Moving Back to Canada: Simple Things + RSUs + Deferred Incme

[pleventi]

I've got some simple and some complex questions. Bear with me...

My situation: Married, both earning good salary. Moving back to Canada from CA in mid-March after two years in US. Have some accumulated cap gains, a small 401(k), and a mid-sized RRSP with only a small gain (~+10%). House purchase closes right after the move. I have a large FTC carry-forward from 1116 of two years ago. I will have additional income in July from vesting of RSUs/ISOs. I also have deferred income tax in Canada linked to exercise-and-hold of CCPC stock options.

Things I’m Going To Do For Sure:

(a) At tax time, compute things as a full-year MFJ 1040 using 1116 for FTC (2555 doesn’t help me), and as a dual-status MFS 1040 + 1040NR. Take the better of two options. Main disadvantages of dual-status are no standard deduction, no MFJ, and fewer credits available.

(b) Sell my losing stocks (outside RRSP/401k) before I leave US. Gives me cap loss for this year’s taxes or a carry forward in the event I move back.

(c) Sell my winners in 2012, or if I need the cash, after my move. Pushing to next tax year means I could do a full-year 1040 without having the gains taxed in US. Pushing past the move date means if I do dual-status return, I won’t pay any US taxes (they don't count on 1040NR) and lower CA taxes on the gain.

(d) File a pro-rated T1 in Canada for the remainder of the year I’m in Canada. Reset my ACBs to value upon entry. (And trigger inclusion of deferred CCPC derived income, but that's another story)

(e) Convert my 401(k) to a Roth IRA. I’ll have to report the withdrawal as income on my part-year/full-year 1040, but no penalty to pay and can withdraw from Roth IRA in future with no tax consequences in either country.

(f) Not worry about the whole 10-day-limit in the US thing post-move, since it doesn’t apply to me as a Canadian (thanks nelsona). My departure date is the date where residency changes.


Questions (in order of difficulty...):

(1) From reading here and elsewhere, my move back to Canada, if paid for by my US employer, is not taxable in Canada, whereas if I were reimbursed once I get to Canada, it would be Canadian taxable income with no offsetting deduction right? Either way, it is US income but the moving expense deduction offsets it?

(2) For dual-status return, are all deductions and credits and tax brackets and such on my 1040 and 1040NR prorated (or completely unusable in the case of some credits and standard deduction)?

(3) If I file a full-year 1040, I get to deduct my Canadian mortgage interest and property taxes, right? If I go dual-status, I assume these are not deductable anywhere?

(4) I will be paid my 2010 bonus and relocation lump sum on my March 15 paycheque. If I move before its paid vs. after, does this affect whether it shows up on my 1040NR? Is it considered "effectively connected with US trade or business"?

(5) Is there any way to use up my carried-forward foreign tax credit? I plan on using some of it in 2010 and first-part of 2011 against US tax arising from my employment income earned while out-of-country on business (roughly 1/6 of the year), since that is "foreign sourced" income. Any other way to use it?

(6) If I withdraw from my RRSP prior to departure, I will owe a flat 25% to Canadian government, plus US & CA taxes on the +10% accumulated gains (as income), which will be slightly offset by a small foreign tax credit arising from the CDN tax withholding. I figure I’ll be paying roughly 28% tax (total) on the withdrawal, which seems a better deal if I think I’ll have relatively high income at retirement (and if I think tax rates will go up in the next few decades). Sound right? Also, I assume I don’t report the RRSP sale on my T1, since my T1 is only for the resident portion of the year.

(7) When my RSUs/ISOs vest and are sold in July (after moving), I think they will only be taxed in Canada. However, on my full-year 1040 or part-year 1040NR (depending on which route I go), I believe a fraction of the RSU/ISO gain is considered US-sourced, based on fraction of time from grant-to-sale I spent in the US, right? Similarly, is the US portion not considered Canadian income, thus excluded from my T1 (or subject to a foreign tax credit)?

(8) When computing a dual-status return (if I go that route), and assuming the 1040 tax brackets are pro-rated (see #2 above) for the fraction of year the 1040 covers. If my annual bonus is paid prior to US departure, then my salary could appear to be very high on pro-rated basis, driving me into a much higher tax bracket, right? E.g. imagine a hypothetical $20k salary ($4k paid until move) with a $20k bonus -- I’d have $24k over a 2.5 month period, which from a tax-rate perspective would be like I made $115k in the year. Is this a correct read on things? This would affect my marginal rate for decisions on things I do before vs. after move.

(9) My deemed disposition of my exercised-and-held CCPC shares triggers taxation of deferred income in Canada. That income will be reported on my pro-rated T1. That income does not exist for US tax purposes, since by US law I have no deferred income. For the purposes of a form 1116, I assume that since this income is not eligible for taxation in the US as worldwide income, it is not included in my foreign gross income or worldwide gross income, and the portion of my foreign taxes arising from the deemed disposition are excluded from the foreign tax paid? E.g. if I have $100k normal income + $50k deferred income and paid $50k in CDN taxes for that tax year, I should report only $100k foreign income with $33k in taxes on 1116?

Thanks. I totally understand if you punt on some or all of these questions.

[nelsona]

I've got to tell you, I;m not reading that who;e mess. Ask more pinpoint questions, please.

[nelsona]

Just 2 points, and that does not mean the rest of your post is correct -- its not..

Regardless of when you get your final payment from your employer it will be taxable in US. If received after arrival in canada, it will be taxable there too.

There is no prorating on dual-status returns and you are entitled to any deduction regardless if it occurs before or after departure.


I would also question that working out of the country in 2010 constitutes foreign sourced income.

[nelsona]

I have reviewed the regs on foreign-sourcing of wages, and, YES, you can consider these foreign-sourced.

Good tip. I have some unused FTC that I will now be able to catch back (and they were expiring this year!).

[pleventi]

Sorry, I know that was a monster of a post. I was hoping that each of the questions were fairly pointed, but I guess not.

Yeah, using the working days out of country divided by *working* days in country really helps out with soaking up the FTCs. As far as I know, its even better than it looks, since you don't count vacation days in either numerator or denominator (even if they are paid vacations). This tends to drive up the % that is foreign.

Wow, no prorating on the part-year return? That makes converting from 401k to Roth IRA more of a no braner, since my marginal rate will be a lot lower in a dual-status year since I only have ~2 months of US-sourced income. Seems odd.

I'll re-post a smaller subset of questions now that I know more of the answers/assumptions.

[nelsona]

There is no prorating, but don't forget that you will be taxed at the MFS rate, and that there may be some MFS thresholds that you might reach.

Watch for certain deductions/credits that you simply cannot take when filing dual or MFS. In the end, if you choose dual, your final tax calculation will be done on the 1040NR, so be careful.