Beginning January 23, 2007, a US citizen travelling by air between the United States and Canada, Mexico, Central America, South America, the Caribbean, or Bermuda must present a valid US passport or Air NEXUS card to enter the United States. The same requirement may come into effect as early as January 2008 for a US citizen travelling between the United States and those countries by land or sea. These new travel restrictions are a result of recommendations made by the 9/11 Commission, and are designed to enable US Customs and Border Protection (CBP) to screen most passengers arriving in the United States from foreign travel points in order to intercept travellers who (1) are identified as or suspected of being terrorists or having affiliations with terrorist organizations, (2) are the subject of active warrants for criminal activity, (3) are currently "inadmissible" or have previously been deported, or (4) otherwise have been identified as potential security risks or raise law enforcement concerns. Despite the express national security purpose, the new passport requirement may have ancillary US tax consequences, particularly for US citizens living in Canada.

The US-tax expatriation regime applies to a US citizen who renounces his citizenship and who meets one of three objective tests on the date of expatriation: (1) the individual's net worth is US$2 million or more; (2) his average US tax liability over the prior 5 years was US$136,000 (for expatriations in 2007); or (3) he fails to certify, under penalty of perjury, that he has complied with his US tax-filing obligations for the prior five years. (The regime also applies to an individual who was a lawful US permanent resident in at least 8 of the preceding 15 years and surrendered his green card.) If the expatriating US citizen meets any of these tests, certain US income, estate, and gift tax consequences from which an expat is normally exempt may apply during the 10 years following expatriation. In addition, the expat is treated as a US citizen, fully taxable on worldwide income, if he is physically present in the United States for more than 30 days in any of the 10 calendar years after expatriation.

Narrow exceptions may apply to an expatriating citizen (not a long-term green-card holder) who otherwise meets the average tax liability or net worth tests, but the expat must certify his US tax compliance (and have in fact filed for the past 5 years) and must comply with initial reporting requirements, including filing form 8854 ("Initial and Annual Expatriation Information Statement") and providing notice of expatriation to the Secretary of State. An exception is available for an expatriating citizen who (1) was born a dual citizen of the United States and another country, (2) continues to be a citizen of the other country, and (3) has had no substantial contacts with the United States. In this context, having substantial contacts with the United States means that the individual (1) was never a US resident under Code section 7701(b) tests (including meeting the mechanical "substantial presence" test), (2) has never held a US passport, and (3) was not present in the United States for more than 30 days during any calendar year in one of the 10 years preceding the individual's loss of citizenship. The requirement of never having held a US passport may now become more of an issue given the new rules requiring passports for US citizens travelling abroad.

An individual may be a dual citizen of the United States and Canada if, for example, he was born in the United States to Canadian parents. However, such an individual may not realize that he is a US citizen. When he applies for a Canadian passport and names the United States as his place of birth, he creates a record of his US citizenship that will appear in the passport. When he later uses the Canadian passport to enter the United States, CBP will probably notice that the individual is actually a US citizen, and in light of the new passport requirements will advise him that he must obtain a US passport to enter the United States. Many individuals who find themselves in these circumstances will obtain a US passport because it facilitates entry into the United States, but they will do so without considering the US tax implications of obtaining the passport. Once the new passport rules go into effect, such an individual may or may not be required to obtain a US passport; it is unclear whether the new rules require a US citizen who holds a Canadian passport to also obtain and present a US passport to enter the United States. Of course, once an individual obtains a US passport, he loses the ability to renounce his US citizenship and to qualify for the dual citizenship exception to the expat tax regime, because the exception requires that the dual citizen never have held a US passport. Accordingly, a US citizen who lives in Canada, who is considering expatriation, and who may meet the net worth or tax liability tests but may also qualify for the dual-citizenship exception should consider his options before he obtains a US passport.

In addition, the new passport requirements expressly allow CBP to share the information it obtains with various federal law enforcement agencies, including those with which it has certain agreements, such as the departments of Justice, Treasury, State, and Commerce. The past several years have seen greater cooperation between CBP (formerly CIS) and the IRS with respect to information sharing and data collection. (See "Data Sharing: IRS and CIS," Canadian Tax Highlights, August 2004.) The expat rules, which were enacted in their current form in 2004, specifically coordinate the tax and immigration procedures and rules applicable to expats. Therefore, a US citizen residing in Canada who obtains a US passport in compliance with the new rules should be aware that doing so may have significant US tax consequences. Furthermore, although we are unaware of the law's ever being enforced, any former US citizen may be denied entry into the United States if he has officially renounced his US citizenship and is determined by the attorney general to have renounced it for the purpose of US tax avoidance (the so-called Reed Amendment). Therefore, possible exclusion from entry into the United States after expatriation is a risk that should be considered before the expatriation decision is made.