in taxable income. Although there was a proposal to increase this inclusion rate to 67.5%, Prime Minister Mark Carney later announced that the rate would remain 50%.

If the calculated tax exceeds $16,500 CAD, the CRA may require security, such as a bank guarantee.

Additionally, while retirement accounts are not directly included in the exit tax calculation upon departure, withdrawals from these accounts as a non-resident may be subject to withholding tax under domestic law or international tax treaties.

 
5. Evaluation
As demonstrated, the exit tax is a tax safeguard mechanism designed to tax previously untaxed gains of individuals who change their tax residency. It aims to resolve practical challenges that arise when individuals transition from full tax liability to limited tax liability by taxing unrealized gains at the moment of departure.

Treating assets as if they were sold at market value ensures that gains accumulated during the taxpayer’s residency do not escape taxation simply because the taxpayer leaves the country.

Currently, Turkey does not have a direct exit tax or departure tax system based on changes in tax residency.

However, individuals and entities terminating their tax liability in Turkey must comply with certain filing obligations. Under Article 92 of the Income Tax Law, an income tax return must be filed within 30 days after the termination of tax liability. Similar provisions exist in the Corporate Tax Law, which requires corporate tax returns to be filed within 30 days after liquidation or dissolution.

These returns tax only realized gains, meaning future gains—such as sales of Turkish real estate or shares listed on Borsa Istanbul—will be taxed under limited taxpayer status, subject to applicable double taxation agreements.

Although introducing an exit tax system in Turkey is theoretically possible, its implementation could raise several practical challenges. For example, questions may arise regarding how taxpayers would pay taxes arising from hypothetical sales when no actual cash has been received, or how asset valuations should be determined.

Nevertheless, to prevent wealthy individuals from avoiding tax by changing tax residency, a targeted exit tax regime could be designed. Such a system could combine Canada’s deferral mechanism with the U.S. net worth and income thresholds, focusing on a limited group of high-income taxpayers and a narrow tax base of specific assets.

This approach would make enforcement easier for tax authorities while ensuring that the tax burden does not exceed the taxpayer’s financial capacity.

 
6. Conclusion
Although the exit tax systems in the United States and Canada are based on similar principles, they differ significantly in scope and flexibility.

The U.S. system applies only to individuals who exceed certain wealth or income thresholds or who fail to meet tax compliance requirements. In contrast, Canada’s system covers a broader group of taxpayers, regardless of wealth thresholds.

However, Canada provides greater flexibility by allowing tax deferral and the possibility of reversing the deemed disposition if residency is re-established. Additionally, while the U.S. system applies only to individuals, Canada also applies exit tax rules to corporations.

At the same time, the Canadian system excludes many assets from the deemed disposition calculation, making its tax base narrower despite covering more taxpayers.

Considering that Turkey has long been chosen as a place of residence by investors from various countries—particularly Russia and Gulf States—introducing a similar mechanism could contribute to increasing tax revenues. By drawing on the experiences of the United States and Canada, Turkey could develop a framework that effectively taxes income earned during the period when individuals or companies are fully taxable residents.

This article was originally published in the March 2026 issue of Vergi Dünyası.